Stock-based Compensation

Stock Option and Equity Incentive Plans

The Company can issue nonqualified and incentive stock options as well as other equity awards pursuant to its Second Amended and Restated 2009 Omnibus Incentive Plan (Option Plan). Such awards pursuant to the Option Plan may be granted by the Company’s Board of Directors to certain of the Company’s employees, directors and consultants.

During the three and nine months ended September 30, 2017, the Company granted 127,200 and 1,677,760, respectively, service-based options to purchase common stock. The options were granted with exercise prices equal to the fair market value of the Company’s stock at the grant date, and other than those granted to non-employee directors, vest over four years, under a graded-vesting methodology, following the date of grant, and expire after ten years. The Company issues new shares upon the exercise of stock options. The weighted average grant-date fair value of service-based options granted under the Option Plan during the three and nine month periods ended September 30, 2017 was $2.53 and $1.99, respectively and, $1.77 and $2.15, respectively for the same periods in 2016.

Non-cash stock-based compensation expense included in cost of goods sold, research and development expenses and selling, general and administrative expenses is summarized in the following table:



	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2017		2016		2017		2016
Cost of goods sold	$	119	$	117	$	316	$	330
Research and development	177		133		$	391	$	392
Selling, general and administrative	459		404		1,346		1,251
Total non-cash stock-based compensation expense	$	755	$	654	$	2,053	$	1,973

The fair value of each service-based stock option grant for the reported periods is estimated on the date of the grant using the Black-Scholes option-pricing model using the weighted average assumptions noted in the following table.



	Nine Months Ended September 30,
Service-Based Stock Options	2017		2016
Expected dividend rate	—	%	—	%
Expected stock price volatility	80.1 – 88.2%		78.7 – 92.2%
Risk-free interest rate	1.8 – 2.3%		1.1 – 1.8%
Expected life (years)	5.5 – 6.3		5.5 – 6.3

The following table summarizes the activity for service-based stock options for the indicated periods:



Service-Based Stock Options	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at December 31, 2016	3,355,692		$	4.66	8.2	$	610
Granted	1,677,760		$	2.82
Exercised	(165,678	)	$	3.12		$	362
Expired	(100,131	)	$	16.31
Forfeited	(190,766	)	$	3.35
Outstanding at September 30, 2017	4,576,877		$	3.84	8.2	$	13,336
Exercisable at September 30, 2017	1,870,011		$	5.18	7.5	$	4,988

As of September 30, 2017 there was approximately $3.4 million of total unrecognized compensation cost related to non-vested service-based stock options granted under the Option Plan. That cost is expected to be recognized over a weighted-average period of 3.0 years.

The total fair value of options vested during the three and nine months ended September 30, 2017 was $0.6 million and $1.8 million, respectively, and $0.6 million and $1.6 million, respectively, for the same periods in 2016.

Employee Stock Purchase Plan

Employees are able to purchase stock under the Vericel Corporation Employee Stock Purchase Plan (ESPP), which was implemented effective October 1, 2015. Participation in this plan is available to substantially all employees. Compensation expense is recorded based on the fair market value of the purchase options at the grant date, which corresponds to the first day of each purchase period and is amortized over the purchase period. On October 2, 2017, employees purchased 40,683 shares resulting in proceeds from the sale of common stock of $0.1 million under the ESPP. The total share-based compensation expense for the ESPP for the nine months ended September 30, 2017 was approximately $0.1 million.