5. Equity-Based Compensation

At September 29, 2018, 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 nine months ended September 29, 2018 and September 30, 2017 was as follows:


	Three Months Ended				Nine Months Ended
	September 29, 2018		September 30, 2017		September 29, 2018		September 30, 2017
	(In thousands)
Equity-based compensation by type of award:
Stock options	$	213	$	350	$	563	$	808
RSUs		309		731		945		1,943
ESPP awards		330		67		946		261

Total equity-based compensation	$	852	$	1,148	$	2,454	$	3,012

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 estimating 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.

A summary of the options activity is as follows:


	Shares			Weighted-Average Exercise Price
Options outstanding at December 30, 2017		2,925,861		$	7.62
Options granted		421,125		$	5.13
Options cancelled and forfeited		(936,428	)	$	9.31
Options exercised		(321,190	)	$	4.87

Options outstanding at September 29, 2018		2,089,368		$	6.78

Options exercisable at September 29, 2018		1,331,565		$	6.60

Intevac issued 410,522 shares under the ESPP during the nine months ended September 29, 2018.

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


	Three Months Ended						Nine Months Ended
	September 29, 2018			September 30, 2017			September 29, 2018			September 30, 2017
Stock Options:
Weighted-average fair value of grants per share	$	1.81		$	3.89		$	1.98		$	4.54
Expected volatility		44.10	%		42.10	%		43.83	%		40.54	%
Risk-free interest rate		2.87	%		1.84	%		2.58	%		1.77	%
Expected term of options (in years)		3.90			4.08			4.41			4.10
Dividend yield		None			None			None			None

	Three Months Ended						Nine Months Ended
	September 29, 2018			September 30, 2017			September 29, 2018			September 30, 2017
Stock Purchase Rights:
Weighted-average fair value of grants per share	$	1.87		$	2.76		$	2.24		$	2.75
Expected volatility		50.64	%		48.59	%		47.64	%		43.51	%
Risk-free interest rate		2.58	%		1.36	%		2.01	%		1.22	%
Expected term of purchase rights (in years)		1.58			0.50			1.33			0.65
Dividend yield		None			None			None			None

The computation of the expected volatility assumptions used in the Black-Scholes calculations for new stock option grants and employee stock 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 30, 2017		769,451		$	7.84
Granted		217,917		$	5.07
Vested		(425,956	)	$	7.15
Cancelled and forfeited		(98,737	)	$	8.74

Non-vested RSUs at September 29, 2018		462,675		$	6.98

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 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.

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 bonus accrual was classified as a liability until the number of shares was 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. The Company recorded equity-based compensation expense related to the annual incentive plans of $102,000 for the nine months ended September 30, 2017.