14. STOCK-BASED COMPENSATION

In June 2011, the Company’s stockholders approved the 2011 Equity Incentive Plan (“2011 Plan”). The 2011 Plan, which authorized 13.0 million shares of common stock to be issued, allows for the grant of stock options, SARs, RSAs, RSUs, performance shares and performance units. In June 2016 and 2015, shareholders authorized the issuance of an additional 1.3 million and 1.7 million shares, respectively, of common stock under the 2011 Plan. As of December 31, 2017, 2.3 million shares of common stock remain available for future grant under the 2011 Plan.

In June 2013, the Company’s stockholders approved the 2013 ESPP with approximately 0.3 million shares of common stock available to be issued. In June 2016, the Company’s stockholders approved an additional approximately 0.3 million shares of common stock available to be issued to be added to the 2013 ESPP. As of December 31, 2017, 0.2 million shares of common stock remain available for future grant under the 2013 ESPP.

In September 2014, the Company initiated the 2014 Employment Commencement Incentive Plan (“2014 Plan”) with approximately 0.6 million shares of common stock available to be issued. In October 2015 and June 2017, the 2014 Plan was increased by 1.0 million 3.8 million shares of common stock available to be issued. As of December 31, 2017, 0.6 million shares of common stock remain available for future grant under the 2014 Plan.

Stock Options

In general, stock options 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 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:

	For the Year Ended December 31,
	2017	2016	2015
Risk-free interest rate (1)	1.6 - 2.1%	1.1 – 1.8%	1.1 – 1.7%
Expected dividend yield (2)	—	—	—
Expected terms (3)	4.2 - 4.8 years	4.2 – 4.8 years	4.7 – 5.0 years
Expected volatility (4)	54.0 - 63.0%	78.2 – 137.1 %	94.3 – 111.1 %

(1)	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.

(2)	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.

(3)	The expected terms are estimated using historical exercise behavior.

(4)

Upon commercialization of EXONDYS 51 in the U.S., the Company’s future risk profile changed. As a result, starting January 1, 2017, the Company estimates expected volatility by using only implied volatility in exchange-traded options of the Company’s common stock. Prior to January 1, 2017, the 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.

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 following tables summarize the Company’s stock option activity for each of the periods indicated:

	For the Year Ended December 31,
	2017							2016					2015
						Weighted					Weighted					Weighted
						Average					Average					Average
						Exercise					Exercise					Exercise
	Shares					Price		Shares			Price		Shares			Price
Grants outstanding at beginning of the period		5,436,951				$	22.70		6,515,976		$	23.91		5,216,203		$	24.45
Granted		4,805,722		(1	)		35.09		1,285,051			14.89		2,830,078			20.28
Exercised		(792,845	)				17.40		(1,056,821	)		18.31		(816,696	)		12.26
Cancelled		(643,624	)				25.44		(1,307,255	)		24.61		(713,609	)		26.78
Grants outstanding at end of the period		8,806,204				$	29.74		5,436,951		$	22.70		6,515,976		$	23.91

Grants exercisable at end of the period		3,288,712				$	24.76		2,942,624		$	24.42		2,617,167		$	23.85
Grants vested and expected to vest at end of the period		6,910,022				$	28.49		5,116,409		$	22.83		5,908,213		$	23.94

(1)

In June 2017, the Company granted its new CEO 3,300,000 options with service and market conditions. These options have a five-year cliff vesting schedule. The fair value of $13.48 for these options was determined by a lattice model with Monte Carlo simulations. The remaining are service-based options which have a four-year vesting schedule with 25% vesting on the first anniversary and 1/48 monthly thereafter.

The weighted-average grant date fair value per share of stock options granted during the years ended December 31, 2017, 2016 and 2015 was $14.78, $12.46 and $14.98, respectively.

			Weighted
	Aggregate		Average
	Intrinsic		Remaining
	Value		Contractual
	(in thousands)		Life (Years)
Options outstanding at December 31, 2017	$	228,081	7.6
Options exercisable at December 31, 2017	$	101,559		5.1
Options vested and expected to vest at December 31, 2017	$	187,582	7.1

The following table summarizes the Company’s stock options vested and exercised for each of the periods indicated:

	For the Year Ended December 31,
	2017		2016		2015
	(in thousands)
Aggregate grant date fair value of stock options vested	$	18,225	$	30,651	$	27,858
Aggregate intrinsic value of stock options exercised	$	20,922	$	30,610	$	18,138

In February 2016, the Company granted to executives approximately 0.3 million stock options with service- and performance-based conditions (“February 2016 performance grants”). Vesting is achieved based upon the FDA approval of EXONDYS 51 and submission of MAA for eteplirsen to the EMA and continuing service over a four-year period. As a result of both milestones achieved in 2016, 50% of the February 2016 performance grants were triggered to be vested immediately and the remaining 50% are subject to the remaining service conditions of the awards.

In June 2013, the Company granted to executives approximately 0.4 million stock options with service- and performance-based conditions (“June 2013 performance grants”). Vesting is achieved based upon various regulatory approval for EXONDYS 51 and filings of investigational new drug (“IND”) submissions for other drug candidates and continuing service over a four-year period. Through the submission of two IND applications during 2014 and the approval of EXONDYS 51 in the U.S. in 2016, cumulatively, 80% of the June 2013 performance grants vested or are eligible to vest subject to the remaining service conditions of the awards. The remaining 20% were forfeited as the performance criteria was not met.

For the years ended December 31, 2017, 2016 and 2015, the Company has recognized approximately $0.9 million, $5.0 million and $0.5 million in stock-based compensation expense related to the options with performance-based criteria, respectively.

As of December 31, 2017, the total stock-based compensation expense related to non-vested awards with only service-vesting conditions not yet recognized is approximately $47.5 million and those with service- and performance-based conditions approximates $0.4 million.

Restricted Stock Awards

The Company grants RSAs to members of its board of directors and certain employees. The following table summarizes the Company’s RSA activity for each of the periods indicated:

	For the Year Ended December 31,
	2017					2016					2015
				Weighted					Weighted					Weighted
				Average					Average					Average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price
Grants outstanding at beginning of the period		153,170		$	34.53		161,320		$	21.50		6,000		$	34.92
Granted		341,500			34.58		117,553			41.22		181,783			20.80
Vested		(63,264	)		14.60		(59,703	)		13.62		(24,463	)		20.21
Forfeited		(19,625	)		43.02		(66,000	)		33.51		(2,000	)		13.90
Grants outstanding at end of the period		411,781		$	37.23		153,170		$	34.53		161,320		$	21.50

In September 2016, the Company granted executives RSAs with certain sales targets. If the sales targets are achieved within the required time frame, the number of RSAs may be increased from 71,925 to 89,906 shares. In December 2017, the Company modified the expiration date of these RSAs from June 30, 2018 to December 31, 2018. As a result of this modification, the grant date fair value was changed to $54.29. As of December 31, 2017, the sales targets related to these RSAs were not deemed probable. If and when deemed probable that such performance milestones may be achieved within the required time frame, the Company may recognize up to $4.9 million of stock-based compensation related to these grants. In September 2015, the Company granted executives 65,000 RSAs with performance conditions. As a result of the performance conditions not being met, these grants were cancelled during 2016.

Restricted Stock Units

The Company also grants RSUs to members of its board of directors and certain employees. The following table summarizes the Company’s RSU activity for the period indicated:

	For the Year Ended December 31, 2017
				Weighted
				Average
				Exercise
	Shares			Price
Granted		181,029		$	33.03
Vested		(78,017	)		32.63
Forfeited		(36,460	)		32.63
Grants outstanding at end of the period		66,552		$	33.72

In March 2017, the Company granted executives 156,029 RSUs with certain sales target and regulatory milestones. In June 2017, one performance condition of these RSUs was achieved. As a result, 50% of these RSUs became immediately vested and, accordingly, the Company recorded $2.5 million of stock-based compensation expenses for the year ended December 31, 2017. As of September 30, 2017, it has become probable that the second performance milestone will be achieved within the required timeline. Accordingly, for the year ended December 31, 2017, the Company recognized approximately $0.4 million of stock-based compensation expenses and there is remaining unrecognized stock-based compensation expense of $0.3 million. The third performance milestone was deemed as not probable of being achieved as of December 31, 2017. If and when deemed probable that the last performance milestone may be achieved within the required time frame, the Company may recognize up to $0.7 million of stock-based compensation related to the third performance milestones of these grants.

Stock Appreciation Rights

The Company issues 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 former 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 Executive 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 summarizes the Company’s SAR activity for each of the periods indicated:

	For the Year Ended December 31,
	2017				2016					2015
			Weighted					Weighted				Weighted
			Average					Average				Average
			Exercise					Exercise				Exercise
	Shares		Price		Shares			Price		Shares		Price
Grants outstanding at beginning of the period		100,000	$	23.85		170,000		$	18.18		170,000	$	18.18
Exercised		—		—		(67,812	)		10.08		—		—
Forfeited		—		—		(2,188	)		10.08		—		—
Grants outstanding at end of the period		100,000	$	23.85		100,000		$	23.85		170,000	$	18.18
Grants exercisable at end of the period		100,000	$	23.85		100,000		$	23.85		141,249	$	17.59
Grants vested and expected to vest at end of the period		100,000	$	23.85		100,000		$	23.85		167,813	$	18.29

			Weighted
	Aggregate		Average
	Intrinsic		Remaining
	Value		Contractual
	(in thousands)		Life (Years)
SARs outstanding, exercisable and vested at December 31, 2017	$	3,179	4.9

2013 Employee Stock Purchase Plan

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 purchase period. The 24-month award period will end between February 28, 2018 and August 31, 2019. The following table summarizes the Company’s ESPP activity for each of the periods indicated:

	For the Year Ended December 31,
	2017		2016		2015
Number of shares purchased		102,698		137,113		75,539
Proceeds received (in millions)	$	1.4	$	1.6	$	0.9

Stock-based Compensation Expense

For the years ended December 31, 2017, 2016 and 2015, total stock-based compensation expense was $30.5 million, $30.0 million and $32.1 million, respectively. Included in the amounts for the year ended December 31, 2017 and 2015 are $2.1 million and $8.6 million of stock-based compensation expense incurred in connection with the resignation of the Company’s former CEOs, respectively. The following table summarizes stock-based compensation expense by function included within the consolidated statements of operations and comprehensive loss:

	For the Year Ended December 31,
	2017		2016		2015
	(in thousands)
Research and development	$	8,542	$	9,499	$	10,403
Selling, general and administrative		21,923		20,463		21,714
Total stock-based compensation	$	30,465	$	29,962	$	32,117

The following table summarizes stock-based compensation expense by grant type included within the consolidated statements of operations and comprehensive loss:

	For the Year Ended December 31,
	2017		2016		2015
	(in thousands)
Stock options	$	23,416	$	26,320	$	29,014
Employee stock purchase plan		1,754		2,380		2,165
Restricted stock awards/units		5,295		872		446
Other		—		390		492
Total stock-based compensation	$	30,465	$	29,962	$	32,117