Note 6: Stock-based Compensation

The Company uses the fair value method of accounting for share-based compensation arrangements. The fair value of stock options is estimated at the date of grant using the Black-Scholes option valuation model. Stock-based compensation expense is reduced for estimated forfeitures and is amortized over the vesting period using the straight-line method.

The following table summarizes the allocation of non-cash stock-based compensation to our expense categories for the three and nine month periods ended September 30, 2018 and 2017 (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
		(unaudited)				(unaudited)
Cost of revenues	$	(5)	$	6	$	29	$	18
Research and development		28		25		73		74
Selling, general and administrative		154		159		410		428
Total stock compensation expense	$	177	$	190	$	512	$	520

At September 30, 2018, total unrecognized compensation costs related to stock options was approximately $0.6 million, net of estimated forfeitures. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and is expected to be recognized over a weighted average period of approximately 3 years.

The following key assumptions were used in the Black-Scholes option pricing model to determine the fair value of stock options granted:



	Nine Months Ended
	September 30,
	2018			2017
	(unaudited)
Dividend yield		0	%	0	%
Risk free interest rates		2.16-2.75	%	0.71-1.65	%
Expected volatility		45.3 to 50.0	%	49.1 to 59.4	%
Expected term (in years)		3.5 to 4.75		3.5 to 5.0

The Company does not expect to pay dividends in the near future. Therefore, the Company used an expected dividend yield of 0%. The risk-free interest rate used in the Black-Scholes option pricing model is based on yield available at dates of option grant, on U.S. Treasury securities with an equivalent term. Expected volatility is based on the weighted average historical volatility of the Company’s common stock for the equivalent term. The expected term of the options represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience and vesting schedules of similar awards.

A summary of the Company’s stock option activity for the nine months ended September 30, 2018 is presented in the following table (unaudited):



		Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (In Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2017			4,768,838	$	3.02
Options granted			587,350		1.70
Options exercised			(99,937)		0.98
Options forfeited			(47,000)		1.78
Options cancelled or expired			(250,131)		4.15
Outstanding at September 30, 2018			4,959,120	$	2.86		4.04	$	146,325
Vested or expected to vest at September 30, 2018	(1)		4,951,630	$	2.86		4.11	$	144,325
Exercisable at September 30, 2018			4,584,666	$	2.92		3.97	$	144,325

(1)

The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to total unvested options.

The aggregate intrinsic value in the table above represents the difference between the exercise price of the underlying options and the quoted price of the Company’s common stock. For the three months and nine month periods ended September 30, 2018, the aggregate intrinsic value of options exercised was $49 thousand and $56 thousand, respectively. The Company issues new shares of common stock upon exercise of stock options.