Note 11. 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				Six Months Ended
	July 1, 2017		June 25, 2016		July 1, 2017			June 25, 2016
Employee Stock Purchase Plan:
Expected life	0.5 years		0.5 years		0.5 years			0.5 years
Volatility		35.2%		39.1%		35.2	%		39.1%
Risk free interest rate		0.65%		0.49%		0.65	%		0.49%
Dividends		—		—		—			—

No stock options were awarded during the six months ended July 1, 2017 and June 25, 2016, respectively.

A summary of activity of stock options during the six months ended July 1, 2017 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 31, 2016		440,545		$	15.06		2.12	$	4,405
Exercised		(111,871	)	$	14.66
Cancelled		(438	)	$	15.60
Outstanding at July 1, 2017		328,236		$	15.20		1.76	$	3,313
Exercisable at July 1, 2017		328,236		$	15.20		1.76	$	3,313

The aggregate intrinsic value in the above table represents the total pretax intrinsic value, based on the Company’s closing stock price of $25.29 as of June 30, 2017, 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 July 1, 2017 and June 25, 2016 was $0.6 million and $1.4 million, respectively, and during the six months ended July 1, 2017 and June 25, 2016 was $1.5 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 31, 2016		819,785		$	16.79
Granted		306,333		$	27.44
Released		(315,228	)	$	17.03
Cancelled		(27,644	)	$	16.01
Outstanding RSUs as of July 1, 2017		783,246		$	20.89

Market-Based Performance Stock Units (“PSUs”)

In addition to granting RSUs that vest on the passage of time only, the Company granted PSUs to key executives. The PSUs 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. 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 31, 2016		107,500		$	9.94
Granted		59,550			26.75
Released		(38,500	)		10.41
Cancelled		(4,000	)		12.64
Outstanding PSUs as of July 1, 2017		124,550		$	17.86

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:

	2017 Award		2016 Award
Grant Date Fair Value Per Share		26.75	$	8.52
Weighted-average assumptions/inputs:
Expected Dividend		—		—
Range of risk-free interest rates		1.40%		0.92%
Range of expected volatilities for peer group	23%-62%		22%-93%

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				Six Months Ended
	July 1, 2017		June 25, 2016		July 1, 2017		June 25, 2016
Cost of products	$	215	$	89	$	412	$	156
Cost of service		157		114		302		218
Research and development		355		313		754		598
Selling		528		463		1,067		955
General and administrative		908		764		1,792		1,505
Total stock-based compensation expense related to employee stock options and employee stock purchases	$	2,163	$	1,743	$	4,327	$	3,432