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STOCK PLANS AND STOCK BASED COMPENSATION

As of December 31, 2015, the Company had two shareholder-approved, share-based compensation plans: (i) the Amended and Restated 2010 Stock Incentive Plan, or the 2010 Plan, adopted by the Board of Directors in March 2015 and approved by shareholders in May 2015 and (ii) the 2010 Employee Stock Purchase Plan, or the ESPP, adopted by the Board of Directors in April 2010 and approved by shareholders in June 2010. In the first quarter of 2010, the Company’s 2000 Stock Incentive Plan expired in accordance with its terms, and its 2000 Director Stock Option Plan had no available shares remaining under the plan. No additional awards will be made under these plans, although all outstanding awards under these plans will remain in effect until they are exercised or they expire in accordance with their terms.

The Amended and Restated 2010 Stock Incentive Plan

The 2010 Plan permits the granting of incentive and non-qualified stock options and stock awards to employees, officers, directors, and consultants of the Company and its subsidiaries at prices determined by the Company’s Board of Directors. The Company can issue up to 19,000,000 shares of its common stock pursuant to awards granted under the 2010 Plan. Options become exercisable as determined by the Board of Directors and expire up to 10 years from the date of grant. The 2010 Plan uses a “fungible share” concept under which each share of stock subject to awards granted as options and stock appreciation rights (“SARs”), will cause one share per share under the award to be removed from the available share pool, while each share of stock subject to awards granted as restricted stock, restricted stock units, other stock-based awards or performance awards where the price charged for the award is less than 100% of the fair market value of the Company’s common stock will cause 1.3 shares per share under the award to be removed from the available share pool. As of December 31, 2015, the Company had only granted options to purchase shares of the Company’s common stock with an exercise price equal to the closing market price of the Company’s common stock on the NASDAQ Global Market on the grant date. As of December 31, 2015, 8,684,409 shares remained available for grant under the 2010 Plan.

During the year ended December 31, 2015, the Company’s board of directors granted options to purchase 2,818,250 shares of the Company’s common stock to officers and employees of the Company under the 2010 Plan. Of these options, 1,758,250 shares vest and become exercisable as to 25% of the shares underlying the award after the first year and as to an additional 6.25% of the shares underlying the award in each subsequent quarter, based upon continued employment over a four-year period, and are exercisable at a price equal to the closing price of the Company’s common stock on the NASDAQ Global Market on the grant dates. The Company’s board of directors granted the remaining 1,060,000 shares of the Company’s common stock to its officers in February 2015. Such stock options have an exercise price equal to $2.39 per share, the closing price of the Company’s common stock on the NASDAQ Global Market on the date of grant, and will vest and become exercisable as to 25% of the shares underlying the award after the first year and as to an additional 6.25% of the shares underlying the award in each subsequent quarter, continued vesting contingent upon continued employment over a four-year period; provided that such awards would terminate and be forfeited if the Company’s stockholders did not approve an amendment to the 2010 Plan to increase the number of shares authorized for issuance thereunder within 12 months of the grant date; and further provided that such options shall not be exercisable and no common stock shall be issued thereunder, before the approval of such stock incentive plan amendment by the Company’s stockholders. The Company’s shareholders approved such amendment in May 2015 and options to purchase an aggregate of 1,060,000 shares of common stock were awarded to the Company’s officers.

During the year ended December 31, 2015, the Company’s board of directors also granted options to its non-employee directors to purchase 260,000 shares of common stock under the 2010 Plan, which will vest and become exercisable in equal monthly installments over a period of one year from the date of grant. These options were granted at exercise prices price of $1.94 per share, the closing market price of the Company’s common stock on the NASDAQ Global Market on the grant date.

Employee and Director Grants

Vesting Tied to Service Conditions

In determining the fair value of stock options, the Company generally uses the Black-Scholes option pricing model. As discussed below, for employee stock options with market performance conditions, the Company uses a Monte Carlo simulation valuation model. The Black-Scholes option pricing model employs the following key assumptions for employee and director options awarded during each of the following years:


	For the Year Ended December 31,
	2015			2014			2013
Expected term (years)—Employees		6.0			6.0			6.0
Expected term (years)—Officers and Directors		7.0			7.0			7.0
Risk-free interest rate		1.5-1.9	%		1.9	%		1.0-2.1	%
Expected volatility		68-70	%		70-71	%		70-72	%
Expected dividend yield		None			None			None

The expected volatility is based on the annualized daily historical volatility of the Company’s stock price for a time period consistent with the expected term of each grant. Management believes that the historical volatility of the Company’s stock price best represents the future volatility of the stock price. The risk-free rate is based on the U.S. Treasury yield in effect at the time of grant for the expected term of the respective grant. The Company has not historically paid cash dividends, and does not expect to pay cash dividends in the foreseeable future.

The stock price volatility and expected terms utilized in the calculation involve management’s best estimates at that time, both of which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the life of the option. GAAP also requires that the Company recognize compensation expense for only the portion of options that are expected to vest. Therefore, management calculated an estimated annual pre-vesting forfeiture rate that is derived from historical employee termination behavior since the inception of the Company, as adjusted. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.

At December 31, 2015, the aggregate intrinsic value of employee options outstanding was $8,066,000, of which $5,684,000 related to exercisable options, and the weighted average remaining contractual life of vested stock options was 6.22 years. The weighted average grant-date fair values of stock options granted with standard vesting terms during the years ended December 31, 2015, 2014 and 2013 were $1.71, $1.79 and $2.27 per share of common stock underlying such stock options, respectively. As of December 31, 2015, there was approximately $5,663,000, including the impact of estimated forfeitures, of unrecognized compensation cost related to unvested employee stock option awards outstanding under the Company’s 2010 Plan that is expected to be recognized as expense over a weighted average period of 2.4 years. The intrinsic value of employee stock options exercised during the years ended December 31, 2015, 2014 and 2013 were $797,000, $105,000 and $2,091,000, respectively.

Vesting Tied to Market Conditions

Monte Carlo simulation models were used to value stock options to purchase an aggregate of 1,040,000 shares of common stock granted to the Company’s officers during the year ended December 31, 2014. Of this amount, options to purchase 640,000 shares of common stock were granted in February 2014 with an exercise price of $3.09 and options to purchase 400,000 shares of common stock were granted in June 2014 with an exercise price of $1.75 per share that contained specific market conditions. The key assumptions used in these Monte Carlo simulation models and resulting valuations are noted in the following table:


	Market Condition Options Granted February 18, 2014	Market Condition Options Granted June 2, 2014
Expected life (years)—officers	6	6
Risk-free interest rate	1.9%	2.1%
Volatility	70%	65%
Dividends	None	None
Number of options granted	640,000	400,000
Fair value per share	$1.20	$0.34

Based on the above, the Monte Carlo simulation models calculated an aggregate fair value of $905,000, excluding forfeitures, related to these grants that are being recognized on a straight-line basis over the estimated vesting periods of the separate tranches. These awards accounted for $396,802 and $392,945 of the employee stock-based compensation expense recorded by the Company for the years ended December 31, 2015 and 2014, respectively. As of December 31, 2015, none of the options with market conditions had vested.

Non-Employee Grants

Pursuant to the Company’s stock plans, the Company has periodically granted stock options and unrestricted stock awards to consultants for services at the closing market price of the Company’s common stock on NASDAQ on the grant date. During the years ended December 31, 2015 and 2013, the Company issued options to purchase a total of 150,000 and 525,000 shares of common stock to consultants, respectively. No options were issued to consultants during the year ended December 31, 2014. These options were issued pursuant to the Amended and Restated 2010 Plan at exercise prices equal to the closing market price of the Company’s common stock on NASDAQ on the grant date. Should the Company terminate any of its consulting agreements, the unvested options underlying the agreements would also be cancelled. Unvested non-employee options are marked-to-market, which means that as the Company’s stock price fluctuates, the related expense either increases or decreases. The Company recognized expense of $292,992 and $351,089 related to non-employee stock options and stock awards for the years ended December 31, 2015 and 2013, respectively, and reversed the previously recognized expense of $80,866 for the year ended December 31, 2014.

A summary of stock option activity under the Amended and Restated 2010 Plan, the 2000 Stock Incentive Plan and the 2000 Director Stock Option Plan is summarized as follows:


	Number of Shares			Weighted Average Exercise Price per Share
Outstanding, December 31, 2014 (7,534,372 exercisable at weighted average price of $2.45 per share)		11,319,619		$	2.66
Granted		3,228,250			2.33
Exercised		(695,338	)		1.63
Cancelled		(561,907	)		3.63

Outstanding, December 31, 2015 (7,946,442 exercisable at weighted average price of $2.58 per share)		13,290,624		$	2.60

Vested and unvested expected to vest		12,697,446		$	2.60

2010 Employee Stock Purchase Plan (ESPP)

The Company has reserved 500,000 of its shares of common stock for issuance under the ESPP. Eligible employees may purchase shares of the Company’s common stock at 85% of the lower closing market price of the common stock at the beginning or ending date of the purchase period, as defined. The Company has two six-month purchase periods per year. As of December 31, 2015, 378,504 shares were issued under the ESPP, of which 53,190 were issued during 2015. As of December 31, 2015, there were 121,496 shares available for future purchase under the ESPP.

For the years ended December 31, 2015, 2014 and 2013, the Company recorded compensation expense related to its ESPP and calculated the fair value of shares expected to be purchased under the ESPP using the Black-Scholes models with the following assumptions:


	For the Year Ended December 31,
	2015			2014			2013
Compensation expense recognized under ESPP	$	29,924		$	25,604		$	40,008
Expected term		6 months			6 months			6 months
Risk-free interest rate		0.06-0.5	%		0.06-0.09	%		0.08-0.1	%
Volatility		55-78	%		55-66	%		42-66	%
Dividends		None			None			None

Employee Stock-Based Compensation Expense

Stock-based compensation for employee and director stock option grants for the years ended December 31, 2015, 2014 and 2013 of $3,582,254, $3,140,855 and $2,651,152, respectively, was calculated using the above valuation models and has been included in the Company’s results of operations. The total fair value of vested stock options for the years ended December 31, 2015, 2014 and 2013 were $2,734,000, $2,907,000 and $2,716,000, respectively.

Total Stock-Based Compensation Expense

For the years ended December 31, 2015, 2014 and 2013, the Company recorded employee and non-employee stock-based compensation expense to the following line items in its Costs and Expenses section of the Consolidated Statements of Operations and Comprehensive Loss:


	For the Year Ended December 31,
	2015		2014		2013
Research and development expenses	$	1,023,269	$	671,063	$	879,052
General and administrative expenses		2,851,977		2,388,926		2,123,189

Total stock-based compensation expense	$	3,875,246	$	3,059,989	$	3,002,241

No income tax benefits have been recorded for the years ended December 31, 2015, 2014 or 2013, as the Company has recorded a full valuation allowance and management has concluded that it is more likely than not that the net deferred tax assets will not be realized (see Note 11).