Note 13. Stockholders’ Equity and Stock-Based Compensation

Options and Employee Stock Purchase Plan (“ESPP”) Awards

The fair value of each option and ESPP 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 Staff Accounting Bulletin No. 107, Share-Based Payment. 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 24, 2016		September 26, 2015		September 24, 2016			September 26, 2015
Employee Stock Purchase Plan:
Expected life	0.5 years		0.5 years		0.5 years			0.5 years
Volatility		38.2%		36.7%		38.7	%		36.9%
Risk free interest rate		0.37%		0.13%		0.44	%		0.12%
Dividends		—		—		—			—

No stock options were awarded during the nine months ended September 24, 2016 and September 26, 2015, respectively.

A summary of activity of stock options during the nine months ended September 24, 2016 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 26, 2015		1,051,867		$	14.60		2.46	$	1,916
Exercised		(352,996	)	$	13.33
Cancelled		(166,849	)	$	15.79
Outstanding at September 24, 2016		532,022		$	15.06		2.32	$	3,849
Exercisable at September 24, 2016		480,462		$	14.91		2.15	$	3,546

The aggregate intrinsic value in the above table represents the total pretax intrinsic value, based on the Company’s closing stock price of $22.29 as of September 23,2016, 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 24, 2016 and September 26, 2015 was $0.5 million and $0.1 million, respectively, and during the nine months ended September 24, 2016 and September 26, 2015 was $1.9 and $1.4 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:

Summary of activity for RSUs	Number of RSUs			Weighted Average Fair Value
Outstanding RSUs as of December 26, 2015		713,243		$	15.99
Granted		455,907		$	17.15
Released		(286,260	)	$	16.11
Cancelled		(45,852	)	$	16.00
Outstanding RSUs as of September 24, 2016		837,038		$	15.58

Market-Based Performance Stock Units (“PSUs”)

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, 66.7% of the shares of the Company’s common stock subject to the PSUs will vest, and up to a maximum of 100% of the shares subject to the PSUs will vest if the maximum stock price performance is achieved for each tranche.

A summary of activity for PSUs is as follows:

Summary of activity for PSUs	Number of PSUs			Weighted Average Fair Value
Outstanding PSUs as of December 26, 2015		60,000		$	18.35
Granted		67,500		$	8.52
Released		(13,333	)	$	18.04
Cancelled		(6,667	)	$	18.04
Outstanding PSUs as of September 24, 2016		107,500		$	12.24

The preceding table reflects the maximum awards that can be achieved upon full vesting.

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:

	2016 Award		2015 Award
Grant Date Fair Value Per Share	$	8.52	$	18.35
Weighted-average assumptions/inputs:
Expected Dividend		—		—
Range of risk-free interest rates		0.92%	0.25%-1.1%
Range of expected volatilities for peer group	22%-93%		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 24, 2016		September 26, 2015		September 24, 2016		September 26, 2015
Cost of products	$	116	$	96	$	273	$	229
Cost of service		138		104		355		195
Research and development		387		300		985		796
Selling		537		511		1,492		1,403
General and administrative		822		671		2,327		2,041
Total stock-based compensation expense related to employee stock options and employee stock purchases	$	2,000	$	1,682	$	5,432	$	4,664