Share-Based Compensation

Stock Options

2013 Equity Incentive Plan

In September 2013, the Company adopted an equity compensation plan entitled the 2013 Equity Incentive Plan (the “2013 Equity Plan”). The 2013 Equity Plan is an omnibus equity compensation plan that permits the issuance of various types of equity-based compensation awards, including options, stock awards, stock appreciation rights and restricted stock units, as well as cash awards, to employees, directors and eligible consultants of the Company. The 2013 Equity Plan has a ten-year term and permits the issuance of incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended. The administrator under the plan has broad discretion to establish the terms of awards, including the size, term, exercise price (if applicable) and applicable vesting conditions. Generally, grants to employees vest over four years, with 25% vesting on the one-year anniversary, and the remainder vesting either quarterly or monthly thereafter; grants to non-employee directors vest over three years, with 33% vesting on the one-year anniversary, and the remainder vesting either quarterly or monthly thereafter.

The 2013 Equity Plan previously allowed for automatic annual increases to the number of shares of common stock authorized for issuance under the plan on the first day of each year, with such increases based on 10% of the outstanding shares of the Company’s common stock as of the last day of the previous year end. On January 1, 2014, the total shares available for grant under the 2013 Equity Plan increased to 440,441. At the 2014 annual meeting of shareholders, the shareholders approved and adopted an amendment to the 2013 Equity Plan to increase the number of shares of common stock authorized for issuance up to a total of 1,100,000 shares and eliminated the automatic annual increase on the first day of each year.

As of December 31, 2014, there were 478,304 shares available for future grants under the 2013 Equity Plan.

Total share-based compensation expense related to share-based awards for the years ended December 31, 2014 and 2013 was comprised of the following (in thousands):



	December 31,
	2014		2013
Research and development	$	1,265	$	992
General and administrative	7,727		11,381
Share-based compensation expense included in operating expenses	$	8,992	$	12,373
Share-based compensation expense from:
Stock options	$	1,152	$	7,762
Restricted stock awards and restricted stock units	7,840		4,611
Share-based compensation expense included in operating expenses	$	8,992	$	12,373

The Company’s stock option award activity for the years ended December 31, 2014 and 2013 was comprised of the following:



	Outstanding Options
	Shares Underlying Stock Options		Weighted-Average Exercise Price per Share	Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2012	11,844,627		$3.00
Granted	54,000		$6.00
Canceled	(11,844,609	)	$3.00
Forfeited/Expired	(18	)	$0.00
Outstanding at December 31, 2013	54,000		$6.00
Granted	567,696		$9.88
Restricted stock awarded	(2,796	)	$0.00
Outstanding at December 31, 2014	618,900		$9.54	9.37 years	$	5,514,059
Vested and expected to vest at December 31, 2014	618,900		$9.54	9.37 years	$	5,514,059
Exercisable at December 31, 2014	15,750		$6.00	8.89 years	$	196,088

Share-based compensation expense recognized in the statements of operations and comprehensive loss for fiscal years 2014 and 2013 is based on awards ultimately expected to vest. There were no forfeitures during 2014 and 2013.

As of December 31, 2014, the Company has reserved 1,097,204 shares of common stock for future issuance upon exercise of all options granted or to be granted under the 2013 Plan.

The weighted-average grant date fair value of options granted during the year ended December 31, 2014 was $9.67 per share. As of December 31, 2014, approximately $4,600,000 of total unrecognized compensation costs related to non-vested stock option awards is expected to be recognized over a weighted average period of approximately 3.2 years. No stock option exercises occurred during the years ended December 31, 2014 and 2013.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option pricing model (the “Black-Scholes model”), which uses the assumptions noted in the following table. Expected volatility is based on historical volatility of the Company’s Common Stock. In determining the expected life of employee options, the Company uses the “simplified” method. The expected life assumptions for non-employees were based upon the contractual term of the option. The risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The dividend yield assumption is based on the expectation of no future dividend payments by the Company.

The Company estimated the fair value of each option grant on the date of grant using the Black-Scholes model with the following weighted-average assumptions:



	December 31,
	2014		2013
Risk-free interest rate	2.1	%	2.8	%
Dividend yield	0	%	0	%
Volatility	186	%	213	%
Expected life (years)	6.74 years		10.00 years

Third Party Share-based Compensation Expense

The Company initially estimates the fair value of options, warrants or stock awards issued to non-employees, other than non-employee directors, on the date of grant using the Black-Scholes model; and thereafter, the Company re-measures the fair value as of each balance sheet date as the options and warrants vest. In December 2014, the Company granted warrants to purchase 51,000 shares of common stock to two outside third parties at an exercise price equal to the fair market value of the stock at the date of each grant. The Company recognized compensation expense for these warrant grants of approximately $63,000 for the year ended December 31, 2014.

Restricted Stock

Restricted Stock Awards

Restricted stock awards are grants that entitle the holder to acquire shares of common stock for no cash consideration or at a fixed price, which is typically nominal. The Company accounts for the restricted stock awards as issued and outstanding common stock, even though the shares covered by a restricted stock award cannot be sold, pledged, or otherwise disposed of until the award vests, and any unvested shares may be reacquired by the Company for the original purchase price following the awardee's termination of service.

On September 24, 2013, the Company issued restricted stock awards ("RSAs") of approximately 1,327,048 shares to an officer, 79,622 shares to a director and an aggregate of 336,185 shares to three employees. The grants to the officer, director and one of the employees were for the replacement of canceled stock options and restricted stock units ("RSUs") granted on April 10, 2012, which was done in order to complete the capital restructuring that took place in September 2013. The RSAs were granted outside of the 2013 Equity Plan, but are governed in all respects by the 2013 Equity Plan. The RSAs were granted with a combination of performance-based and time-based vesting components. During December 31, 2014, all of the performance-based vesting components were either achieved or modified to time-based vesting. As of December 31, 2014, there were no remaining performance-based vesting components, and the RSAs will be fully vested within approximately 13 months.

On January 25, 2014, the Company granted RSAs representing 2,976 shares of common stock with a grant date fair market value of $25,000 to a consultant for services. The RSAs vested immediately and were issued under the 2013 Equity Plan.

On March 31, 2014, RSAs representing 39,811 shares of common stock were canceled upon forfeiture. The remaining unrecognized share-based compensation expense for the canceled RSAs was expensed during the three months ended March 31, 2014. In addition, RSAs representing 7,318 shares of common stock were canceled in exchange for the payment of employee income taxes during the three months ended September 30, 2014.

The Company’s restricted stock award activity for the years ended December 31, 2014 and 2013 was comprised of the following:



	Number of Shares		Weighted Average Grant Date Fair Value
Unvested at December 31, 2012	59,755		$	3.00
Granted	1,782,853		$	11.65
Vested	(36,000	)	$	4.00
Forfeited	—		$	—
Unvested at December 31, 2013	1,806,608		$	11.51
Granted	2,976		$	8.40
Vested	(2,976	)	$	8.40
Forfeited	(47,129	)	$	4.41
Unvested at December 31, 2014	1,759,479		$	11.70

The remaining unrecognized share-based compensation expense for research and development attributable to RSAs to be recognized over the next 13 months is approximately $1,500,000. The remaining unrecognized share-based compensation expense for general and administrative attributable to RSAs to be recognized over the next 13 months is approximately $6,800,000.

Restricted Stock Units

A restricted stock unit is a promise by the Company to issue a share of common stock upon vesting of the unit. On September 24, 2013 the Company canceled an aggregate of 207,502 RSUs that were granted on April 10, 2012 to one director and one employee. As a result of the modification, the remaining unamortized share-based compensation expense to be recognized over the remaining service period for the RSUs was transferred to the new RSAs; and as of December 31, 2014 and 2013, there was no unamortized share-based compensation expense related to RSUs to be recognized.