3. STOCK COMPENSATION

The Company previously sponsored a 2002 Equity Incentive Plan (the “2002 Plan”) pursuant to which it issued options to purchase its common stock to the Company’s employees, directors and service providers. In June 2011, the 2002 Plan was replaced by the 2011 Equity Incentive Plan (the “2011 Plan” and, together with the 2002 Plan, the “Plans”) following approval by the Company’s stockholders. There will be no further grants under the 2002 Plan. The 2011 Plan allows for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares and performance units. As of December 31, 2013, 2,879,000 shares of common stock remain available for future grant. In June 2013, the Company’s stockholders approved the 2013 Employee Stock Purchase Plan (“ESPP”) with 250,000 shares of common stock available to be issued as of December 31, 2013.

Stock Options

Historically, stock options granted under the 2002 Plan prior to December 31, 2010 vested over a three year period, with one-third of the underlying shares vesting on each anniversary of grant, and have a ten year term, subject to the terms of the applicable plan under which they were granted. Beginning in January 2011, stock options granted under the 2002 Plan vest over a four year period, with one-fourth of the underlying shares vesting on the first anniversary of the grant and 1/48th of the underlying shares vesting monthly thereafter, such that the underlying shares will be fully vested on the fourth anniversary of the grant.

Stock options granted under the 2011 Plan have a ten year term and vest over a four year period, with one-fourth of the underlying shares vesting on the first anniversary of the grant and 1/48th of the underlying shares vesting monthly thereafter, such that the underlying shares will be fully vested on the fourth anniversary of the grant, subject to the terms of the applicable plan under which they were granted.

The Company’s stock option activity consisted of the following as of the dates indicated:


	For the Year Ended December 31,
	2013					2012					2011
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Options outstanding at beginning of year		2,522,522		$	11.76		2,417,659		$	11.18		1,415,009		$	12.84
Granted		2,283,719			34.18		1,269,470			12.92		1,595,375			9.18
Exercised		(241,056	)		11.31		(371,353	)		10.18		(25,291	)		6.54
Canceled or expired		(374,818	)		16.83		(793,254	)		12.59		(567,434	)		9.90


Options outstanding at end of year		4,190,367		$	23.46		2,522,522		$	11.76		2,417,659		$	11.18


Exercisable at year end		1,051,329		$	11.91		615,394		$	12.71		742,211		$	15.60

Vested at December 31, 2013 and expected to vest		3,467,069		$	21.50


	Aggregate Intrinsic Value		Weighted Average Remaining Contractual Life (Years)
Options outstanding at end of year	$	18,544,313		8.58

Exercisable at end of year		9,856,124		7.04

Vested at December 31, 2013 and expected to vest		18,069,138		8.41

The weighted-average fair value per share of stock options granted during the 2013, 2012 and 2011 was $22.86, $9.54 and $6.12, respectively. During the same periods, the total intrinsic value of stock options exercised was $5.4 million, $5.0 million, and $0.1 million, respectively. The total grant date fair value of stock options vested for 2013, 2012 and 2011 was $4.9 million, $3.7 million and $2.8 million, respectively.

During 2013, 2012 and 2011, $2.7 million, $3.8 million and $0.2 million, respectively, was received upon the exercise of stock options.

Valuation Assumptions

Stock-based compensation costs for stock options are based on the fair value calculated from the Black-Scholes-Merton option-pricing model on the date of grant. The fair value of stock option grants is amortized as compensation expense on a straight-line basis over the vesting period of the grants.

The fair values of stock options granted during the periods presented were measured on the date of grant using the Black-Scholes-Merton option-pricing model, with the following assumptions:


	Year Ended December 31,
	2013		2012		2011
Risk-free interest rate		0.7% - 1.7%		0.6% - 1.1%		0.9% - 2.4%
Expected dividend yield		0%		0%		0%
Expected lives		4.8 - 5.0 years		4.8 - 5.3 years		5.2 - 8.9 years
Expected volatility		80.0% - 90.7%		79.7% - 108.6%		78.2% - 81.6%

The risk-free interest rate is estimated using an average of treasury bill interest rates over a historical period commensurate with the expected term of the option that correlates to the prevailing interest rates at the time of grant. The expected dividend yield is zero as the Company has not paid any dividends to date and does not expect to pay dividends in the future. The expected lives are estimated using expected and historical exercise behavior. For the year ended December 31, 2013, expected volatility was estimated using a blend of calculated volatility of the Company’s common stock over a historical period and implied volatility in exchange-traded options of the Company’s common stock. Prior to January 1, 2013, expected volatility was estimated using calculated volatility of the Company’s common stock over a historical period commensurate with the expected term of the option. The amounts estimated according to the Black-Scholes-Merton option pricing model may not be indicative of the actual values realized upon the exercise of these options by the holders.

The Company is required to estimate potential forfeiture of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures is adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up in the period of change and impact the amount of stock compensation expense to be recognized in future periods.

Restricted Stock Awards

In 2013, 2012 and 2011, the Company granted a total of 6,000, 4,998 and 5,000 shares of restricted stock, respectively to members of its board of directors. These shares vest on the first anniversary of the grant. During 2013, 2012 and 2011, the Company recognized compensation expense related to these shares of $149 thousand, $38 thousand and $22 thousand, respectively.

The following table sets forth restricted stock activity for the years shown:


	For the Year Ended December 31,
	2013					2012					2011
	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Restricted Stock Awards outstanding at beginning of year		4,998		$	10.08		5,000		$	8.46		3,333		$	7.80
Granted		6,000			34.92		4,998			10.08		5,000			8.46
Vested		(4,998	)		10.08		(5,000	)		8.46		(3,333	)		7.80
Forfeited or canceled		—			—		—			—		—			—


Restricted Stock Awards outstanding at end of year		6,000		$	34.92		4,998		$	10.08		5,000		$	8.46

The weighted-average grant-date fair value of restricted stock awards is the market price of the Company’s common stock on the date of grant which is amortized to stock-based compensation expense on a straight-line basis over the vesting period of the grants. The total grant-date fair values of restricted stock awards that vested during 2013, 2012 and 2011 were approximately $50 thousand, $42 thousand and $26 thousand, respectively.

Restricted Stock Units

In April 2012, the Company granted 32,377 shares of restricted stock units (RSUs) to employees in lieu of cash for a portion of the 2011 bonus. These shares vest over a two-year period and have a weighted average grant date fair value of $5.40 per share. In addition, in August 2012, 7,500 RSUs with a grant date fair value of $10.08 per share were granted to an officer of the Company. The Company did not grant any RSUs in 2013 or 2011. The weighted-average grant-date fair value of RSU awards is based on the market price of the Company’s common stock on the date of grant which is amortized to stock-based compensation expense on a straight-line basis over the vesting period of the grants. The following table sets forth restricted stock unit activity for the period shown:


	For the Year Ended December 31,
	2013					2012
	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Restricted Stock Units outstanding at beginning of year		38,260		$	6.32		—		$	—
Granted		—			—		39,877			6.28
Vested		(31,379	)		6.52		—			—
Forfeited or canceled		(374	)		5.40		(1,617	)		5.40


Restricted Stock Units outstanding at end of year		6,507		$	5.40		38,260		$	6.32

The weighted-average grant-date fair value of restricted stock units is the market price of the Company’s common stock on the date of grant which is amortized to stock-based compensation expense on a straight-line basis over the vesting period of the grants. The total grant-date fair value of restricted stock units that vested during 2013 was approximately $0.2 million.

Stock Appreciation Rights

The Company issues Stock Appreciation Rights (SARs) to employees on the same terms as options granted to employees. The grant date fair value of the SARs is determined using the same valuation assumptions as for stock options described above. Stock-based compensation expense is recognized on a straight-line basis over the vesting period of the SARs.

In August 2012, 70,000 SARs were granted to the Company’s President and CEO and have an exercise price of $10.08 per share. In November 2012, 100,000 SARs were granted to the Company’s Senior Vice-President and CFO and have an exercise price of $23.85 per share. The SARs are classified as equity as the agreements require settlement in shares of stock. The following table sets forth stock appreciation rights activity for the period shown:


	For the Year Ended December 31,
	2013				2012
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Stock Appreciation Rights outstanding at beginning of year		170,000	$	18.18		—	$	—
Granted		—		—		170,000		18.18


Stock Appreciation Rights outstanding at end of year		170,000	$	18.18		170,000	$	18.18

Exercisable at end of year end		50,416	$	17.48
Vested at December 31, 2013 and expected to vest		170,000	$	18.18


	Aggregate Intrinsic Value		Weighted Average Remaining Contractual Life (Years)
Stock Appreciation Rights outstanding at end of year	$	720,300		8.76
Exercisable at end of year		240,097		8.75
Vested at December 31, 2013 and expected to vest		720,300		8.76

The total grant-date fair value of stock appreciation rights that vested during 2013 was approximately $0.7 million.

Employee Stock Purchase Plan (ESPP)

Under the Company’s ESPP, participating employees purchase common stock through payroll deductions. The purchase price is equal to 85% of the lower of the closing price of the Company’s common stock on the first business day and the last business day of the relevant plan period. The initial 26-month award period will end on August 31, 2015. Each subsequent offering period will begin on March 1 or September 1.

For the year ended December 31, 2013, the fair value of stock purchase rights ranges from $16.12 to $24.65 per share on 54,995 shares estimated to be purchased during the initial award period. The fair value was estimated using the Black-Scholes-Merton option-pricing model. The Company used a weighted-average stock-price volatility ranging from 84% to 98%, expected option life assumption from 0.7 to 2.2 years and a risk-free interest rate from 0.1% to 0.4%. The Company recorded $0.5 million of stock-based compensation expense for the year ended December 31, 2013 related to the ESPP. For 2012 and 2011 there was no ESPP and as such no expense was recorded for those periods.

Stock-based Compensation Expense

Total stock-based compensation expense recognized in 2013, 2012 and 2011 was $11.1 million, $3.1 million and $3.1 million, respectively. A summary of the stock-based compensation expense recognized in the statement of operations and comprehensive loss is as follows:


	Year Ended December 31,
	2013		2012		2011
	(in thousands)
Research and development	$	3,888	$	1,173	$	1,279
General and administrative		7,239		1,905		1,850


Total	$	11,127	$	3,078	$	3,129

As of December 31, 2013, there was $47.2 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements, including stock options, restricted stock, RSUs, and SARs, granted under the Plan. These costs are expected to be recognized over a weighted-average period of 3.1 years.

In 2011, the Company entered into separation agreements and releases with several of its former executives. Pursuant to these agreements, the Company immediately vested certain outstanding stock options held by these departing executives and extended the period in which the options could be exercised for a period of up to one year. As a result of these separation agreements and releases, the Company recorded a stock-based compensation expense of $0.5 million and severance and other compensation expenses of $1.3 million in 2011. There were no significant modifications to outstanding stock awards in 2013 or 2012.