12.

Stockholders’ equity:

Stock-based compensation

During the three months ended March 31, 2018, a total of 618,174 options to purchase Common Stock, with an aggregate fair market value of approximately $1.5 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. 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:


Stock-based compensation expense	2018		2017
Research and development	$	1,052	$	401
Selling, general and administrative	$	1,869	$	2,669

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 key assumptions used in determining the fair value of options granted during the three months ended March 31, 2018 follows:


Expected price volatility		60.41%-68.77%
Risk-free interest rate		2.05%-2.60%
Weighted average expected life in years		6 years
Dividend yield		—

Option activity during the three months ended March 31, 2018 was as follows:


	Number of shares			Weighted average exercise price per share		Aggregate intrinsic value
Outstanding at January 1, 2018		2,712,954		$	2.98	$	1,190

Granted in 2018:
Employees		618,174			2.50
Exercised		(63,295	)		2.05
Forfeitures		(201,989	)		4.64

Outstanding at March 31, 2018		3,065,844		$	2.80	$	292

As of March 31, 2018, options exercisable totaled 1,769,300. There was approximately $4.9 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 2021.

Restricted stock units

During the three months ended March 31, 2018, 1,155,611 RSUs were granted to the Company’s executive officers and employees, with a fair market value of approximately $2.5 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 (the “EIP”).

Of the aforementioned 2018 RSU grants, 292,500 are time-based and 292,500 are performance based, all of which vest over a three-year period. Performance-based RSUs vest if specified predetermined net revenue and operating income goals are achieved with respect to the annual fiscal years 2018 through 2020. 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.

Pursuant to retirement agreements of certain Company senior staff, the remaining 570,611 RSUs terminated and immediately were issued into shares of Common Stock.

Restricted stock activity during the three months ended March 31, 2018 was as follows:


	Number of restricted shares			Weighted average fair market value per RSU
Outstanding at January 1, 2018		4,706,895		$	5.20
Granted:
Executive officers		463,129			2.10
Directors		375,305			2.18
Employees		317,177			2.10
Vested		(1,038,957	)		2.35
Forfeitures		(235,110	)		2.52
Conversions		(1,640,198	)		2.68

Outstanding at March 31, 2018		2,948,241		$	3.02

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. A cumulative total of 2,136,020 shares underlying warrants to purchase Common Stock are outstanding as of March 31, 2018 with a weighted average exercise price of $2.60 per share.