13.

Stockholders’ equity:

Stock-based compensation

During the nine months ended September 30, 2017, a total of 908,661 options to purchase Common Stock, with an aggregate fair market value of approximately $1.8 million, were granted to Company employees. Options granted to employees have a term of 10 years from the grant date and vest ratably over a three year period. Options granted to the Company’s Board of Directors have a term of 10 years from the grant date and one-half of those Options vest at grant date and the remaining half vest in one year. The fair value of each option is amortized as compensation expense evenly through the vesting period.

The Company’s stock-based compensation expense is allocated between research and development and selling, general and administrative as follows:


	Three months ended,				Nine months ended,
Stock-based compensation expense	September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016
Research and Development	$	0.5	$	0.5	$	1.3	$	2.1
Selling, General and Administrative	$	3.7	$	3.6	$	8.9	$	9.5

The fair value of each option award is estimated on the grant date using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatilities are based on implied volatilities from historical volatility of the Common Stock, and other factors estimated over the expected term of the options.

Expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus contract term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term. The weighted average for key assumptions used in determining the fair value of options granted during the nine months ended September 30, 2017 follows:


Expected price volatility		78.68% -78.77%
Risk-free interest rate		1.77% -1.87%
Weighted average expected life in years		6 years
Dividend yield		—

Option activity during the nine months ended September 30, 2017 was as follows:


	Number of Shares			Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Outstanding at January 1, 2017		3,468,991		$	4.14
Granted in 2017
Officers and Directors		83,658			2.64
Others		825,003			1.91
Exercised		(151,373	)		2.07
Forfeitures		(1,183,795	)		5.89

Outstanding at September 30, 2017		3,042,484		$	2.92	$	1,466

As of September 30, 2017, options exercisable totaled 1,807,765. There was approximately $8.1 million of unrecognized compensation cost related to non-vested share-based compensation awards, including options and restricted stock units (“RSUs”) granted. These costs will be expensed through 2020.

During the nine month ended September 31, 2017, an executive officer of the Company exercised approximately 0.15 million stock options, with net proceeds to the Company of approximately $0.3 million.

Restricted stock units

During the nine months ended September 30, 2017, 2,342,315 RSUs were granted to the Company’s executive officers and employees, with a fair market value of approximately $4.5 million. The fair value of restricted units is determined using quoted market prices of the Common Stock and the number of shares expected to vest. These RSUs were issued under the Company’s 2011 Equity Incentive Plan, as amended. Of the aforementioned 2017 RSU grants, 2,060,000 are one-half time-based and one-half are performance based and all vest over a three-year period. The performance-based RSUs provide for vesting if specified predetermined net revenue and operating income goals are achieved with respect to the annual fiscal years 2017 through 2019. Actual performance relative to the predetermined performance measures are evaluated independently at the end of each fiscal year and the number of awards that will vest will be based upon the percentage of the individual performance measure achieved relative to the predetermined target. This allows for partial vesting relative to separate performance measures. Additionally, 120,000 RSUs were granted to Company employees and vest in full in one year. Cumulatively, these RSUs were granted over the plan allotment of our 2011 Equity Incentive Plan and will require stockholder approval at the 2017 annual stockholder meeting. The remaining 162,315 RSUs were granted to the Company’s Board of Directors and one-half of those RSUs vest at grant date and the remaining half vest in one year. Cumulatively, these RSUs were also granted over the plan allotment of our 2011 Equity Incentive Plan and will require approval at the 2017 annual stockholder meeting.


	Number of Restricted Shares			Weighted Average Fair Market Value Per RSU
Outstanding at January 1, 2017		4,584,297		$	7.29
Granted:
Executive officers		1,640,000			1.80
Directors		162,315			2.80
Employees		540,000			2.04
Vested		(1,568,042	)		2.17
Forfeitures		(554,675	)		2.28

Outstanding at September 30, 2017		4,803,895		$	5.14

Warrants

The Company has granted warrants to purchase shares of Common Stock.

The fair value of each warrant grant is estimated on the grant date using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatilities are based on implied volatilities from historical volatility of the Common Stock, and other factors estimated over the expected term of the warrants.

Expected term of warrants granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus contract term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term. The weighted average for key assumptions used in determining the fair value of warrants granted during the nine months ended September 30, 2017 follows:


Expected price volatility		78.39%
Risk-free interest rate		1.92%
Weighted average expected life in years		6 years
Dividend yield		—

Warrant activity during the nine months ended September 30, 2017 was as follows:


	Number of Shares		Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Outstanding at January 1, 2017		84,986	$	3.53
Granted in 2017		1,701,583		2.38
Exercised		—		—
Forfeitures		—		—

Outstanding at September 30, 2017		1,786,569	$	2.43	$	970