Stockholders’ Equity

The Company recognizes stock-based compensation in accordance with the provisions of ASC Topic 718, Compensation--Stock Compensation. The Company adopted ASC Update No. 2016-09, Compensation-Stock Compensation (ASC Topic 718): Improvements to Employee Share-Based Payment Accounting on January 1, 2017. Although this ASC update did not impact the Company’s results of operations, financial position or cash flows for any periods prior to the adoption, the adoption of this ASC update had the following impact on the date of adoption:

•

The adoption of ASC Update No. 2016-09 requires all income tax adjustments to be recorded in the consolidated statements of operations. The cumulative adjustment upon adoption to accumulated earnings was zero since the increase in net deferred tax assets was fully offset by a corresponding increase in the deferred tax asset valuation allowance. The amount of deferred tax assets that had not been previously recognized due to the recognition of excess tax benefits was $1,571.


•	The tax benefit or expense is required to be classified as a cash flow provided by (used in) operating activities. It was previously required to be presented as a cash flow provided by (used in) financing activities in the Consolidated Statements of Cash Flows, with a corresponding adjustment to operating cash flows.


•	In the diluted net earnings per share calculation, when applying the treasury stock method for shares that could be repurchased, the assumed proceeds no longer include the amount of excess tax benefit. This provision, which is only applicable on a prospective basis, did not have an impact on the Company's diluted net earnings per share calculation for the year ended December 31, 2017.

•

The Company has elected to account for forfeitures on share-based payments as these forfeitures occur instead of a 5% forfeiture rate, which represents a change from the accounting previously required under ASC Topic 718. As a result, future forfeitures could result in a significant reversal of stock-based compensation expense recognized in the period in which such forfeitures occur. During the year ended December 31, 2017, as a result of share-based award forfeitures, the Company recorded a reversal of previously recognized stock-based compensation expense of $215. In addition, had the Company continued to account for stock-based compensation expense related to forfeitures of share-based payments based on estimating the number of awards expected to be forfeited and recognizing only stock-based compensation expense on awards expected to vest, the Company would have recognized $3,449 of stock-based compensation expense, or $19 less than what was actually recorded, during the year ended December 31, 2017.

Stock-based compensation expense, excluding compensation charges related to our employee stock purchase plan, or the ESPP, was $3,468 and $3,640 for the year ended December 31, 2017 and 2016, respectively.


(a)	Employee Stock Options

The Company is authorized to grant stock options, restricted stock awards and other stock-based awards under its 2016 Equity and Incentive Plan (the 2016 Plan) with respect to up to 3,000 shares of common stock (plus up to an additional 1,690 shares in respect of certain awards under earlier equity compensation plans that may be forfeited, cancelled, reacquired by the Company or terminated after adoption of the 2016 Plan). Options are generally granted with an exercise price equal to the fair market value of the common stock on the date of grant and generally vest in equal annual amounts over four years beginning on the first anniversary of the date of the grant. No options are exercisable for periods of more than five years after date of grant. Under the 2016 Plan, each share issued under awards other than options and stock appreciation rights will reduce the number of shares reserved for issuance by two shares. Shares issued under options or stock appreciation rights will reduce the shares reserved for issuance on a share-for-share basis. The 2016 Plan and earlier equity compensation plans, pursuant to which an aggregate of 12,415 shares of the Company’s common stock were reserved for issuance, were all approved by the Company's shareholders. As of December 31, 2017, 1,715 shares were available for future grants. The Compensation Committee of the Board of Directors administers the equity compensation plans, approves the individuals to whom awards will be granted and determines the number of shares and other terms of each award. Outstanding options under the Company's equity compensation plans at December 31, 2017 expire from February 2018 through November 2022. None of the Company’s outstanding options includes performance-based or market-based vesting conditions as of December 31, 2017.

The Company has estimated the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model. The expected volatility assumption is based on the historical daily price data of the Company’s common stock over a period equivalent to the weighted average expected life of the Company’s options. The expected term of options granted is derived using assumed exercise rates based on historical exercise patterns and represents the period of time the options granted are expected to be outstanding. The risk-free interest rate is based on the actual U.S. Treasury zero-coupon rates for bonds matching the expected term of the option as of the option grant date. The dividend yield of zero is based upon the fact that the Company has not historically declared or paid cash dividends, and does not expect to declare or pay dividends in the foreseeable future.

The per share weighted-average fair values of stock options granted during 2017, 2016, and 2015 were $2.74, $2.77, and $4.39, respectively. The weighted-average assumptions used to value options as of their grant date were as follows:



	Year Ended December 31,
	2017		2016		2015
Risk-free interest rate	1.98	%	1.43	%	1.55	%
Expected volatility	35.7	%	38.2	%	43.3	%
Expected life (in years)	4.22		4.18		4.17
Dividend yield	0	%	0	%	0	%

The changes in outstanding stock options for the year ended December 31, 2017, 2016, and 2015 are as follows:



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in Years)	Aggregate Intrinsic Value
Outstanding at December 31, 2016	686		$	11.41
Granted	682		$	8.65
Exercised	(134	)	$	9.24
Expired, canceled or forfeited	(170	)	$	10.46
Outstanding at December 31, 2017	1,064		$	10.06	3.27	$	1,268
Exercisable at December 31, 2017	307		$	12.37	1.37	$	9
Options vested or expected to vest at December 31, 2017	1,064		$	10.06	3.27	$	1,268



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in Years)	Aggregate Intrinsic Value
Outstanding at December 31, 2015	1,177		$	11.60
Granted	75		$	8.90
Exercised	(269	)	$	9.06
Expired, canceled or forfeited	(297	)	$	13.68
Outstanding at December 31, 2016	686		$	11.41	2.23	$	681
Exercisable at December 31, 2016	379		$	11.39	1.50	$	382
Options vested or expected to vest at December 31, 2016	674		$	11.42	2.04	$	662



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in Years)	Aggregate Intrinsic Value
Outstanding at December 31, 2014	1,205		$	11.65
Granted	120		$	12.04
Exercised	(10	)	$	8.64
Expired, canceled or forfeited	(138	)	$	12.59
Outstanding at December 31, 2015	1,177		$	11.60	2.04	$	123
Exercisable at December 31, 2015	687		$	11.60	2.00	$	122
Options vested or expected to vest at December 31, 2015	1,154		$	11.58	1.25	$	111

The total aggregate intrinsic value of options exercised was $149, $484, and $50 in 2017, 2016, and 2015, respectively.

As of December 31, 2017, there was $1,789 of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted-average period of 2.99 years. In 2017, 2016, and 2015, the Company recorded compensation charges of $707, $702, and $1,229, respectively, related to stock options. Compensation costs for options subject only to service conditions that vest ratably are recognized on a straight-line basis over the requisite service period for the entire award. During 2017, 2016, and 2015, cash received under stock option plans for exercises was $1,236, $2,438 and $90, respectively.


(b)	Restricted Stock

The Company granted 271, 424, and 203 restricted stock awards to employees under the terms of the 2016 Plan or the Amended and Restated 2006 Stock Incentive Plan (2006 Plan) for the years ended December 31, 2017, 2016, and 2015, respectively. The restricted stock awards generally vest annually over four years from the date of grant subject to the recipient remaining an employee through the applicable vesting dates. Compensation expense for restricted stock awards is measured at fair value on the date of grant based on the number of shares granted and the quoted market closing price of the Company’s common stock. Such value is recognized as expense over the vesting period of the award, net of forfeitures. The weighted-average grant-date fair value of restricted stock granted during 2017, 2016, and 2015 was $8.83, $8.68, and $12.43 per share, respectively.

As of December 31, 2017, there was $3,863 of total unrecognized compensation expense related to restricted stock awards, which is expected to be recognized over a weighted-average period of 2.15 years. Compensation costs for awards subject only to service conditions that vest ratably are recognized on a straight-line basis over the requisite service period for the entire award. Compensation cost for awards initially subject to certain performance conditions are recognized on a ratable basis over the requisite service period for the entire award. In 2017, 2016, and 2015, the Company recorded compensation charges of $2,760, $2,938, and $2,422, respectively, related to restricted stock awards.

Restricted stock activity under the 2006 Plan and the 2016 Plan for 2017 is as follows:



	Number of Shares		Weighted- average grant date fair value
Outstanding at December 31, 2016, unvested	644		$	10.58
Granted	271		8.83
Vested	(269	)	11.20
Forfeited	(42	)	9.57
Outstanding at December 31, 2017, unvested	604		$	9.59


(c)	Employee Stock Purchase Plan

Under the Company's Amended and Restated 1996 Employee Stock Purchase Plan (ESPP), an aggregate of 1,650 shares of common stock have been reserved for issuance, of which 954 shares remain available as of December 31, 2017.

The ESPP covers all of the Company’s employees. Under the terms of the ESPP, eligible employees can elect to have up to six percent of their pre-tax compensation withheld to purchase shares of the Company’s common stock on a semi-annual basis. Before the amendment to the plan, the ESPP allowed eligible employees the right to purchase the Company’s common stock on a semi-annual basis at 85% of the market price at the end of each purchase period. Under the amendment, the ESPP now allows eligible employees the right to purchase the Company's common stock on a semi-annual basis at 85% of the market price on the first or last day of each purchase period, whichever is lower. During 2017, 2016, and 2015, shares issued under this plan were 46, 18, and 28 shares, respectively. The Company utilizes the Black-Scholes option-pricing model to calculate the fair value of these discounted purchases. The fair value of the 15% discount is recognized as compensation expense over the purchase period. The Company applies a graded vesting approach because the ESPP provides for multiple purchase periods and is, in substance, a series of linked awards. In 2017, 2016, and 2015, the Company recorded compensation charges of $50, $11, and $58, respectively, related to the ESPP. During 2017, 2016, and 2015, cash received under the ESPP was $358, $146, and $291, respectively.


(d)	Stock- Based Compensation Expense

The following presents stock-based compensation expense, including expense for the ESPP, in the Company's consolidated statements of operations for the years ended December 31, 2017, 2016, and 2015.



	2017		2016		2015
Cost of product sales	$	298	$	321	$	317
Cost of service sales	18		1		—
Research and development	696		690		619
Sales, marketing and support	780		1,027		927
General and administrative	1,726		1,612		1,871
	$	3,518	$	3,651	$	3,734