Stock-Based Compensation Plans

Employee and Director Stock Options, Restricted Stock and ESPP

We have two active equity incentive plans, the "2013 Incentive Plan and the "2011 Non-Employee Director Equity Incentive Plan", under which shares remain available for grants to employees and non-employee directors, 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 $0.5 million and $0.6 million related compensation expense in fiscal 2019 and 2018, respectively. During fiscal 2017 only, the ESPP was suspended and we recorded no related compensation expense.

At December 28, 2019, a total of 9.0 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 share granted. During fiscal 2019, a total of 2.9 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 28, 2019, a total of 1.4 million shares of our common stock were available for future purchases under the 2012 ESPP.

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 28, 2019		December 29, 2018		December 30, 2017
Cost of revenue	$	1,422	$	940	$	795
Research and development	5,640		4,357		5,245
Selling, general, and administrative	11,837		8,349		6,503
Total stock-based compensation	$	18,899	$	13,646	$	12,543

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.

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 were 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 28, 2019	December 29, 2018	December 30, 2017
Employee and Director Stock Options *
Expected volatility	n/a	39.87% to 41.11%	40.96% to 48.01%
Risk-free interest rate	n/a	2.29% to 2.78%	1.99% to 2.09%
Expected term (years)	n/a	4.08 to 4.25	4.08 to 4.25
Employee Stock Purchase Plan **
Weighted average expected volatility	31.6%	36.4%	n/a
Weighted average risk-free interest rate	2.51%	1.61%	n/a
Expected term	6 months	6 months	n/a

* No stock options granted during fiscal 2019
** ESPP suspended during fiscal 2017 only

At December 28, 2019, there was $3.2 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 1.5 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 28, 2019:



(Shares and aggregate intrinsic value in thousands)	Shares		Weighted average exercise price		Weighted average remaining contractual term (years)	Aggregate Intrinsic Value
Balance, December 29, 2018	6,616		$	5.94
Granted	—		—
Effect of vesting multiplier	36
Exercised	(2,715	)	5.73
Forfeited or expired	(605	)	5.72
Balance, December 28, 2019	3,332		$	6.16
Vested and expected to vest at December 28, 2019	3,332		$	6.16	4.50	$	43,553
Exercisable, December 28, 2019	1,721		$	6.00	3.95	$	22,758

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 2019, 2018, and 2017 was $17.8 million, $6.5 million, and $2.2 million, respectively. The total fair value of options and RSUs vested and expensed in fiscal 2019, 2018, and 2017 was $18.4 million, $13.0 million, and $12.5 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 and $2.02 for fiscal years 2018 and 2017, respectively. No stock options were granted during fiscal 2019. The weighted average fair values for the ESPP, calculated using the Black-Scholes option pricing model with the noted assumptions for the ESPP, were $1.69 and $1.50 for fiscal years 2019 and 2018, respectively.

The following table summarizes our RSU activity for the year ended December 28, 2019:



(Shares in thousands)	Shares		Weighted average grant date fair value
Balance, December 29, 2018	4,412		$	7.53
Granted	2,445		16.23
Effect of vesting multiplier	216		—
Vested	(1,734	)	8.10
Forfeited or expired	(564	)	7.27
Balance, December 28, 2019	4,775		$	12.23

At December 28, 2019 there was $51.9 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.

Market-Based and Performance-Based Stock Compensation

In fiscal years 2017 through 2019, we granted stock options and RSUs with either a market condition (TSR) or a performance condition (Adjusted EBITDA) to certain executives.

The options with a market condition granted in fiscal year 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 fiscal years 2018 and 2019, we granted inducement awards outside of, but subject to the terms and conditions of the 2013 Incentive Plan to certain executives. These awards consisted of RSUs with either a market condition or a performance condition that vest and become payable upon achievement of TSR or 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 either 200% or 250% of the units vesting at the 75th percentile, depending upon the executive, 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. During the third quarter of fiscal 2019, the market condition for awards granted in the previous year achieved the 75^th percentile of the condition, and the first tranche of these awards vested at 200% or 250% of the RSUs, as applicable for the respective executive.

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



	Year Ended
	December 28, 2019	December 29, 2018	December 30, 2017
Executive stock options with a market condition
Expected volatility	n/a	n/a	41%
Risk-free interest rate	n/a	n/a	1.9%
Expected term (years)	n/a	n/a	4.5
Executive RSUs with a market or performance condition
Expected volatility	40.15% to 41.10%	41.06% to 41.74%	n/a
Risk-free interest rate	1.66% to 2.55%	2.71% to 2.87%	n/a
Expected term (years)	3.00	3.00 to 3.16	n/a

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



(Shares in thousands)	Unvested		Vested		Total
Balance, December 29, 2018	909		—		909
Granted	584		—		584
Effect of vesting multiplier	260		—		260
Vested	(484	)	71		(413	)
Exercised	—		(71	)	(71	)
Canceled	(106	)	—		(106	)
Balance, December 28, 2019	1,163		—		1,163

We incurred stock compensation expense related to these stock option and RSU awards with a market or performance condition of approximately $5.7 million, $0.9 million, and $0.5 million in fiscal years 2019, 2018, and 2017, respectively, which is recorded as a component of total stock-based compensation expense.