9. STOCK-BASED COMPENSATION

2006 Stock Option Plan. Following the Acquisition, option grants to directors and employees are made under the Company’s 2006 Stock Incentive Plan (the “Plan”). A total of 14,000,000 shares of common stock are authorized for issuance under the Plan for grants of incentive or nonqualified stock options, rights to purchase restricted and unrestricted shares of common stock, stock appreciation rights and performance share grants. A committee of the board of directors determines exercise prices, vesting periods and any performance requirements on the date of grant, subject to the provisions of the Plan. Options are granted at or above the fair market value of the common stock at the grant date and expire on the tenth anniversary of the grant date. Vesting periods are generally between one and four years. Options granted pursuant to the Plan generally will become fully vested upon a termination event occurring within one year following a change in control, as defined. A termination event is defined as either termination of employment or services other than for cause or constructive termination of employees or consultants resulting from a significant reduction in either the nature or scope of duties and responsibilities, a reduction in compensation or a required relocation. As of December 31, 2013, there are an aggregate of 3,340,131 shares available for future grants under the Plan.

Accounting for Stock-Based Compensation

The Company uses the Black-Scholes option-pricing model to calculate the grant-date fair value of stock option awards. The resulting compensation expense, net of expected forfeitures, for non-performance based awards is recognized on a straight-line basis over the service period of the award, which is generally three years for stock options. For stock options with performance-based vesting provisions, recognition of compensation expense, net of expected forfeitures, commences if and when the achievement of the performance criteria is deemed probable. The compensation expense, net of expected forfeitures, for performance-based stock options is recognized over the relevant performance period. Evaluation of the probability of meeting performance targets is evaluated at the end of each reporting period. Non-employee stock-based compensation is accounted for in accordance with the guidance of FASB ASC Topic 505, Equity. As such, the Company recognizes expense based on the estimated fair value of options granted to non-employees over their vesting period, which is generally the period during which services are rendered and deemed completed by such non-employees.

The following table summarizes amounts charged to expense for stock-based compensation related to employee and director stock option grants and recorded in connection with stock options granted to non-employee consultants:

	Year Ended December 31,					Cumulative Development- Stage Period from November 7, 2002 through December 31,
	2013		2012		2013
Employee and director stock option grants:
Research and development	$	355,012	$	319,703	$	1,163,273
General and administrative		1,229,617		1,010,605		4,388,409
Restructuring costs		705,518		—		705,518
		2,290,147		1,330,308		6,257,200
Non-employee consultant stock option grants:
Research and development		21,516		79,879		137,552
General and administrative		11,570		93,110		286,651
		33,086		172,989		424,203
Total stock-based compensation	$	2,323,233	$	1,503,297	$	6,681,403

In connection with the reorganization of the Company’s executive management (see Note 16), the employment of both the Company’s chief executive officer and its vice president of research and development were terminated during 2013. In connection with these terminations and pursuant to existing agreements, certain modifications were made to the terms of the options held by these executives to accelerate vesting and extend the exercise periods of options outstanding as of their termination dates. The incremental stock-based compensation associated with these modifications was measured as the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. Accordingly, the Company recorded incremental stock-based compensation of $136,022 and recognized $569,496 of previously unrecognized stock-based compensation in connection with the modifications, which amounts are recorded as a component of restructuring costs on the accompanying consolidated statement of operations for the year ended December 31, 2013.

In November 2013, the Company completed a restructuring of its board of directors with the resignation of five directors and the appointment of one new director. In connection with the resignations of the five directors, all of the unvested options held by them at the date of resignation were vested and the exercise period of the vested options was extended to three years from the date of resignation. The Company recorded incremental stock-based compensation of $171,835 and recognized $101,972 of previously unrecognized stock-based compensation as a result of this modification. The incremental stock-based compensation was measured as the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.

During the year ended December 31, 2013, the Company granted options to purchase 5,285,573 shares of common stock in connection with the appointment of its Acting Chief Executive Officer (see Note 12), including options to purchase 1,925,573 shares of common stock exercisable at $0.75 per share (the “Anti-dilution Option”), exercisable as shares of the Company’s common stock are issued following the exercise of outstanding warrants to purchase up to 36,585,895 shares of the Company’s common stock, in the ratio of one option share for each 19 shares issued upon warrant exercise. No compensation expense was recognized related to these options as the Company was not able to conclude that the achievement of the performance condition was probable. On February 20, 2014, warrants to purchase 5,500,000 shares of common stock at an exercise price of $0.50 per share expired unexercised and as a result, the number of shares subject to the Anti-dilution Option was reduced by 289,473 shares, according to its terms. During the year ended December 31, 2012 the Company granted options to purchase 167,550 shares of common stock pursuant to performance-based awards to its chief executive officer. No compensation expense was recognized related to the performance-based awards as the milestones were not met and the options were forfeited during the twelve months ended December 31, 2013.

Assumptions Used In Determining Fair Value

Valuation and amortization method. The fair value of each stock award is estimated on the grant date using the Black-Scholes option-pricing model. The estimated fair value of employee stock options is amortized to expense using the straight-line method over the vesting period. The estimated fair value of the non-employee options is amortized to expense over the period during which a non-employee is required to provide services for the award (usually the vesting period).

Volatility. The Company estimates volatility based on an average of (1) the Company’s historical volatility since its common stock has been publicly traded and (2) review of volatility estimates of publicly held drug development companies with similar market capitalizations.

Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected term assumption.

Expected term. The expected term of stock options granted is based on an estimate of when options will be exercised in the future. The Company applied the simplified method of estimating the expected term of the options, as described in the SEC’s Staff Accounting Bulletins 107 and 110, as the historical experience is not indicative of the expected behavior in the future. The expected term, calculated under the simplified method, is applied to groups of stock options that have similar contractual terms. Using this method, the expected term is determined using the average of the vesting period and the contractual life of the stock options granted. The Company applied the simplified method to non-employees who have a truncation of term based on termination of service and utilizes the contractual life of the stock options granted for those non-employee grants which do not have a truncation of service.

Forfeitures. The Company records stock-based compensation expense only for those awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. An annual forfeiture rate of 2% and 0% was applied to all unvested options for employees and directors, respectively as of December 31, 2013. Ultimately, the actual expense recognized over the vesting period will be for only those shares that vest.

The following table summarizes weighted-average values and assumptions used for options granted to employees, directors and consultants in the periods indicated:

	Year Ended December 31, 2013			Year Ended December 31, 2012
Volatility		109	%		109% -115	%
Risk-free interest rate		0.92% - 2.05	%		0.7% - 0.925	%
Expected life (years)		5.75 - 6.55			5.06 - 6.25
Dividend		0	%		0	%
Weighted-average exercise price	$	0.46		$	0.75
Weighted-average grant-date fair value	$	0.28		$	0.62

Stock Option Activity

A summary of stock option activity is as follows:

	Number of Shares Issuable Upon Exercise of Outstanding Options		Weighted Average Exercise Price	Weighted Average Remaining Contracted Term in Years		Aggregate Intrinsic Value
Outstanding at November 7, 2002	—
Options acquired in a business combination	49,159	$	100.52
Granted	6,240,083	$	1.35
Canceled	(1,001,728)	$	3.80
Forfeited	(459,876)	$	2.46
Outstanding at December 31, 2011	4,827,638	$	1.82
Granted	1,956,650	$	0.75
Canceled	(1,666)	$	0.45
Forfeited	(343,434)	$	1.38
Outstanding at December 31, 2012	6,439,188	$	1.52
Granted	6,885,573	$	0.46
Canceled	(189,040)	$	5.89
Forfeited	(442,555)	$	0.78
Outstanding at December 31, 2013	12,693,166	$	0.91

Vested, December 31, 2013	4,906,718	$	1.55	4.17	$	0
Unvested, December 31, 2013	7,786,448	$	0.50	9.64	$	134,400
Exercisable at December 31, 2013	4,906,718	$	1.55	4.17	$	0

Exercise prices for all grants made during the twelve months ended December 31, 2013 and 2012 were equal to or greater than the market value of the Company’s common stock on the date of grant. The aggregate intrinsic value of options outstanding is calculated based on the positive difference between the estimated per-share fair value of common stock at the end of the respective period and the exercise price of the underlying options. There have been no option exercises to date. Shares of common stock issued upon the exercise of options are from authorized but unissued shares.

The weighted-average grant-date fair value of options granted during the year ended December 31, 2013, December 31, 2012 and for the period from November 7, 2002 to December 31, 2013 was $0.28, $0.62 and $0.82, respectively. The total fair value of shares vested during December 31, 2013 and 2012 and for the period November 7, 2002 to December 31, 2013 was $2,109,200, $1,549,300 and $6,464,900, respectively. The weighted-average grant-date fair value of vested and unvested options outstanding at December 31, 2013 was $0.88 and $0.33, respectively. The weighted-average grant-date fair value of vested and unvested options outstanding at December 31, 2012 was $1.01 and $0.73, respectively.

As of December 31, 2013, there was $2,045,527 of total unrecognized compensation cost related to unvested stock-based compensation arrangements. Of this total amount, the Company expects to recognize $607,116, $450,336, $323,536 and $172,363 during 2014, 2015, 2016 and 2017, respectively. The Company expects 5,860,873 in unvested options to vest in the future. In addition, there are outstanding options to purchase 1,925,573 shares of common stock that vest upon the occurrence of future events. The Company was not able to conclude that the achievement of the performance condition is probable and thus do not have basis to estimate whether these options will vest and whether the future stock-based compensation expense of $492,176 will be recorded.