Note 8 – Stock-Based Compensation

Stock Options

Following the expiration of the Amended and Restated 2005 Stock Incentive Plan (“2005 Plan”) in February 2015, no new awards may be made under such plan, although outstanding awards will continue in accordance with their terms. In order to continue to provide for long-term compensation incentives in the form of equity awards, the Board adopted the 2015 Stock Incentive Plan (“2015 Plan”) in March 2015. Consistent with historical practice, the Board granted annual equity awards in the first quarter of 2015 under the 2015 Plan; however, these awards are contingent upon stockholder approval of both the 2015 Plan and the Company’s Charter Amendment (See Note 7) at the Company’s annual meeting of stockholders in June 2015. Under the 2015 Plan, equity awards may be granted to officers, directors, employees and consultants of and advisors to the Company and any present or future subsidiary. The 2015 Plan authorizes the issuance of up to 25,000,000 shares of common stock under equity awards granted under the plan, but such shares will not be reserved until and unless the 2015 Plan and the Charter Amendment are approved by the Company’s stockholders. The 2015 Plan will expire on March 4, 2025.

The 2015 Plan permits and the 2005 Plan permitted the grant of stock options (including incentive stock options), restricted stock, stock appreciation rights, and restricted stock units. In addition, under the 2015 Plan, unrestricted stock, stock units and performance awards may be granted. Stock options and stock appreciation rights generally have a maximum term of 10 years and may be or were granted with an exercise price that is no less than 100% of the fair market value of the Company’s common stock at the time of grant. Grants of stock options are generally subject to vesting over periods ranging from six months to four years.

Stock Options Awards

The following is a summary of option activity under the 2005 Plan and the 1995 Stock Option Plan (“1995 Plan”) for the three months ended March 31, 2015:

	2005 Plan				1995 Plan
	Stock Options		Weighted-Average Exercise Price		Stock Options		Weighted-Average Exercise Price
Outstanding at January 1, 2015		16,928,098	$	3.24		35,000	$	2.21
Granted		22,500	$	6.70		—	$	—
Exercised		(545,251)	$	2.22		(35,000)	$	2.21
Canceled		(121,375)	$	3.74		—	$	—
Outstanding at March 31, 2015		16,283,972	$	3.27		—	$	—
Shares exercisable at March 31, 2015		7,811,347	$	2.45		—	$	—

Also, during the three months ended March 31, 2015, the Company granted 6,974,441 stock options with a weighted-average exercise price of $8.94 under the 2015 Plan. Due to the fact that the 2015 Plan has not yet been approved by the Company’s stockholders, the Company will not record any stock-based compensation expense for these awards until such time as the 2015 Plan and the Charter Amendment are both approved by the stockholders. Those proposals will be presented to the stockholders at the Company’s annual meeting of stockholders in June 2015.

The fair value of stock options granted under the 2005 Plan was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Three Months Ended March 31,
	2015		2014
Weighted-average Black-Scholes fair value of stock options granted	$	2.92	$	2.63
Risk-free interest rate		1.19%		1.24%-2.22%
Dividend yield		0%		0%
Volatility		53.58%-53.89%		52.47%-67.93%
Expected term (in years)		4.26		4.04-6.96
Expected forfeiture rate		16.33%		0%-23.15%

The aggregate intrinsic value and weighted-average remaining contractual term of stock options outstanding under the 2005 Plan as of March 31, 2015 was approximately $81.4 million and 7.6 years, respectively. The aggregate intrinsic value and weighted-average remaining contractual term of stock options exercisable under the 2005 Plan as of March 31, 2015 was approximately $45.5 million and 6.6 years, respectively. The aggregate intrinsic value represents the total intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2015. This amount is subject to change based on changes to the closing price of the Company’s common stock. The aggregate intrinsic value of options exercised for the three months ended March 31, 2015 and 2014 was $3.8 million and $1.4 million, respectively.

Employee Stock Purchase Plan

In 2013, the Company adopted an Employee Stock Purchase Plan (the “ESPP”), which authorized an aggregate of 2,000,000 shares of common stock to be purchased, which will increase 5% on each anniversary of its adoption up to a maximum of 3,000,000 shares. The ESPP allows employees to purchase shares of common stock of the Company at each purchase date through payroll deductions of up to a maximum of 15% of their compensation, at 85% of the lesser of the market price of the shares at the time of purchase or the market price on the beginning date of an option period (or, if later, the date during the option period when the employee was first eligible to participate). At March 31, 2015, there were 1,313,388 shares available for issuance under the ESPP.

The ESPP is considered compensatory for financial reporting purposes. As such, the fair value of ESPP shares was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Three Months Ended March 31,
	2015		2014
Weighted-average Black-Scholes fair value of stock options granted		$1.06-$2.24		$0.97-$1.79
Risk-free interest rate		0.05%-0.35%		0.11%-0.14%
Dividend yield		0%		0%
Volatility		40.79%-64.24%		53.80%-67.57%
Expected term (in years)		0.5-2.0		0.5-1.0
Expected forfeiture rate		5%		5%

Stock-based compensation related to the ESPP for the three months ended March 31, 2015 and 2014 was $0.2 million and $0.1 million, respectively.

Restricted Stock Awards

The following is a summary of restricted stock awards activity for the three months ended March 31, 2015:

	Number of Shares		Per Share Weighted-Average Grant-Date Fair Value
Outstanding and Unvested at January 1, 2015		15,000	$	4.48
Restricted stock granted		—	$	—
Restricted stock vested		—	$	—
Restricted stock forfeited		—	$	—
Outstanding and Unvested at March 31, 2015		15,000	$	4.48

The Company recorded stock-based compensation expense in the consolidated statements of operations as follows (in thousands):

	Three Months Ended March 31,
	2015		2014
Research and development	$	1,032	$	524
General and administrative		900		516
Total stock-based compensation expense	$	1,932	$	1,040

As of March 31, 2015, there was approximately $12.5 million of total unrecognized compensation expense (net of estimated forfeitures and exclusive of stock options granted under the 2015 Plan) related to unvested stock options, ESPP and restricted stock awards. This unrecognized compensation expense is expected to be recognized over a weighted-average period of 1.5 years. This estimate does not include the impact of other possible stock-based awards that may be made during future periods.