Note 8—Share-Based Compensation

The Company accounts for share-based compensation in accordance with ASC Topic 718, Stock Compensation ("ASC 718"). All stock options issued to employees are recognized as share-based compensation expense in the financial statements based on their respective grant date fair values, and are recognized within the statements of operations as general and administrative, marketing, fulfillment or technology expense, based on employee departmental classifications.

Under these guidelines, the fair value of each share-based payment award is estimated on the date of grant using an option pricing model that meets certain requirements. The Company currently uses the Black-Scholes option pricing model to estimate the fair value of share-based payment awards. The determination of the fair value of share-based payment awards utilizing the Black-Scholes option pricing model is affected by the Company's stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. As of October 1, 2011, the Company did not have an adequate history of market prices of its common stock as the Company recently became a public company, and as such, the Company estimates volatility using historical volatilities of similar public entities. The expected life of the awards is based on a simplified method which defines the life as the average of the contractual term of the options and the weighted average vesting period for all open tranches. Due to the limited period of time our equity shares have been publicly traded, we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of awards. The dividend yield assumption is based on the Company's expectation of paying no dividends. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company considers many factors when estimating expected forfeitures, including employee class, economic environment, and historical experience. Share-based compensation expense recognized in our financial statements is based on awards that are ultimately expected to vest. If factors change and we employ different assumptions, share-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of the underlying unvested options, we may be required to accelerate, increase or cancel any remaining unrecognized share-based compensation expense.

The Company also accounts for equity instruments issued in exchange for board services rendered by non-employee directors in accordance with the provisions of ASC 718.

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration for other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services. Equity instruments awarded to non-employees are periodically re-measured as the underlying awards vest unless the instruments are fully vested, immediately exercisable and non-forfeitable on the date of grant.

Under the Company's 2007 Omnibus Incentive Plan, the Company granted stock options to purchase 40,000 shares of common stock during the thirteen weeks ended October 1, 2011 at a weighted-average grant date fair value of $4.47. The Company granted stock options to purchase 700,000 shares of common stock during the thirty-nine weeks ended October 1, 2011 at a weighted-average grant date fair value of $7.56. The Company had $3.0 million of unrecognized share-based compensation expense related to stock options outstanding as of October 1, 2011, which expense is expected to be recognized over a weighted-average period of 2.23 years. During the thirteen weeks ended October 1, 2011, options to purchase 27,416 shares were exercised and the total intrinsic value of the exercised options was $0.1 million. During the thirty-nine weeks ended October 1, 2011, options to purchase 98,407 shares were exercised and the total intrinsic value of the exercised options was $0.4 million. The intrinsic value of stock options at the date of the exercise is the difference between the fair value of the stock at the date of exercise and the exercise price. At October 1, 2011, there were 2,653,167 shares of common stock available for future grants under this plan.

Under the Company's 2007 New Employee Incentive Plan, there were no stock options granted during the thirty-nine weeks ended October 1, 2011. The Company had $0.1 million of unrecognized share-based compensation expense related to stock options outstanding under this plan as of October 1, 2011, which expense is expected to be recognized over a weighted-average period of 1.25 years. During the thirty-nine weeks ended October 1, 2011, there were no options exercised under this plan. At October 1, 2011, 750,000 shares of common stock were available for future grants under this plan.

Under the Company's 2006 Equity Incentive Plan, there were no stock options granted during the thirty-nine weeks ended October 1, 2011. The Company had no unrecognized share-based compensation expense related to stock options outstanding under this plan as of October 1, 2011. During the thirty-nine weeks ended October 1, 2011, there were no options exercised under this plan. As of October 1, 2011, there were 2,760,387 shares of common stock available for future grants under this plan.

On May 5, 2009, the Company issued warrants to purchase up to 30,000 shares of common stock, which warrants terminate seven years after their grant date. The warrants were issued in connection with the financial advisory services provided by a consultant to the Company. The warrants vest in thirty-six equal monthly increments of 833 shares each on the last calendar day of each calendar month commencing May 5, 2009. The re-measured fair value of these warrants was $3.43 per share at October 1, 2011. On April 27, 2010, the Company issued additional warrants to purchase up to 20,000 shares of common stock to the same holder in connection with the financial advisory services provided to the Company. The warrants vest in twenty-four equal monthly increments of 833 shares each on the last calendar day of each calendar month commencing April 27, 2010. The re-measured fair value of these warrants was $1.55 per share at October 1, 2011. The Company determined the fair value of the warrants using the Black-Scholes option pricing model based on the estimated fair value of the underlying common stock. There were no warrants exercised during the thirty-nine weeks ended October 1, 2011.