Note 10 — Stock-Based Compensation

The cost that has been charged against income for stock-based compensation is set forth below (in thousands):

	Three Months Ended				Nine Months Ended
	September 30, 2016		October 2, 2015		September 30, 2016		October 2, 2015
Employee stock options	$	208	$	625	$	5,257	$	1,818
Restricted stock		32		88		259		396
Restricted stock units		146		210		2,569		484
Nonemployee stock options		—		—		58		49
Total	$	386	$	923	$	8,143	$	2,747

The Company recorded stock-based compensation costs in the following categories on the accompanying condensed consolidated statements of operations (in thousands):

	Three Months Ended				Nine Months Ended
	September 30, 2016		October 2, 2015		September 30, 2016		October 2, 2015
Cost of sales	$	—	$	9	$	560	$	33
General and administrative		248		543		3,936		1,667
Marketing and selling		72		184		1,544		539
Research and development		66		187		2,103		508
Total stock compensation expense		386		923		8,143		2,747
Amounts capitalized as part of inventory		39		130		227		258
Total	$	425	$	1,053	$	8,370	$	3,005

Stock Option Plan

The Amended and Restated 2003 Omnibus Equity Incentive Plan (“the Plan”) provides for various forms of stock-based incentives. To date, of the available forms of awards under the Plan, the Company has granted only stock options, restricted stock, unrestricted share grants, restricted stock units, and performance contingent stock units. Options under the plan are granted at fair market value on the date of grant, become exercisable over a three-year period, or as determined by the Board of Directors, and expire over periods not exceeding 10 years from the date of grant. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the Plan). Pursuant to the Plan, options for 3,614,370 shares were outstanding at September 30, 2016 with exercise prices ranging between $0.95 and $17.62 per share. Restricted stock grants under the Plan generally vest over a period between one to four years. There were 23,140 shares of restricted stock and 266,050 restricted stock units (RSUs) outstanding at September 30, 2016. As of September 30, 2016, there were 2,222,972 shares authorized and available for grants under the Plan.

Immediate Vesting of All Unvested Equity Awards

On February 11, 2016, one of our shareholders increased its beneficial ownership of the Company’s common stock to approximately 26% of all shares outstanding. This triggered the “Change in Control” provision in the Plan, which resulted in the immediate vesting of all unvested equity awards outstanding under the Plan (“Acceleration Event”) and the recording of an aggregate $6.9 million non-cash charge to stock-based compensation in the condensed consolidated statements of operations on that date ($4.6 million for stock options and $2.3 million for restricted stock and RSUs). This charge was recorded and included in the following categories of the condensed consolidated statements of operations for the nine months ended September 30, 2016: $2.9 million in general and administrative expenses, $1.5 million in marketing and selling expenses, $1.9 million in research and development expenses and $0.6 million in manufacturing costs. Approximately $3.7 million of the $6.9 million of accelerated charges would have been recognized for stock-based compensation by the Company during fiscal year 2016 after the Change in Control provision was triggered.

Assumptions

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model applying the weighted-average assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company’s stock. The expected term of options granted is derived from the historical exercises and post-vesting cancellations and represents the period of time that options granted are expected to be outstanding. The Company has calculated a 9% estimated forfeiture rate based on historical forfeiture experience. The risk-free rate is based on the U.S. Treasury yield curve corresponding to the expected term at the time of the grant.

	Three Months Ended						Nine Months Ended
	September 30, 2016			October 2, 2015			September 30, 2016			October 2, 2015
Expected dividend yield		0	%		0	%		0	%		0	%
Expected volatility		57	%		58	%		57	%		57	%
Risk-free interest rate		1.19	%		1.60	%		1.34	%		1.61	%
Expected term (in years)		5.57			5.62			5.57			5.61

A summary of option activity under the Plan for the nine-month period ended September 30, 2016 is presented below:

	Options Shares (000’s)
Outstanding at January 1, 2016		3,623
Granted		761
Exercised		(424)
Forfeited or expired		(346)
Outstanding at September 30, 2016		3,614
Exercisable at September 30, 2016		2,968

A summary of restricted stock and restricted stock unit’s activity under the Plan for the nine-month period ended September 30, 2016 is presented below:

	Restricted Shares (000’s)		Restricted Units (000’s)
Outstanding at January 1, 2016		124		339
Granted		23		313
Exercised		(124)		(380)
Forfeited		—		(6)
Outstanding at September 30, 2016		23		266