Share-based Compensation

Service Vesting Based Stock Options

The following is a summary of service vesting based related stock option activity for the nine month period ended September 30, 2017, and the status of stock options outstanding at September 30, 2017:

	Nine Month Period Ended
	September 30, 2017
			Wtd. Avg.
			Exercise
	Options		Price
Outstanding at beginning of year		2,513,861	$	1.78
Granted		110,000	$	1.79
Exercised		(131,427)	$	1.17
Forfeited		(47,932)	$	3.61
Expired		(91,068)	$	1.45
Outstanding at September 30, 2017		2,353,434	$	1.79

Stock options exercisable at September 30, 2017		1,496,041	$	1.73

Performance-based Stock Options

The Company’s Board of Directors has implemented a Management Performance Bonus Plan for 2017. Based on achieving varying levels of specified revenue for the year ending December 31, 2017, up to 1,000,000 options to purchase shares of the Company’s common stock may be vested. The options have an exercise price of $1.64, and if revenue levels are met, vest 50% on the release of the Company’s audited financial statements for 2017, and 50% one year thereafter. If the minimum performance targets are not achieved, no options will vest. The Company currently deems it probable that the 1,000,000 options will vest and is recognizing stock compensation for these options over the requisite service period.

As of September 30, 2017, there was $13,333,864 of aggregate intrinsic value of outstanding stock options, including $5,995,214 of aggregate intrinsic value of exercisable stock options. Intrinsic value is the total pretax intrinsic value for all “in-the-money” options (i.e., the difference between the Company’s closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number of shares) that would have been received by the option holders had all option holders exercised their options on September 30, 2017. This amount will change based on the fair market value of the Company’s stock. During the three and nine months ended September 30, 2017 intrinsic value of awards exercised was none and $91,817, respectively. Weighted average grant date fair value for options granted during the three and nine months ended September 30, 2017 was none and $1.13 per share and $1.32 and $1.26 for the three and nine months ended September 30, 2016, respectively. There were no options granted in the three months ended September 30, 2017.

The fair value of share-based payments made with stock options to employees and non-employee directors was estimated on the measurement date using the Black-Scholes model using the following weighted average assumptions.

	Three Month Period Ended					Nine Month Period Ended
	September 30,					September 30,
	2017		2016			2017			2016
Risk free interest rate		N/A		1.33	%		2.07	%		1.51	%
Dividend yield		N/A		0.0	%		0.00	%		0.0	%
Expected term (in years)		N/A		7.00			5.18			7.00
Volatility		N/A		75	%		75	%		75	%

We recognized stock compensation expense of $274,653 and $159,764, related to stock options for the three months ended September 30, 2017 and September 30, 2016, respectively and $843,925 and $569,176, related to stock options for the nine months ended September 30, 2017 and September 30, 2016, respectively. As of September 30, 2017, we had approximately $1,794,275 of unrecognized compensation expense related to unvested stock options. We expect to recognize this compensation expense over a weighted average period of approximately 1.8 years.

Restricted Stock

The following is a summary of restricted stock activity for the nine month period ended September 30, 2017, and the status of unvested restricted stock outstanding at September 30, 2017:

	Nine Month Period Ended
	September 30, 2017
	Number of
	Restricted		Grant-Date
	Shares		Fair Value
Outstanding at beginning of year		98,439	$	1.90
Granted		207,350	$	1.76
Vested		(42,189)	$	1.90
Forfeited		(5,000)	$	1.76
Outstanding at September 30, 2017		258,600	$	1.79

The aggregate fair value of the awards granted during the three and nine months ended September 30, 2017 was none and $364,936, respectively, and during the three and nine months ended September 30, 2016 was none and $380,000, respectively, which represents the market value of our common stock on the date that the restricted stock awards were granted. The aggregate fair value of the restricted stock awards that vested for the three months ended September 30, 2017 and 2016 was $38,567 and $22,217, respectively and for the nine months ended September 30, 2017 and 2016 was $99,725 and $138,921, respectively.

We recognized stock compensation expense of $39,290 and $21,320 related to restricted stock awards for the three months ended September 30, 2017 and 2016, respectively and $113,786 and $144,671 related to restricted stock awards for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, there was $399,874 in unrecognized compensation costs related to restricted stock awards. We expect to recognize those costs over 2.8 years.

We recorded stock compensation expense for the three and nine month periods ended September 30, 2017 and 2016, as follows:

	Three Month Period Ended				Nine Month Period Ended
	September 30,				September 30,
	2017		2016		2017		2016
Research and development costs	$	59,434	$	33,574	$	177,514	$	118,409
Sales and marketing costs		55,402		31,903		173,072		150,150
General and administrative costs		156,621		103,587		479,803		323,465
Cost of product sales		42,486		12,020		127,322		(8,177)
Total	$	313,943	$	181,084	$	957,711	$	583,847

Management adopted ASU 2016-09 on January 1, 2017 and no longer applies an estimated forfeiture rate. As a result, we had a cumulative-effect adjustment to retained earnings and additional paid in capital of $27,908 resulting from adoption. The estimated forfeiture rate derived from historical employee termination data applied for the three and nine months ended September 30, 2016 was approximately 8.1%.