9.	Stock-Based Compensation

We have adopted equity incentive plans for which stock options and restricted stock awards are available to grant to employees, consultants and directors. Except for 265,000 options issued to certain Swedish employees during 2015, all employee, consultant and director stock options granted under our stock option plans have an exercise price equal to the market value of the underlying common stock on the grant date. There are no vesting provisions tied to performance conditions for any options, as vesting for all outstanding option grants was based only on continued service as an employee, consultant or director. All of our outstanding stock options and restricted stock awards are classified as equity instruments.

Stock Options

During the year ended 2015, our shareholders approved the Neonode Inc. 2015 Stock Incentive Plan (the “2015 Plan”) which replaces our 2006 Equity Incentive Plan (the “2006 Plan”). Under the 2015 Plan, 2,100,000 shares of common stock have been reserved for awards, including nonqualified stock option grants and restricted stock grants to officers, employees, non-employee directors and consultants. The terms of the awards granted under the 2015 Plan are set by our compensation committee at its discretion. During the year ended December 31, 2016, 25,000 stock options were granted under the 2015 Plan.

Accordingly, as of December 31, 2016, we had two equity incentive plans:

	●	The 2006 Equity Incentive Plan (the “2006 Plan”).
	●	The 2015 Equity Incentive Plan (the “2015 Plan”).

We also had one non-employee director stock option plan as of December 31, 2016:

●

The 2001 Non-Employee Director Stock Option Plan (the “Director Plan”), which expired for new awards in March 2011.

The following table summarizes information with respect to all options to purchase shares of common stock outstanding under the 2006 Plan, the 2015 Plan and the Director Plan at December 31, 2016:

Options Outstanding					Options Exercisable
Range of Exercise Price	Number Outstanding at 12/31/16		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price		Number Exercisable at 12/31/16		Weighted Average Exercise Price

$ 1.44 - $ 3.50		200,000		5.30	$	2.85		147,083	$	2.78
$ 3.51 - $ 5.00		1,426,000		2.85	$	4.23		1,426,000	$	4.23
$ 5.01 - $ 6.50		130,000		3.63	$	5.98		129,166	$	5.98
$ 6.51 - $ 8.21		90,000		0.02	$	8.21		90,000	$	8.21
		1,846,000		3.03	$	4.39		1,792,249	$	4.43

A summary of the combined activity under all of the stock option plans is set forth below:

	Options Outstanding
						Weighted-
						Average
				Weighted-		Remaining
				Average		Contractual		Aggregate
	Number of			Exercise		Life		Intrinsic
	Shares			Price		(in years)		Value
Options outstanding – January 1, 2014		1,600,583		$	5.22
Options granted		405,200			6.31
Options exercised		-			-
Options cancelled or expired		(296,383	)		5.46
Options outstanding – December 31, 2014		1,709,400			4.92
Options granted		605,000			3.57
Options exercised		-			-
Options cancelled or expired		(130,283	)		6.03
Options outstanding – December 31, 2015		2,184,117			4.48
Options granted		25,000			1.44
Options exercised		-			-
Options cancelled or expired		(363,117	)		4.73
Options outstanding – December 31, 2016		1,846,000		$	4.39		3.03	$	10,000
Options exercisable and expected to vest – December 31, 2016		1,846,000		$	4.39		3.03	$	10,000

The assumptions used to value stock options granted to directors, employees and consultants during the years ended December 31, 2016, 2015 and 2014 are as follows:

	For the year ended
	December 31, 2016

Annual dividend yield		-
Expected life (years)		3.5
Risk-free interest rate		0.83	%
Expected volatility		65.46	%

	For the year ended
	December 31, 2015

Annual dividend yield		-
Expected life (years)		2.97
Risk-free interest rate		0.47% - 1.41	%
Expected volatility		60.07% - 72.33	%

	For the year ended
	December 31, 2014

Annual dividend yield		-
Expected life (years)		3.5
Risk-free interest rate		0.28% - 1.47	%
Expected volatility		60.68% - 108.75	%

During the years ended December 31, 2016, 2015 and 2014, we recorded $0.3 million, $1.1 million and $1.7 million, respectively, of compensation expense related to the vesting of stock options. The estimated fair value of the stock-based compensation was calculated using the Black-Scholes option pricing model as of the grant date of the stock option.

Options granted under the Director Plan vest over a one to four-year period, expire five to seven years after the date of grant and have exercise prices reflecting market value of the shares of our common stock on the date of grant. Stock options granted under the 2006 and 2015 Plans are exercisable over a maximum term of ten years from the date of grant, vest in various installments over a one to four-year period and have exercise prices reflecting the market value of the shares of common stock on the date of grant.

During the year ended December 31, 2016, we granted options to purchase 25,000 shares of our common stock to employees with total grant date estimated fair value of $17,000 computed using the Black-Scholes option pricing model. The weighted-average grant date fair value of the options granted during year ended December 31, 2016 was $0.67 per share.

During the year ended December 31, 2015, we granted options to purchase 515,000 shares of our common stock to employees and an option to purchase 90,000 shares of our common stock to four members of our board of directors with total grant date estimated fair value of $0.8 million computed using the Black-Scholes option pricing model. The weighted-average grant date fair value of the options granted during year ended December 31, 2015 was $1.24 per share.

During the year ended December 31, 2014, we granted options to purchase 395,200 shares of our common stock to employees and an option to purchase 10,000 shares of our common stock to a former member of our board of directors with total grant date estimated fair value of $1.3 million computed using the Black-Scholes option pricing model. The weighted-average grant date fair value of the options granted during year ended December 31, 2014 was $3.14 per share.

Stock-Based Compensation

The stock-based compensation expense for the years ended December 31, 2016, 2015 and 2014 reflects the estimated fair value of the vested portion of options granted to directors, employees and non-employees.

(In thousands)

	Years ended
	December 31,
	2016		2015		2014

Research and development	$	48	$	484	$	510
Sales and marketing		150		296		353
General and administrative		57		295		866
Stock-based compensation expense	$	255	$	1,075	$	1,729

(In thousands)

		Remaining unrecognized expense at December 31, 2016
Stock-based compensation		$	84

The remaining unrecognized expense related to stock options will be recognized on a straight line basis monthly as compensation expense over the remaining vesting period which approximates 1.1 years.

The estimated fair value of stock-based awards is calculated using the Black-Scholes option pricing model, even though this model was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from our stock options. The Black-Scholes model also requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term and forfeiture rate of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior, as well as expected behavior on outstanding options. The risk-free rate is based on the U.S. Treasury rates in effect during the corresponding period of grant. The expected volatility is based on the historical volatility of our stock price. These factors could change in the future, which would affect fair values of stock options granted in such future periods, and could cause volatility in the total amount of the stock-based compensation expense reported in future periods.