4. Equity-Based Compensation

At July 1, 2017, Intevac had equity-based awards outstanding under the 2012 Equity Incentive Plan and the 2004 Equity Incentive Plan (together, the “Plans”) and the 2003 Employee Stock Purchase Plan (the “ESPP”). Intevac’s stockholders approved all of these plans. The Plans permit the grant of incentive or non-statutory stock options, restricted stock, stock appreciation rights, restricted stock units (“RSUs”) and performance shares.

The ESPP provides that eligible employees may purchase Intevac’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market value at the entry date 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.

Compensation Expense

The effect of recording equity-based compensation for the three and six months ended July 1, 2017 and July 2, 2016 was as follows:


	Three Months Ended				Six Months Ended
	July 1, 2017		July 2, 2016		July 1, 2017		July 2, 2016
	(In thousands)
Equity-based compensation by type of award:
Stock options	$	202	$	209	$	458	$	485
RSUs		495		480		1,212		1,114
Employee stock purchase plan		90		191		194		392

Total equity-based compensation	$	787	$	880	$	1,864	$	1,991

Equity-based compensation expense is based on awards ultimately expected to vest and such amount has been historically reduced for estimated forfeitures. Beginning January 1, 2017, Intevac accounts for forfeitures as they occur, rather than estimate expected forfeitures. The net cumulative effect of this change was recognized as a $1.1 million increase to the accumulated deficit as of January 1, 2017.

Stock Options and ESPP

The fair value of stock options and ESPP awards is estimated at the grant date using the Black-Scholes option valuation model. The determination of fair value of stock options and ESPP awards on the date of grant using an option-pricing model is affected by Intevac’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual employee stock option exercise behavior.

Option activity as of July 1, 2017 and changes during the six months ended July 1, 2017 were as follows:


	Shares			Weighted Average Exercise Price
Options outstanding at December 31, 2016		2,740,364		$	7.00
Options granted		383,825		$	12.42
Options cancelled and forfeited		(39,604	)	$	11.82
Options exercised		(101,954	)	$	7.03

Options outstanding at July 1, 2017		2,982,631		$	7.63

Options exercisable at July 1, 2017		2,109,908		$	7.22

Intevac issued 195,184 shares under the ESPP during the six months ended July 1, 2017.

Intevac estimated the weighted-average fair value of stock options and employee stock purchase rights using the following weighted-average assumptions:


	Three Months Ended						Six Months Ended
	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Stock Options:
Weighted-average fair value of grants per share	$	4.64		$	1.75		$	4.63		$	1.74
Expected volatility		41.79	%		44.14	%		40.43	%		44.11	%
Risk free interest rate		1.87	%		0.94	%		1.77	%		0.94	%
Expected term of options (in years)		4.4			4.3			4.1			4.3
Dividend yield		None			None			None			None


	Six Months Ended
	July 1, 2017			July 2, 2016
Stock Purchase Rights:
Weighted-average fair value of grants per share	$	2.74		$	1.54
Expected volatility		40.66	%		39.33	%
Risk free interest rate		1.14	%		0.76	%
Expected term of purchase rights (in years)		0.74			1.93
Dividend yield		None			None

The computation of the expected volatility assumptions used in the Black-Scholes calculations for new stock option grants and ESPP purchase rights is based on the historical volatility of Intevac’s stock price, measured over a period equal to the expected term of the stock option grant or purchase right. The risk-free interest rate is based on the yield available on U.S. Treasury Strips with an equivalent remaining term. The expected term 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 equity-based awards and vesting schedules. The expected term of purchase rights represents the period of time remaining in the current offering period. The dividend yield assumption is based on Intevac’s history of not paying dividends and the assumption of not paying dividends in the future.

RSUs

A summary of the RSU activity is as follows:


	Shares			Weighted Average Grant Date Fair Value
Non-vested RSUs at December 31, 2016		949,455		$	4.64
Granted		334,221		$	11.45
Vested		(499,527	)	$	4.46
Cancelled and forfeited		(4,249	)	$	6.72

Non-vested RSUs at July 1, 2017		779,900		$	7.66

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 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.

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. We granted 125,000 of such awards to certain executive officers in the six months ended July 2, 2016. These awards have a derived service period of 2.8 years.

Intevac estimated the weighted-average fair value of market condition-based RSUs using the following weighted-average assumptions:


	Six Months Ended
	July 2, 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

In fiscal 2016, the annual bonus for certain participants in the Company’s annual incentive plan was settled with RSUs with one-year vesting. The Company accrued for the payment of bonuses at the expected company-wide payout percentage amount at July 2, 2016, which amounts were less than the target bonus amounts for each participant. The bonus accrual was classified as a liability until the number of shares is determined on the date the awards were granted, at which time the Company classified the awards into equity. In February 2017, the annual 2016 bonus for certain participants was settled with RSUs with one-year vesting. 33 participants were granted stock awards to receive an aggregate of 134,000 shares of common stock with a weighted average grant date fair value of $9.63 per share. In February 2016, the annual 2015 bonus for certain participants was settled with RSUs with one-year vesting. 34 participants were granted stock awards to receive an aggregate of 266,000 shares of common stock with a weighted average grant date fair value of $4.40 per share. The Company recorded equity-based compensation expense related to the annual incentive plans of $102,000 for the six months ended July 1, 2017. The Company recorded equity-based compensation expense related to the annual incentive plan of $129,000 and $243,000, respectively, for the three and six months ended July 2, 2016.