Stock-based Compensation

(a) Valuation of Options, SARs, and RSUs Granted

The Company has elected to use the Black-Scholes-Merton ("BSM") option-pricing model to estimate the fair value of stock options and SARs that it grants. The BSM model incorporates various assumptions including volatility, expected term of the option from the date of grant to the time of exercise, risk-free interest rates, and dividend yields. The weighted average fair value of options granted during the years ended December 31, 2017 and 2016 was $3.09 and $2.55, respectively, and was determined using the following weighted average assumptions:



	Year ended December 31,
	2017	2016
Expected dividend yield	—%	—%
Risk-free interest rate	1.7%	1.2%
Expected volatility	55.9%	58.1%
Expected term (in years)	3.75	5.12

The expected dividend yield reflects the fact that the Company has not paid any dividends in the past and does not currently intend to pay dividends in the foreseeable future. The risk-free interest rate assumption is based on U.S. Treasury yields in effect at the time of grant for the expected term of the option. The expected volatility is based on both the historical volatility of the Company's common stock over the most recent period commensurate with the expected life of the option as well as on implied volatility calculated from the market traded options on the Company's stock. The expected term has been calculated by applying the simplified method calculation to the 10-year term option grants made during 2016 and 2017, as the Company does not have relevant and adequate exercise history for such options.

The grant date fair value of RSUs and RSAs granted to employees is determined by multiplying the fair market value of the Company's stock on the grant date times the number of RSUs and RSAs awarded. During the years ended December 31, 2017 and 2016, the Company issued a limited number of RSUs to non-employee consultants. The final measurement date for these awards is determined at the earlier of the date at which a commitment for performance by the consultant to earn the RSUs is reached, or the date at which the consultant's performance necessary for the RSUs to vest has been completed. Between the date of issuance and the final measurement date, which is expected to be the date the consultants' performance is complete and the awards vest, the awards are remeasured based on the fair market value of the Company's stock at each reporting date. During the year ended December 31, 2017, awards granted to non-employee consultants and the related share-based payment expense were not significant.

(b) Equity Compensation Expense for RSUs and RSAs with Financial or other Performance-Based Vesting Requirements

As of December 31, 2017, there were 143,283 non-vested RSUs that were granted in 2017 that were subject to service-based vesting conditions as well as certain financial or other performance-based vesting requirements that must be achieved before vesting can occur. The following table contains pertinent information regarding these outstanding awards as of December 31, 2017 (in thousands except for number of awards granted):



Grant Date	# of Awards Granted and Outstanding	Fair Value on Grant Date		Cumulative Expense Recognized		Unearned Compensation Expense		Latest Date Performance Condition Could be Met
January 2017	143,283	$	721	$	132	$	589	December 2017

Through December 31, 2017, cumulative compensation expense of $132,000 associated with the 143,283 unvested RSUs granted in January 2017 had been recognized. From the date of grant through December 31, 2017, the Company believed it was probable that the performance requirements associated with certain of these awards would be achieved and therefore recognized expense on those specific awards. However, as of March 31, June 30, and September 30, 2017, the Company determined that separate performance conditions related to the remainder of the awards granted in January 2017 was improbable of achievement. Accordingly, no compensation expense has been recognized on these additional awards. As the performance conditions required for the vesting of these additional awards were not met as of December 31, 2017, the final date that the performance conditions could be met, the Company expects approximately 114,379 awards will expire unvested in March 2018 and will be returned to the Plan.

c) Expense Allocation

As of December 31, 2017, total compensation cost related to non-vested stock options and other equity based awards not yet recognized was $1.6 million, which is expected to be recognized over the next 0.9 years on a weighted-average basis.

The following table summarizes stock-based compensation expense for the years ended December 31, 2017 and 2016 and its allocation within the consolidated statements of operations (in thousands):



	Year ended 31 December,
	2017			2016

Cost of revenues	$	158		$	48
Product development	475			173
Sales and marketing	(20		)	57
General and administrative	844			468
Total stock based compensation expense related to stock options and share awards	1,457			746
Tax benefit	—			—
Stock-based compensation expense related to stock options and share awards, net of tax	$	1,457		$	746

As of December 31, 2017, and 2016, stock-based compensation expense capitalized as part of the cost of inventory and deferred cost of goods sold was immaterial.