13. Stock-Based Compensation

The Company’s stock-based compensation plans include the TransEnterix, Inc. 2007 Incentive Compensation Plan, previously named the SafeStitch Medical, Inc. 2007 Incentive Compensation Plan (the “2007 Plan”), as well as options outstanding under the TransEnterix, Inc. Stock Option Plan (the “2006 Plan”). As part of the Merger, options outstanding, whether vested or unvested, under the 2006 Plan were adjusted by the Exchange Ratio of 1.1533, and assumed by the Company concurrent with the closing of the Merger .

The 2007 Plan was approved by the majority of the SafeStitch’s stockholders on November 13, 2007. The 2007 Plan was amended on June 19, 2012 to increase the number of shares of common stock available for issuance to 5,000,000 and was amended on October 29, 2013 to (a) increase the number of shares of common stock authorized for issuance under the 2007 Plan from 5,000,000 shares of common stock to 24,700,000 shares of common stock, (b) increase the per-person award limitations for options or stock appreciation rights from 1,000,000 to 2,500,000 shares and for restricted stock, deferred stock, performance shares and/or other stock-based awards from 500,000 to 1,000,000 shares, and (c) change the name of the 2007 Plan to reflect the change to the TransEnterix, Inc. 2007 Incentive Compensation Plan. Under the 2007 Plan, which is administered by the Compensation Committee, the Company may grant stock options, stock appreciation rights, restricted stock and/or deferred stock to employees, officers, directors, consultants and vendors. The exercise price of stock options or stock appreciation rights may not be less than the fair market value of the Company’s shares at the date of grant and, within any 12 month period. Additionally, no stock options or stock appreciation rights granted under the 2007 Plan may have a term exceeding ten years.

The 2006 Plan was adopted in September 2006 and provided for the granting of up to 400,000 stock options to employees, directors, and consultants. Under the 2006 Plan, both employees and non-employees were eligible for such stock options. In 2009, the 2006 Plan was amended to increase the total options pool to 5,550,264. In 2011, the 2006 Plan was amended to increase the total options pool to 16,890,945. The Board of Directors had the authority to administer the plan and determine, among other things, the exercise price, term and dates of the exercise of all options at their grant date. Under the 2006 Plan, options become vested generally over four years, and expire not more than 10 years after the date of grant. As part of the Merger, options outstanding under the 2006 Plan were adjusted by the Conversion Ratio, and remain in existence as options in the combined entity.

During the years ended December 31, 2013 and 2012, the Company recognized $941,245 and $343,137, respectively, of stock-based compensation expense.

The Company recognizes as expense, the grant-date fair value of stock options and other stock based compensation issued to employees and non-employee directors over the requisite service periods, which are typically the vesting periods. The Company uses the Black-Scholes-Merton model to estimate the fair value of its stock-based payments. The volatility assumption used in the Black-Scholes-Merton model is based on the calculated historical volatility based on an analysis of reported data for a peer group of companies. The expected term of options granted by the Company has been determined based upon the simplified method, because the Company does not have sufficient historical information regarding its options to derive the expected term. Under this approach, the expected term is the mid-point between the weighted average of vesting period and the contractual term. The risk-free interest rate is based on U.S. Treasury rates whose term is consistent with the expected life of the stock options. The Company has not paid and does not anticipate paying cash dividends on its shares of common stock; therefore, the expected dividend yield is assumed to be zero. The Company estimates forfeitures based on the historical experience of the Company and adjusts the estimated forfeiture rate based upon actual experience.

The fair value of options granted were estimated using the Black-Scholes-Merton option pricing model based on the assumptions in the table below:

Year ended December 31,	2013		2012
Expected dividend yield		0%		0%
Expected volatility		62%-63%		55% - 67%
Risk-free interest rate		1.64% - 1.98%		0.4% - 3.7%
Expected life (in years)		5.7 – 6.1		2.9 - 10.0

The Company is also required to estimate the fair value of the common stock underlying the stock-based awards when performing the fair value calculations with the Black-Scholes option-pricing model. The fair value of the common stock underlying the stock-based awards for the common stock before the Company was public was estimated on each grant date by the Board of Directors, with input from management. The Board of Directors is comprised of a majority of non-employee directors with significant experience in the medical device industry. Given the absence of a public trading market of the Company’s common stock prior to the Merger, and in accordance with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately- Held-Company Equity Securities Issued as Compensation, the Board of Directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of the common stock, including among other things, the rights, preferences and privileges of the redeemable convertible preferred stock, business performance, present value of future cash flows, likelihood of achieving a liquidity event, illiquidity of the Company’s capital stock, management experience, stage of development, industry information and macroeconomic conditions. In addition, the Company’s Board of Directors utilized independent valuations performed by an unrelated third-party specialist to assist with the valuation of the common stock; however, the Company and the Board of Directors have assumed full responsibility for the estimates. The Board of Directors utilized the fair values of the common stock derived in the third-party valuations to set the exercise price for options granted during the year ended December 31, 2012, and also for options granted prior to the Merger in fiscal 2013.

The following table summarizes the Company’s stock option activity, including grants to non-employees, for the years ended December 31, 2013 and 2012:

					Weighted-
					Average
			Weighted-		Remaining
	Number of		Average		Contractual
	Shares		Exercise Price		Term (Years)

Options outstanding at December 31, 2011		4,164,090	$	0.48		7.58
Granted		11,769,866		0.07
Cancelled		(2,962,834)		0.14
Exercised		(48,356)		0.07

Options outstanding at December 31, 2012		12,922,766	$	0.08		8.70
Options assumed through merger with SafeStitch		3,547,750		0.75
Granted		3,015,696		0.44
Cancelled		(30,643)		0.08
Exercised		(341,133)		0.16
Options outstanding at December 31, 2013		19,114,436	$	0.26		7.95

The following table summarizes information about stock options outstanding at December 31, 2013:

					Weighted-
					Average
			Weighted-		Remaining
	Number of		Average		Contractual
	Shares		Exercise Price		Term (Years)
Exercisable at December 31, 2013		10,031,605	$	0.30		7.23
Vested or expected to vest at December 31, 2013		18,788,438	$	0.26		7.94

The aggregate intrinsic value of stock options outstanding, exercisable, and vested or expected to vest at December 31, 2013 was approximately $24.8 million, $12.7 million, and $24.3 million, respectively. This amount is before applicable income taxes and represents the closing market price of the Company’s common stock at December 31, 2013 less the grant price, multiplied by the number of stock options that had a grant price that is less than the closing market price. This amount represents the amount that would have been received by the optionees had these stock options been exercised on that date.

The following table summarizes the unvested stock option activity:

			Weighted-Average
	Number of Shares		Fair Value
Unvested options at December 31, 2011		1,683,733	$	0.33
Granted		11,769,866		0.07
Vested		(3,612,025)		0.14
Forfeited		(1,303,895)		0.23

Unvested options at December 31, 2012		8,537,679	$	0.08
Unvested options assumed through merger with SafeStitch		1,116,000		0.49
Granted		3,015,696		0.19
Vested		(3,559,092)		0.25
Forfeited		(27,452)		0.04

Unvested options at December 31, 2013		9,082,831	$	0.22

The Company granted 3,015,696 and 11,769,866 options to employees and nonemployees during the years ended December 31, 2013 and 2012, respectively, with a weighted-average grant date fair value of $0.19 and $0.07, respectively. The total intrinsic value of options exercised during 2013 and 2012 was approximately $347,593 and $0, respectively.

The total fair value of options vested during 2013 and 2012 was $879,826 and $263,751, respectively. As of December 31, 2013, the Company had future employee stock-based compensation expense of $1,790,930 related to unvested share awards, which is expected to be recognized over an estimated weighted-average period of 2.6 years.