Stock-Based Compensation

For the years ended December 31, 2016, 2015 and 2014 stock-based compensation expense was $8.0 million, $7.4 million and $6.7 million, respectively, of which $4.7 million, $4.7 million and $4.3 million, respectively, related to stock options and $2.4 million, $2.0 million and $2.1 million, respectively, related to RSUs and PSUs. For the years ended December 31, 2016, 2015 and 2014 the Company recorded $0.9 million, $0.7 million and $0.3 million in stock-based compensation expense, respectively, associated with the deferred bonus compensation program, described in Note 4. During the years ended December 31, 2016, 2015 and 2014, $0.9 million, $0.6 million and $0.3 million, respectively, were initially recorded as a component of accrued payroll and related expenses.

Stock-based compensation expense related to stock options, RSUs and PSUs was as follows (in thousands):



	Year ended December 31,
	2016		2015		2014
Cost of sales	$	617	$	581	$	609
Research and development	1,551		734		1,062
Sales and marketing	1,189		1,554		1,059
General and administrative	4,629		4,550		3,994
	$	7,986	$	7,419	$	6,724

Stock-based compensation expense capitalized to inventory and compensation expense related to the Company’s ESPP were not material for the years ended December 31, 2016, 2015 and 2014.

Stock Options

Compensation expense related to stock options granted is recognized ratably over the service vesting period for the entire option award. For stock options with graded vesting, the Company ensures that the cumulative amount of compensation expense recognized at the end of any reporting period at least equals the portion of the stock option that has vested at that date. The total number of stock options expected to vest is adjusted by estimated forfeiture rates. The estimated fair value of each stock option was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions for the option grants:



	Year ended December 31,
	2016		2015		2014
Risk-free interest rate	1.47	%	1.50	%	1.59	%
Expected option life (in years)	6.59		6.24		5.78
Volatility rate	36	%	40	%	42	%
Dividend rate	—	%	—	%	—	%

The computation of the expected option life is based on a weighted-average calculation combining the average life of options that have already been exercised and post-vest cancellations with the estimated life of the remaining vested and unexercised options. The expected volatility is based on the historical volatility of the Company’s stock. The risk-free interest rate is based on the U.S. Treasury yield curve over the expected term of the option. The Company has never paid any cash dividends on its common stock, and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model. The Company’s estimated forfeiture rate is based on its historical experience and future expectations.

The Company’s determination of fair value is affected by the Company’s stock price as well as a number of assumptions that require judgment. The weighted-average fair value per share was $6.00, $9.46 and $10.96 for options granted during the years ended December 31, 2016, 2015 and 2014, respectively. The total intrinsic value was $4.5 million, $1.6 million and $2.8 million for options exercised during the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, total unrecognized compensation expense related to stock options was approximately $5.8 million and the related weighted-average period over which it is expected to be recognized is approximately 2.2 years. The maximum contractual term of the Company’s stock options is ten years.

A summary of the status of stock option activity for the years ended December 31, 2014, 2015 and 2016 is as follows (in thousands, except price data and years):



	Number of Shares		Weighted- average exercise price per share		Weighted- average remaining contractual term (in years)	Aggregate intrinsic value
Outstanding at January 1, 2014	3,474		$	14.74
Granted	559		26.63
Exercised	(251	)	13.67
Cancelled	(175	)	20.63
Outstanding at December 31, 2014	3,607		16.37
Granted	659		23.15
Exercised	(168	)	12.30
Cancelled	(131	)	23.41
Outstanding at December 31, 2015	3,967		17.44
Granted	677		15.48
Exercised	(553	)	13.76
Cancelled	(150	)	20.86
Outstanding at December 31, 2016	3,941		$	17.49	5.52	$	19,236
Vested and expected to vest at December 31, 2016	3,781		$	17.45	5.38	$	18,590
Exercisable at December 31, 2016	2,529		$	15.92	3.95	$	15,451
Available for future grant at December 31, 2016	2,572

Restricted Stock Units

The Company grants both time-based RSUs and PSUs. The fair value of RSUs and PSUs is determined based on the closing market price of the Company’s common stock on the grant date. Compensation expense for RSUs is measured at the grant date and recognized ratably over the vesting period. A portion of the restricted stock granted in 2012 was performance-based and vesting was tied to achievement of specific Company goals in 2014. For purposes of measuring compensation expense for PSUs, the amount of shares ultimately expected to vest was estimated at each reporting date based on management’s expectations regarding the relevant performance criteria. The recognition of compensation expense associated with the PSUs required judgment in assessing the probability of meeting the performance goals, as well as defined criteria for assessing achievement of the performance-related goals. The PSUs granted in March 2012 were released in March 2015. See further discussion of amended performance metrics and the impact to stock-based compensation expense for the year ended December 31, 2014 in Note 4. There was no stock-based compensation expense related to PSUs for the years ended December 31, 2016 or 2015.

A summary of the status of stock awards activity for the years ended December 31, 2014, 2015 and 2016 is as follows (in thousands, except price data):



	Shares		Weighted-average grant date fair value
Non-vested at January 1, 2014	454		$	16.22
Granted	145		25.73
Vested	(174	)	28.27
Forfeited	(23	)	18.19
Non-vested at December 31, 2014	402		14.84
Granted	171		22.79
Vested	(96	)	18.01
Forfeited	(18	)	22.87
Non-vested at December 31, 2015	459		21.61
Granted	185		16.14
Vested	(120	)	18.50
Forfeited	(23	)	20.80
Non-vested at December 31, 2016	501		$	20.37

In 2016, 2015 and 2014, the Company issued approximately 0.1 million restricted share units each year in exchange for the deferred bonus liability of $0.5 million, $0.4 million and $0.7 million, respectively.

The total amount of unrecognized compensation expense related to non-vested stock awards as of December 31, 2016 was approximately $3.1 million, which is expected to be recognized over a weighted-average period of approximately 2.4 years.