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. All employee 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 2015, 605,000 stock options were granted under the 2015 Plan.

Accordingly, as of December 31, 2015, 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, 2015:

●

The 2001 Non-Employee Director Stock Option Plan (the “Director Plan”), which expired 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, 2015:

Options Outstanding					Options Exercisable
Range of Exercise Price	Number Outstanding at 12/31/15		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price		Number Exercisable at 12/31/15		Weighted Average Exercise Price

$ 2.08 - $ 3.50		296,450		6.10	$	2.98		62,717	$	2.95
$ 3.51 - $ 5.00		1,516,000		3.16	$	4.22		1,501,000	$	4.23
$ 5.01 - $ 6.50		201,667		4.53	$	5.84		161,385	$	5.81
$ 6.51 - $ 8.21		170,000		2.80	$	7.83		163,334	$	7.84
		2,184,117		3.65	$	4.48		1,888,436	$	4.63

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, 2013		1,715,200		$	5.04
Options granted		145,000			6.06
Options exercised		(241,361	)		4.39
Options cancelled or expired		(18,256	)		5.57
Options outstanding – December 31, 2013		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		3.65	$	10,740
Options exercisable and expected to vest – December 31, 2015		1,888,436		$	4.63		3.30	$	4,006

The assumptions used to value stock options granted to directors, employees and consultants during the years ended December 31, 2015, 2014 and 2013 are as follows:

	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	%

	For the year ended
	December 31, 2013

Annual dividend yield		-
Expected life (years)		4.3
Risk-free interest rate		0.65% - 2.15	%
Expected volatility		117% - 154	%

During the years ended December 31, 2015, 2014 and 2013, we recorded $1.1 million, $1.7 million and $2.7 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.

The 1998 Plan terminated effective June 15, 2008. The last stock options from the 1998 Plan were exercised during the year ended December 31, 2015. 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, 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, 2015 was $3.14 per share.

During the year ended December 31, 2013, we received an aggregate of $1.1 million from five employees in connection with the exercise of stock options into 241,361 shares of common stock. The intrinsic value of the options exercised was $502,000 on the date of exercise.

We granted options to purchase 145,000 shares of our common stock to three employees during the year ended December 31, 2013 with an aggregate grant date fair value of approximately $748,000 computed using the Black-Scholes option pricing model. The options have a 7-year life and 1/3 of the options are vested on the one year anniversary date of grant with the remaining to vest monthly over the next 24-months.

Warrants

During the year ended December 31, 2015 and 2014, certain warrant holders exercised their warrants under the cash and cashless exercise provisions, as defined in the agreements. See Note 8 for details of such exercises and number of common stock shares issued.

We issued 20,000 three-year stock purchase warrants at an exercise price of $3.90 per share with a vesting period over 24 months to an employee during the year ended December 31, 2011. The unvested warrant granted to an employee had an estimated fair value on the date of grant of $75,000. This amount was expensed over the vesting period and $26,000 of expense related to this warrant is included in research and development expense for the year ended December 31, 2013. The estimated fair value of stock-based compensation related to the issuance of warrants is calculated using the Black-Scholes option pricing model as of the grant date of the underlying warrant.

The stock-based compensation expense for the years ended December 31, 2015, 2014 and 2013 reflects the estimated fair value of the vested portion of options and warrants granted to directors, employees and non-employees.

(In thousands)

	Years ended
	December 31,
	2015		2014		2013

Research and development	$	484	$	510	$	267
Sales and marketing		296		353		909
General and administrative		295		866		1,480
Stock compensation expense	$	1,075	$	1,729	$	2,656

(In thousands)

		Remaining unrecognized expense at December 31, 2015
Stock-based compensation		$	520

The remaining unrecognized expense related to stock options and warrants will be recognized on a straight line basis monthly as compensation expense over the remaining vesting period which approximates 1.6 years.

A summary of all warrant activity is set forth below:

Outstanding and exercisable	Warrants			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life
January 1, 2013		4,704,636		$	1.61		1.41
Issued		-			-		-
Expired/forfeited		-			-		-
Exercised		(3,876,063	)		1.45		-
December 31, 2013		828,573			2.39		2.06
Issued		2,575,000			5.09		-
Expired/forfeited		(40,000	)		3.98		-
Exercised		(28,500	)		2.85		-
December 31, 2014		3,335,073			4.45		0.93
Issued		-			-		-
Expired/forfeited		(2,591,000	)		5.06		-
Exercised		(280,000	)		1.30		-
Outstanding and exercisable, December 31, 2015		464,073		$	3.02		0.19

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 and warrants. 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.

Outstanding Warrants to Purchase Common Stock as of December 31, 2015:

Description

Issue Date

Exercise Price

Expiration Date

February 2011 Legal Advisor Warrant

2/22/2011

2.50

80,000

2/22/2016

March 2011 Investor Warrants

3/9/2011

3.13

349,973

3/9/2016

March 2011 Investor Warrants

4/7/2011

3.13

34,100

4/7/2016

Total Warrants Outstanding

464,073