2. Equity-Based Compensation

Intevac accounts for share-based awards in accordance with the provisions of the accounting guidance which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, consultants and directors based upon the grant-date fair value of those awards. The estimated fair value of Intevac’s equity-based awards, less expected forfeitures, is amortized over the awards’ service periods using the graded vesting attribution method.

Descriptions of Plans

Equity Incentive Plans

At December 31, 2016, Intevac had equity-based awards outstanding under the 2012 Equity Incentive Plan and the 2004 Equity Incentive Plan (the “Plans”) and the 2003 Employee Stock Purchase Plan (the “ESPP”). Intevac’s stockholders approved all of these plans.

The Plans are a broad-based, long-term retention program intended to attract and retain qualified management and employees, and align stockholder and employee interests. The Plans permit the grant of incentive or non-statutory stock options, restricted stock, stock appreciation rights, RSUs and performance shares. Option price, vesting period, and other terms are determined by the administrator of the Plans, but the option price shall generally not be less than 100% of the fair market value per share on the date of grant. As of December 31, 2016, 5.5 million shares of common stock were authorized for future issuance under the Plans. The 2012 Plan expires no later than May 8, 2022.

2003 Employee Stock Purchase Plan

In 2003, Intevac’s stockholders approved adoption of the ESPP, which serves as the successor to the Employee Stock Purchase Plan originally adopted in 1995. Upon adoption of the ESPP, all shares available for issuance under the prior plan were transferred to the ESPP. The ESPP provides that eligible employees may purchase Intevac common stock through payroll deductions at a price equal to 85% of the lower of the fair market value at the beginning of the applicable offering period or at the end of each applicable purchase interval. Offering periods are generally two years in length, and consist of a series of six-month purchase intervals. Eligible employees may join the ESPP at the beginning of any six-month purchase interval. Under the terms of the ESPP, employees can choose to have up to 15% of their base earnings withheld to purchase Intevac common stock. As of December 31, 2016, 242,000 shares remained available for issuance under the ESPP.

The effect of recording equity-based compensation for fiscal 2016, 2015 and 2014 was as follows (in thousands):


	2016		2015		2014
Equity-based compensation by type of award:
Stock options	$	880	$	963	$	1,094
RSUs		2,190		1,711		1,464
Employee stock purchase plan		674		946		442

Total equity-based compensation	$	3,744	$	3,620	$	3,000

Stock Options

The exercise price of each stock option equals the market price of Intevac’s stock on the date of grant. Most options are scheduled to vest over three and/or four years and expire no later than ten years after the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. This model was developed for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable. Intevac’s employee stock options have characteristics significantly different from those of publicly traded options. The weighted-average assumptions used in the model are outlined in the following table:


	2016			2015			2014
Stock Options:
Weighted-average fair value of grants per share	$	1.76		$	2.05		$	3.15
Expected volatility		43.86	%		46.12	%		52.12	%
Risk free interest rate		0.97	%		1.42	%		1.39	%
Expected term of options (in years)		4.28			3.99			4.38
Dividend yield		None			None			None

The computation of the expected volatility assumption used in the Black-Scholes calculations for new grants is based on historical volatility of Intevac’s stock price. The risk-free interest rate is based on the yield available on U.S. Treasury Strips with an equivalent remaining term. The expected life of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards and vesting schedules. The dividend yield assumption is based on Intevac’s history of not paying dividends and the assumption of not paying dividends in the future.

A summary of the stock option activity is as follows:


	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Options outstanding at January 2, 2016		2,433,647		$	7.52		4.10	$	141,546
Options granted		422,500		$	4.88
Options cancelled and forfeited		(107,230	)	$	10.69
Options exercised		(8,553	)	$	4.47

Options outstanding at December 31, 2016		2,740,364		$	7.00		3.64	$	5,837,900

Vested and expected to vest at December 31, 2016		2,624,994		$	7.07		3.55	$	5,476,403
Options exercisable at December 31, 2016		1,829,765		$	7.73		2.74	$	3,082,215

The total intrinsic value of options exercised during fiscal years 2016, 2015 and 2014 was $13,000, $65,000 and $496,000, respectively. At December 31, 2016, Intevac had $640,000 of total unrecognized compensation expense, net of estimated forfeitures, related to stock option plans that will be recognized over the weighted-average period of 1.17 years.

The options outstanding and currently exercisable at December 31, 2016 were in the following exercise price ranges:


	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number of Shares Outstanding		Weighted Average Remaining Contractual Term (years)		Weighted Average Exercise Price		Number Vested and Exercisable		Weighted Average Exercise Price
$3.91 - —$ 5.42		1,023,311		4.88	$	4.77		407,446	$	4.54
$5.43 - $7.37		924,908		3.93	$	6.61		660,729	$	6.61
$7.38 - $20.10		792,145		1.71	$	10.34		761,590	$	10.42

$3.91 - $20.10		2,740,364		3.64	$	7.00		1,829,765	$	7.73

RSUs

A summary of the RSU activity is as follows:


	Shares			Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Non-vested RSUs at January 2, 2016		553,584		$	6.16		1.02	$	2,607,381
Granted		768,527		$	4.20
Vested		(268,883	)	$	6.46
Cancelled		(103,773	)	$	4.81

Non-vested RSUs at December 31, 2016		949,455		$	4.64		1.04	$	8,117,840

Time-based RSUs are converted into shares of Intevac common stock upon vesting on a one-for-one basis. Time-based RSUs typically are scheduled to vest over three and/or four years. Vesting of time-based RSUs is subject to the grantee’s continued service with Intevac. The compensation expense related to these awards is determined using the fair market value of Intevac common stock on the date of the grant, and the compensation expense is recognized over the vesting period. At December 31, 2016, Intevac had $1.4 million of total unrecognized compensation expense, net of estimated forfeitures, related to RSUs that will be recognized over the weighted-average period of 1.04 years.

Market condition-based RSUs vest upon the achievement of certain market conditions (our stock performance) during a set performance period (typically five years) subject to the grantee’s continued service with Intevac through the date the applicable market condition is achieved. The fair value is based on the values calculated under the Monte Carlo simulation model on the grant date. Compensation cost is not adjusted in future periods for subsequent changes in the expected outcome of market related conditions. The compensation expense is recognized over the derived service period. Intevac granted 125,000 of such awards to certain executive officers in fiscal 2016. These awards have a derived service period of 2.8 years. The weighted-average assumptions used in the model are outlined in the following table.


	2016
Weighted-average fair value of grants per share	$	2.46
Expected volatility		47.65	%
Risk free interest rate		1.35	%
Expected term (in years)		4.79
Dividend yield		None

The annual bonus for certain participants in the Company’s annual incentive plan for fiscal 2016 will be settled with RSUs with one year vesting issued in 2017. The Company accrued for the payment of bonuses at the expected company-wide payout percentage amount at December 31, 2016, which amounts were less than the target bonus amounts for each participant. The bonus accrual is classified as a liability until the number of shares is determined on the date the awards are granted, at which time the Company classifies the awards into equity. The Company recorded equity-based compensation expense related to the annual incentive plan of $490,000 in fiscal 2016. At December 31, 2016, Intevac had $566,000 of total unrecognized compensation expense, net of estimated forfeitures, related to the annual incentive plan that will be recognized over a remaining period of 1.15 years.

The annual bonus for certain participants in the Company’s annual incentive plan for fiscal 2015 was settled with RSUs with one year vesting issued in 2016. The Company recorded equity-based compensation expense related to the annual incentive plan of $324,000 in fiscal 2015. In February 2016, the annual bonus for certain participants was settled with RSUs with one year vesting. Thirty-four participants were granted stock awards to receive 266,000 shares of common stock with a weighted-average grant date fair value of $4.40 per share.

The annual bonus for certain participants in the Company’s annual incentive plan for fiscal 2014 was settled with RSUs with one year vesting issued in 2015. The Company recorded equity-based compensation expense related to the annual incentive plan of $554,000 in fiscal 2014. In February 2015, the annual bonus for certain participants was settled with RSUs with one year vesting. Twenty-nine participants were granted stock awards to receive 133,000 shares of common stock with a weighted-average grant date fair value of $6.85 per share.

ESPP

The fair value of the employee stock purchase right is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:


	2016			2015			2014
Stock Purchase Rights:
Weighted-average fair value of grants per share	$	1.55		$	2.14		$	2.08
Expected volatility		39.22	%		43.45	%		44.00	%
Risk free interest rate		0.75	%		0.45	%		0.11	%
Expected term of purchase rights (in years)		1.87			1.36			0.69
Dividend yield		None			None			None

The expected life of purchase rights is the period of time remaining in the current offering period.

The ESPP activity during fiscal 2016, 2015 and 2014 is as follows:


	2016		2015		2014
	(in thousands, except per share amounts)
Shares purchased		384		374		444
Weighted-average purchase price per share	$	3.78	$	3.90	$	3.63
Aggregate intrinsic value of purchase rights exercised	$	514	$	688	$	1,444

As of December 31, 2016, Intevac had $277,000 of total unrecognized compensation expense, net of estimated forfeitures related to purchase rights that will be recognized over the weighted-average period of 0.56 years.