STOCK-BASED COMPENSATION

Stock Options

At December 26, 2018, options to purchase 2,102,404 shares of common stock of the Company were outstanding, including 1,722,455 vested and 379,949 unvested. Unvested options vest over time, or upon our achieving annual financial goals. However, the compensation committee of the board of directors, as administrator of the Company’s 2018 Omnibus Equity Incentive Plan, has the power to accelerate the vesting schedule of stock-based compensation, and, generally, in the event of an employee termination in connection with a change in control of the Company, any unvested portion of an award under the plan shall become fully vested. At December 26, 2018, 1,381,010 premium options, options granted above the stock price at date of grant, remained outstanding. In fiscal 2018 and 2017, the Company granted 311,272 and 135,036 options, respectively, with an exercise price equal to the fair market value of the common stock on the date of grant. The options granted in fiscal 2018 and 2017 had a four-year vesting period. On November 15, 2016, the board of directors approved the modification of the remaining performance based stock options granted in 2014 and 2013 to vest based solely on service conditions. As a result, a) 17,380 performance based stock options that did not vest in fiscal 2015 based on performance targets not being met, vested as of November 15, 2016; b) 80,799 performance based stock options that would not have vested based on 2016 performance targets vested as of December 28, 2016; and c) 17,378 performance based stock options that would not have vested based on the 2017 performance target vested at the end of fiscal 2017, subject to continued employment of the option holder and the other terms and conditions of the 2014 Stock Option Plan. The Company recorded $0.6 million as compensation expense in fiscal 2016 as a result of this stock option modification. As of December 26, 2018, there were no remaining performance based stock options and 2,102,404 time based stock options outstanding. Stock options generally expire 10 years from the date of grant. Changes in stock options for the years ended December 26, 2018 and December 27, 2017, are as follows:



	Shares		Weighted-Average Exercise Price
Outstanding - December 28, 2016	2,191,728		$	7.26
Grants	135,036		13.73
Exercised	(17,661	)	5.26
Forfeited, cancelled or expired	—		—
Outstanding - December 27, 2017	2,309,103		7.65
Grants	311,272		10.98
Exercised	(269,549	)	6.81
Forfeited, cancelled or expired	(248,422	)	12.46
Outstanding - December 26, 2018	2,102,404		$	7.68
Vested and expected to vest at December 26, 2018	2,091,138		$	7.66
Exercisable at December 26, 2018	1,722,455		$	6.86

Stock options at December 26, 2018 are summarized as follows:



Range of Exercise Prices	Number Outstanding	Weighted-Average Remaining Contractual Life (in Years)	Weighted- Average Exercise Price		Number Exercisable	Weighted-Average Exercise Price
$4.09	99,531	4.50	$	4.09	99,531	$	4.09
$5.84	1,381,010	3.52	5.84		1,381,010	$	5.84
$9.65 - $13.95	482,831	8.89	11.59		102,882	$	12.24
$15.00	139,032	5.58	15.00		139,032	$	15.00
$4.09 - $15.00	2,102,404	4.93	$	7.68	1,722,455	$	6.86

The intrinsic value of options outstanding and options exercisable, calculated as the difference between the market value as of December 26, 2018 and the exercise price, is $15.5 million and $14.2 million, respectively. The intrinsic value of options exercised, calculated as the difference between the market value on the date of exercise and the exercise price, was $1.5 million, $0.2 million and $0.9 million for fiscal years 2018, 2017 and 2016, respectively.

The Company measures and recognizes compensation expense for the estimated fair value of stock options for employees and non-employee directors and similar awards based on the grant-date fair value of the award. For options that are based on a service requirement, the cost is recognized on a straight-line basis over the requisite service period, usually the vesting period. For options that were based on performance requirements, costs were recognized over periods to which the performance criteria related. The Company has authorized 5,652,240 shares of common stock for issuance in connection with stock awards. As of December 26, 2018, 1,495,767 shares were available for grant. In order to calculate our stock options’ fair values and the associated compensation costs for share-based awards, the Company utilizes the Black–Scholes option pricing model, and has developed estimates of various inputs including forfeiture rate, expected term, expected volatility, and risk-free interest rate. The forfeiture rate is based on historical rates and reduces the compensation expense recognized. The expected term for options granted is derived using the “simplified” method, in accordance with SEC guidance. The Company calculates the risk-free interest rate using the implied yield for a U.S. Treasury security with constant maturity and a remaining term equal to the expected term of the Company’s employee stock options. The Company does not anticipate paying any cash dividends for the foreseeable future and therefore uses an expected dividend yield of zero for option valuation purposes. Expected volatility is estimated using four publicly-traded companies in our market category. These are selected based on similarities of market capitalization, size, and other financial and operational characteristics. Volatility is calculated by taking the historical daily closing equity prices of our peer companies, prior to the grant date, over a period equal to the expected term.

The weighted-average estimated fair value of employee stock options granted in fiscal 2018 was $3.78 per share using the Black–Scholes model with the following weighted-average assumptions used to value the option grants: expected volatility of 28.4%, expected term of 6.25 years, risk-free interest rate of 2.86% to 2.88%, and expected dividend yield of 0%.

The weighted-average estimated fair value of employee stock options granted in fiscal 2017 was $4.29 per share using the Black–Scholes model with the following weighted-average assumptions used to value the option grants: expected volatility of 28.6%, expected term of 5.75 years, risk-free interest rates of 1.88% to 2.01%, and expected dividend yield of 0%.

During the years ended December 26, 2018, December 27, 2017 and December 28, 2016, the Company recognized stock option compensation expense of $1.1 million, $0.6 million and $0.9 million, respectively. These expenses were included in general and administrative expenses consistent with the salary expense for the related optionees in the accompanying consolidated statements of operations. In connection with the retirement of our former President and Chief Executive Officer ("CEO") during fiscal 2018, the Company modified previously granted equity awards to accelerate the vesting of 33,545 awards, which would have otherwise vested in May 2018, and extended the exercisability of all vested and outstanding options until the expiration of the original term of such awards. As a result, the Company incurred incremental stock-based compensation expense of $0.8 million for the year ended December 26, 2018.

As of December 26, 2018, we had total unrecognized compensation expense of $1.3 million related to unvested stock options, which the Company expects to recognize over a weighted average period of 3.27 years.

The above assumptions generally require significant judgment. If in the future we determine that another method is more reasonable, or if another method for calculating these input assumptions is prescribed by authoritative guidance, and, therefore, should be used to estimate volatility or expected term, the fair value calculated for our stock options could change significantly. Higher volatility and longer expected lives result in an increase to stock-based compensation expense determined at the date of grant. Stock-based compensation expense affects our general and administrative expense.

We estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. Changes in the estimated forfeiture rate can have a significant effect on reported stock-based compensation expense, as the cumulative effect of adjusting the rate for all expense amortization is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously-estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the financial statements. If a revised forfeiture rate is lower than the previously-estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in the financial statements. The effect of forfeiture adjustments was insignificant in fiscal 2018, 2017 and 2016. We will continue to use significant judgment in evaluating the expected term, volatility, and forfeiture rate related to our stock-based compensation.

Restricted Shares

In fiscal 2018 and 2017, 323,764 and 181,292 restricted share and restricted stock unit awards were granted, respectively, at the fair market value on the date of grant. These grants vest based on continued service over three years for directors and four years for employees. Included in the fiscal 2018 restricted stock award grants were 72,116 performance share units which vest over a minimum of one year and a maximum of five years. Performance share units are granted at fair market value on the date of grant and are subject to service-based and market-based vesting conditions. A portion of the performance share units satisfied their market-based vesting conditions during the fourth quarter of fiscal 2018 and will vest upon the satisfaction of their service condition in the second quarter of fiscal 2019. We base the amount of unearned compensation recorded on the fair market value of the awards on the date of issuance. In fiscal 2018, 2017, and 2016 the Company recognized share-based compensation expense of $1.0 million, $0.5 million, and $0.2 million, respectively. This expense was included in general and administrative expenses in the accompanying consolidated statements of operations. As of December 26, 2018, there was total unrecognized compensation expense of $4.6 million related to unvested restricted share awards, which the Company expects to recognize over a weighted-average period of 3.06 years.

Changes in restricted shares for the years ended December 26, 2018 and December 27, 2017, are as follows:



	Shares		Weighted-Average Fair Value
Unvested shares at December 28, 2016	36,752		$	15.42
Granted	181,292		$	13.69
Released	(10,527	)	$	16.48
Forfeited, cancelled, or expired	(10,875	)	$	16.72
Unvested shares at December 27, 2017	196,642		$	13.70
Granted	395,880		$	10.22
Released	(45,991	)	$	13.86
Forfeited, cancelled, or expired	(55,831	)	$	13.42
Unvested shares at December 26, 2018	490,700		$	10.91