Stock-Based Compensation Plans

Employee and Director Stock Options, Restricted Stock and ESPP

We have four equity incentive plans (the "1996 Stock Incentive Plan," the "2001 Stock Plan," the "2013 Incentive Plan, and the "2011 Non-Employee Director Equity Incentive Plan") and in connection with our acquisition of Silicon Image in 2015, we assumed outstanding awards under the Silicon Image, Inc. 2008 Equity Incentive Plan and the Silicon Image, Inc. 1999 Equity Incentive Plan (together, the “Silicon Image Equity Incentive Plans”). Awards granted under the 1996 Stock Incentive Plan remain outstanding, but no awards granted under the 2001 Stock Plan remain outstanding, and no shares are available for future awards under these plans. Shares remain available for grants to employees and non-employee directors only under the 2013 Incentive Plan and the 2011 Non-Employee Director Equity Incentive Plan, respectively. In addition, we have made grants of inducement awards to certain of our newly hired executives and employees that are granted outside of, but governed by, the 2013 Incentive Plan. "Incentive stock options" under Section 422 of the U.S. Internal Revenue Code and restricted stock unit ("RSU") grants are part of our equity compensation practices for employees who receive equity grants. Options and RSUs generally vest quarterly over a four-year period beginning on the grant date. The contractual terms of options granted do not exceed ten years.

In May 2012, the Company's stockholders approved the 2012 Employee Stock Purchase Plan ("2012 ESPP"), which authorizes the issuance of 3.0 million shares of common stock to eligible employees to purchase shares of common stock through payroll deductions, which cannot exceed 10% of an employee's compensation. The purchase price of the shares is the lower of 85% of the fair market value of the stock at the beginning of each six-month offering period or 85% of the fair market value at the end of such period. We have treated the 2012 ESPP as a compensatory plan. We recorded $0.6 million related compensation expense in both fiscal 2018 and 2016. During fiscal 2017 only, the ESPP was suspended and we recorded no related compensation expense.

At December 29, 2018, a total of 6.1 million shares of our common stock were available for future grants under the 2013 Incentive Plan, and the 2011 Non-Employee Director Equity Incentive Plan. Following our 2018 Shareholder meeting, a share ratio of 2.2:1 was applied to the 2013 Incentive Plan. This ratio takes two and two tenths shares out of the 2013 Plan for every one full value granted. During fiscal 2018, a total of 2.5 million shares were adjusted out of the 2013 Plan. Shares subject to stock option grants that expire or are canceled, without delivery of such shares, generally become available for re-issuance under equity incentive plans. At December 29, 2018, a total of 1.7 million shares of our common stock were available for future purchases under the 2012 ESPP. On March 10, 2015, in conjunction with the acquisition of Silicon Image, we assumed certain outstanding stock option and RSU grants of the Silicon Image Equity Incentive Plans. We assumed all stock option grants that were unvested or vested and out-of-the-money and all outstanding unvested RSU grants. The exchange ratio for the conversion was 1.09816 for all grants. The conversion ratio was determined by the weighted average closing price of Lattice common stock for the ten days prior to the acquisition date divided by the offer price of $7.30. The converted outstanding option grants totaled 2,087,605 shares and converted RSU grants totaled 2,025,255 shares as of March 10, 2015. As of December 29, 2018, 76,449 options and 2,223 RSU shares arising from this conversion remained outstanding.

Stock-Based Compensation

Total stock-based compensation expense included in our Consolidated Statements of Operations is presented in the following table:



	Year Ended
(In thousands)	December 29, 2018		December 30, 2017		December 31, 2016
Cost of products sold	$	940	$	795	$	888
Research and development	4,357		5,245		7,928
Selling, general, and administrative	8,349		6,503		7,397
Total stock-based compensation	$	13,646	$	12,543	$	16,213

The stock-based compensation expense included in Selling, general, and administrative expense for fiscal 2018 includes approximately $1.4 million of additional one-time expense for acceleration of stock compensation under the CEO separation agreement executed with our former CEO during the first quarter of fiscal 2018.

ASC 718, “Compensation-Stock Compensation (“ASC 718”),” requires that we recognize compensation expense for only the portion of employee and director options and ESPP rights that are expected to vest.

The fair values of each option award on the date of grant and of the shares expected to be issued under the employee stock purchase plan are estimated using the Black-Scholes valuation model and the assumptions noted in the following table. The expected term is based on historical vested option exercises and includes an estimate of the expected term for options that are fully vested and outstanding. The expected volatility of both stock options and ESPP shares is based on the daily historical volatility of our stock price, measured over the expected term of the option or the ESPP purchase period. The risk-free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term closest to the expected term of the option. The dividend yield reflects that we have not paid any cash dividends since inception and do not intend to pay any cash dividends in the foreseeable future.

The following table summarizes the assumptions used in the valuation of stock option and ESPP compensation:



	Year Ended
	December 29, 2018	December 30, 2017	December 31, 2016
Employee and Director Stock Options
Expected volatility	39.87% to 41.11%	40.96% to 48.01%	44.2% to 50.8%
Risk-free interest rate	2.29% to 2.78%	1.99% to 2.09%	.94% to 2.06%
Expected term (years)	4.08 to 4.25	4.08 to 4.25	4.06 to 4.78
Employee Stock Purchase Plan *
Weighted average expected volatility	36.4%	—%	57.9%
Weighted average risk-free interest rate	1.61%	—%	0.43%
Expected term	6 months	n/a	6 months

* ESPP suspended during fiscal 2017 only

At December 29, 2018, there was $6.8 million of total unrecognized compensation cost related to unvested employee and director stock options, which is expected to be recognized over a weighted average period of 2.3 years. Our current practice is to issue new shares to satisfy option exercises. Compensation expense for all stock-based compensation awards is recognized using the straight-line method.

The following table summarizes our stock option activity and related information for the year ended December 29, 2018:



(Shares and aggregate intrinsic value in thousands)	Shares		Weighted average exercise price		Weighted average remaining contractual term (years)	Aggregate Intrinsic Value
Balance, December 30, 2017	12,939		$	5.76
Granted	843		7.61
Exercised	(4,882	)	5.79
Forfeited or expired	(2,284	)	5.87
Balance, December 29, 2018	6,616		$	5.94
Vested and expected to vest at December 29, 2018	6,616		$	5.94	4.26	$	6,788
Exercisable, December 29, 2018	3,122		$	5.70	2.82	$	3,668

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company's closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on that day. This amount changes based on the fair market value of the Company's stock. Total intrinsic value of options exercised for fiscal 2018, 2017, and 2016 was $6.5 million, $2.2 million, and $3.3 million, respectively. The total fair value of options and RSUs vested and expensed in fiscal 2018, 2017, and 2016 was $13.0 million, $12.5 million, and $15.6 million, respectively.

The resultant grant date weighted-average fair values for stock options granted, calculated using the Black-Scholes option pricing model with the noted assumptions for stock options, were $2.73, $2.02 and $2.14 for fiscal years 2018, 2017 and 2016, respectively. The weighted average fair values for the ESPP, calculated using the Black-Scholes option pricing model with the noted assumptions for the ESPP, were $1.50 and $1.82 for fiscal years 2018 and 2016, respectively.

The following table summarizes our RSU activity for the year ended December 29, 2018:



(Shares in thousands)	Shares		Weighted average grant date fair value
Balance, December 30, 2017	2,766		$	5.85
Granted	3,498		8.02
Vested	(1,124	)	5.97
Forfeited or expired	(728	)	5.90
Balance, December 29, 2018	4,412		$	7.53

At December 29, 2018 there was $31.6 million of total unrecognized compensation cost related to unvested RSUs. Our current practice is to issue new shares when RSUs vest. Compensation expense for RSUs is recognized using the straight-line method over the related vesting period.

In fiscal years 2016 through 2018, we granted stock options and RSUs with either a market condition or a performance condition to certain executives. The market condition is a comparison of the Company's relative Total Shareholder Return ("TSR") when compared to the TSR of a component of companies of the PHLX Semiconductor Sector Index over a measurement period. TSR is a measure of stock price appreciation plus dividends paid, if any, in the performance period. We determined and fixed the fair value of the awards with a market condition on the date of grant using a lattice-based option-pricing model. The valuation of these awards incorporated a Monte-Carlo simulation, and considered the likelihood that we would achieve the market condition. The performance condition is based upon the Company’s generating specified “adjusted” EBITDA levels on a trailing four-quarter basis in any two consecutive trailing four-quarter periods. We valued the RSUs with a performance condition using the market price on the day of grant.

The options with a market condition granted in fiscal years 2016 and 2017 have a two year vesting period and vest between 0% and 200% of the target amount, based on the Company's relative TSR when compared to the TSR of a component of companies of the PHLX Semiconductor Sector Index over a two year period. Under the terms of the grants, executives will receive the target amount if the Company’s TSR relative to that of the Index achieves or exceeds the 50^th percentile. Executives may receive 200% if the Company’s TSR exceeds the 75^th percentile. No vesting occurs if the Company’s TSR does not exceed the 25^th percentile.

In September 2018, we granted inducement awards outside of, but subject to the terms and conditions of the 2013 Incentive Plan to our incoming President and Chief Executive Officer. These awards included restricted stock units that vest and become payable upon satisfaction of certain market and performance conditions. The market and performance conditions include TSR and Adjusted EBITDA targets, respectively. The TSR-based awards vest and become payable over a three-year period based on the Company’s TSR relative to the PHLX Semiconductor Sector Index, with 100% of the units vesting at the 50th percentile and 250% of the units vesting at the 75th percentile achievement, zero vesting if relative TSR is below the 25th percentile, and vesting scaling linearly for achievement between the 25th and 75th percentile. The Adjusted EBITDA-based awards will vest and become payable based upon the Company’s generating specified “adjusted” EBITDA levels on a trailing four quarter basis in any two consecutive trailing four-quarter periods.

In September 2018, we granted inducement awards outside of, but subject to the terms and conditions of the 2013 Incentive Plan to our incoming Corporate Vice President of Research and Development, and we granted awards from the 2013 Incentive Plan to certain executives including our incoming Corporate Vice President of Marketing and Strategy and our Corporate Vice President and General Counsel. These awards included restricted stock units that would vest and become payable upon achievement of a target TSR. The awards vest and become payable over a three-year period based on the Company’s TSR relative to the PHLX Semiconductor Sector Index, with 100% of the units vesting at the 50th percentile and 200% of the units vesting at the 75th percentile achievement, zero vesting if relative TSR is below the 25th percentile, and vesting scaling linearly for achievement between the 25th and 75th percentile.

The following table summarizes the activity for our stock options and RSUs with a market or performance condition:



(Shares in thousands)	Unvested		Vested		Total
Balance, December 30, 2017	707		83		790
Granted	788		—		788
Vested	(31	)	31		—
Exercised	—		(104	)	(104	)
Canceled	(555	)	(10	)	(565	)
Balance, December 29, 2018	909		—		909

We incurred stock compensation expense related to these stock option and RSU awards with a market or performance condition of approximately $0.9 million, $0.5 million, and $0.8 million in fiscal years 2018, 2017, and 2016, respectively, which is recorded as a component of total stock-based compensation expense.

The following table summarizes the assumptions used in the valuation of stock options and RSUs with a market or performance condition:



	Year Ended
	December 29, 2018	December 30, 2017	December 31, 2016
Executive stock options with a market condition
Expected volatility	n/a	41%	46%
Risk-free interest rate	n/a	1.9%	1.1%
Expected term (years)	n/a	4.5	4.5
Executive RSUs with a market or performance condition
Expected volatility	41.06% to 41.74%	n/a	n/a
Risk-free interest rate	2.71% to 2.87%	n/a	n/a
Expected term (years)	3.00 to 3.16	n/a	n/a