Note 12. Stock-based Compensation.

We record stock-based compensation based on fair value as of the grant date using the Black-Scholes option-pricing model for stock options granted and Monte Carlo simulation techniques for certain RSUs with performance-based vesting conditions. We recognize such costs as compensation expense on a straight-line basis over the employee’s requisite service period, which is generally four years. Our valuation assumptions are as follows:

Risk-free interest rate. We base the risk-free interest rate used in the Black-Scholes option-pricing model on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent expected term of the options for each option group.

Expected term. The expected term represents the period that our stock-based awards are expected to be outstanding. The expected term assumption is based on the simplified method in which the expected term is equal to the average of the stock-based award’s weighted-average vesting period and its contractual term. We expect to continue using the simplified method until sufficient information about historical behavior is available.

Volatility. We determine volatility based on the historical stock volatility of our publicly traded stock.

Dividend yield. We have never declared or paid any cash dividend and do not currently plan to pay a cash dividend in the foreseeable future. Consequently, we used an expected dividend yield of zero.

The following table summarizes the weighted-average assumptions used in the Black-Scholes option-pricing model to determine fair value of stock options:


	Three months ended
	March 31, 2019
Volatility	66	%
Expected dividend yield	—
Risk-free rate	2.27	%
Expected term (in years)	6

The weighted-average grant date fair value of the options granted under the 2015 Equity Incentive Plan as calculated using the Black-Scholes option-pricing model was $3.57 per share for the three months ended March 31, 2019. There were no options granted during the three months ended March 31, 2020.

On March 25, 2019, our compensation committee granted 147,954 RSUs that do not begin vesting unless certain performance goals are met. Vesting of these shares will not begin unless the stock price performance goals are met and the number of shares eligible to begin vesting are based on Adesto’s share performance as compared to the Russell 2000 stock index which is the performance threshold established by the compensation committee. The evaluation period for the stock performance is from March 15, 2019 through March 15, 2020. Vesting would begin on the one-year anniversary of the grant date with 20% of the shares vesting immediately and the remaining 80% of the shares vesting over the next eight quarters. As a result of these performance-based vesting conditions we valued these RSUs using Monte Carlo simulation techniques to establish a fair value per share of $4.05 at the time of grant. Expense for these RSUs is being amortized over three years. As of March 15, 2020 it was determined that the performance criteria had been met and that these RSU’s had been earned and would begin vesting.

On February 17, 2019, our compensation committee granted 97,087 RSUs that do not begin vesting unless certain performance goals are met. Vesting of these shares will not begin unless the stock price performance goals are met and the number of shares eligible to begin vesting are based on Adesto’s share performance as compared to the Russell 2000 stock index which is the performance threshold established by the compensation committee. The evaluation period for the stock performance is from January 31, 2020 through January 31, 2021. Vesting would begin on January 31, 2021 with 25% of the shares vesting every six months over two years. As a result of these performance-based vesting conditions we valued these RSUs using Monte Carlo simulation techniques to establish a fair value per share of $10.75 at the time of grant. Expense for these RSUs is being amortized over three years.

The following table presents the effects of stock-based compensation for stock options, RSUs (including performance-based RSUs), and ESPP purchase rights (in thousands):


	Three Months Ended
	March 31,
	2020		2019
Cost of revenue	$	142	$	65
Research and development		696		389
Selling, general and administrative		1,087		621
Total	$	1,925	$	1,075

Stock-based compensation expense capitalized to inventories was not material during the three months ended March 31, 2020 and 2019.

We did not realize any income tax benefit from stock option exercises in any of the periods presented due to recurring losses and valuation allowances.

As of March 31, 2020, the total unrecognized compensation cost related to stock options, net of estimated forfeitures, was approximately $1.9 million, and this amount is expected to be recognized over a weighted-average period of approximately 1.9 years.

As of March 31, 2020, the total unrecognized compensation cost related to RSUs (including performance-based RSUs) and ESPP purchase rights was $12.1 million and $0.2 million respectively, and these amounts are expected to be recognized over 2.5 years and 0.3 years, respectively.