Stockholders’ Equity and Stock-Based Compensation

Options and ESPP Awards

The fair value of each option award is estimated on the grant date using the Black-Scholes valuation model and the assumptions noted in the following table. The expected lives of options granted were calculated using the simplified method allowed by the SAB 107. The risk-free rates were based on the U.S Treasury rates in effect during the corresponding period of grant. The expected volatility was based on the historical volatility of the Company’s stock price. The dividend yield reflects that the Company has not paid any cash dividends since inception and does not intend to pay any cash dividends in the foreseeable future.



	Three Months Ended		Nine Months Ended
	September 26, 2015	September 27, 2014	September 26, 2015	September 27, 2014
Stock Options:
Expected life	—	—	—	4.6 years
Volatility	—	—	—	54.9%
Risk free interest rate	—	—	—	1.54%
Dividends	—	—	—	—
Employee Stock Purchase Plan:
Expected life	0.5 years	0.5 years	0.5 years	0.5 years
Volatility	36.7%	29.6%	36.9%	32.6%
Risk free interest rate	0.13%	0.06%	0.12%	1.00%
Dividends	—	—	—	—

No stock options were awarded during the nine months ended September 26, 2015 or three months ended September 27, 2014. The weighted average fair value per share of the stock options awarded in the nine months ended September 27, 2014 was $8.13.

A summary of activity of stock options during the nine months ended September 26, 2015 is as follows:



	Number of Shares Outstanding (Options)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in Thousands)
Options
Outstanding at December 27, 2014	1,382,993		$	13.92	3.41	$	4,108
Exercised	(191,037	)	9.86
Cancelled	(72,527	)	17.22
Outstanding at September 26, 2015	1,119,429		$	14.40	2.63	$	925
Exercisable at September 26, 2015	948,053		$	14.07	2.28	$	925

The aggregate intrinsic value in the above table represents the total pretax intrinsic value, based on the Company’s closing stock price of $12.33 as of September 26, 2015, the last trading day of the quarter, which would have been received by the option holders had all option holders exercised their options as of that date. The total intrinsic value of options exercised during the three months ended September 26, 2015 and September 27, 2014 was $0.1 million and $0.4 million, respectively, and during the nine months ended September 26, 2015 and September 27, 2014 was $1.4 million and $2.9 million, respectively.

Restricted Stock Units (“RSUs”)

Time-based RSUs are valued using the market value of the Company’s common stock on the date of grant, assuming no expectation of dividends paid.

A summary of activity for RSUs is as follows:



RSUs	Number of RSUs		Weighted Average Fair Value
Outstanding RSUs as of December 27, 2014	563,337		$	17.90
Granted	448,299		15.64
Released	(223,143	)	16.70
Cancelled	(59,655	)	17.10
Outstanding RSUs as of September 26, 2015	728,838		$	16.02

Market-Based Performance Stock Units (“PSUs”)

In March 2015, in addition to granting RSUs that vest on the passage of time only, the Company granted PSUs to an executive. The PSUs will vest in three equal tranches over one, two and three years based on the relative performance of the Company’s stock during those periods, compared to a peer group over the same period. If target stock price performance is achieved, 40,000 shares of the Company’s common stock will vest, and up to a maximum of 60,000 shares will vest if the maximum stock price performance is achieved for each tranche.

Valuation of PSUs

On the date of grant, the Company estimated the fair value of PSUs using a Monte Carlo simulation model. The assumptions for the valuation of PSUs are summarized as follows:



	2015 Award
Number of PSUs granted and outstanding as of September 26, 2015	40,000
Grant Date Fair Value Per Share	$	18.35
Weighted-average assumptions/inputs:
Expected Dividend	—
Range of risk-free interest rates	0.25%-1.1%
Range of expected volatilities for peer group	23%-65%

Stock-based Compensation Expense

Stock-based compensation expense for all share-based payment awards made to the Company’s employees and directors pursuant to the employee stock option and employee stock purchase plans by function were as follows (in thousands):



	Three Months Ended				Nine Months Ended
	September 26, 2015		September 27, 2014		September 26, 2015		September 27, 2014
Cost of products	$	96	$	70	$	229	$	199
Cost of service	104		53		195		227
Research and development	300		331		796		967
Selling	511		490		1,403		1,353
General and administrative	671		761		2,041		2,369
Total stock-based compensation expense	$	1,682	$	1,705	$	4,664	$	5,115