9. Stockholders' Equity

9 Months Ended

Sep. 30, 2015

Stockholders Equity

Stockholders' Equity

Note 9. Stockholders' Equity

Capital Stock

In July 2015, the Company filed a Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company (the "Certificate of Amendment") with the Secretary of State of the State of Maryland. The Certificate of Amendment amended the Company's Amended and Restated Certificate of Incorporation by increasing the number of authorized shares of the Company's common stock from 90,000,000 shares to 140,000,000 shares and the attendant increase in capital stock of all classes from 100,000,000 to 150,000,000, consisting of 140,000,000 shares of common stock and 10,000,000 shares of preferred stock, which shall include 1,000,000 shares of Series B junior participating stock.  The Company did not change the authorized number of shares of preferred stock.

In April 2015, the Company issued 1,682,086 shares of common stock for approximately $11.9 million in connection with the acquisition of Zohydro ER, see Note 13, Business Combination.

In April 2015, the Company issued 2,338,129 shares of Common stock for approximately $19.5 million for the inducement and 18,055,556 shares for $60.2 million, net of deferred financing costs and accrued interest forfeited of $4.8 million in connection with the conversion of the outstanding 8.00% Convertible Notes, see Note 8, Debt.

Warrants

In March 2015, Pozen exercised all 500,000 of their warrants in a cashless exercise for which 315,835 shares were issued. In February 2015 and July 2015, Frontline exercised 222,631 and 277,369, respectively, of their warrants in cashless exercises for which 217,562 shares were issued. There are 0 warrants remaining for Frontline. As of September 30, 2015, the Company assumed approximately 464,564 outstanding warrants in connection with the acquisition of Somaxon in March 2013.

Stock Option Plans

In June 2015, the Company's shareholders approved the 2015 Omnibus Incentive Plan (the "2015 Plan"). The maximum number of shares that can be offered under this plan is 7.0 million. Incentives may be granted under the 2015 Plan to eligible participants in the form of (a) incentive stock options, (b) non-qualified stock options, (c) restricted shares, (d) restricted stock units, (e) share appreciation rights and (f) other share-based awards. Incentive grants under the 2015 Plan generally vest based on four years of continuous service and have 10-year contractual terms.

Stock-Based Compensation

Stock-based compensation expense is recognized, net of an estimated forfeiture rate, on a straight-line basis over the requisite service period, which is the vesting period.

The Company currently uses the Black-Scholes option pricing model to determine the fair value of its stock options and the Monte Carlo option pricing model to determine the fair value of its performance stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option pricing model is affected by the Company's stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include the Company's expected stock price volatility over the term of the awards, actual employee exercise behaviors, risk-free interest rate and expected dividends.

The weighted average fair value of stock options granted during the periods and the assumptions used to estimate those values using the Black-Scholes option pricing mode were as follows:

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2015			2014			2015			2014
Weighted average expected
stock price volatility		71.4	%		75.4	%		72.3	%		74.6	%
Estimated dividend yield		-	%		-	%		-	%		-	%
Risk-free interest rate		1.8	%		2.0	%		1.7	%		1.9	%
Expected life of option (in years)		6.3			6.3			6.3			6.2
Weighted average grant date
fair value per option	$	3.09		$	5.08		$	4.26		$	3.04

The expected stock price volatility for the stock options is based on historical volatility of the Company's stock. The Company has not paid and does not anticipate paying cash dividends; therefore, the expected dividend rate is assumed to be 0%. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected life assumption. The expected life of the stock options granted was estimated based on the historical exercise patterns over the option lives.

Stock-based compensation expense was $1.3 million and $4.4 million for the three and nine months ended September 30, 2015 and $878,000 and $3.4 million for the three and nine months ended September 30, 2014, respectively. Stock-based compensation expense for the periods presented is included within the selling, general and administrative expense in the condensed consolidated statements of operations.

Stock Options

As of September 30, 2015, approximately 7.0 million options are outstanding that have been issued to current officers and employees under the Company's 2007 Stock Option Plan, the 2009 Plan and the 2015 Plan. As of September 30, 2015, there was approximately $15.3 million of total unrecognized compensation cost related to non-vested stock options issued to employees and directors of the Company, which is expected to be recognized ratably over a weighted-average period of 3.2 years.

During the three months ended September 30, 2015, the Company's Board of Directors awarded a total of 485,000 options ("Performance Options") to certain of the Company's executive officers. A determination of whether and how many of the Performance Options vest and become exercisable will be made on August 14, 2018 (the "Measuring Date") (the date that is three-years from the grant date) based upon the average closing bid price of the Company's Common Stock for the twenty trading days ending on the Measuring Date. If the average closing bid price of the Company's Common Stock for the twenty trading days immediately ending on the Measuring Date is (i) less than $20 per share, no Performance Options vest, (ii) $20 per share or more and less than $25 per share, then 50% of the Performance Options vest, (iii) $25 per share or more and less than $30 per share, then 75% of the Performance Options vest, (iii) $30 per share or more and less than $35 per share, then 100% of the Performance Options vest, and (iv) $35 per share or more, then 150% of the Performance Options vest. 50% of any such vested options shall be exercisable on the Measuring Date and the remaining 50% of such vested options shall be exercisable one year after the Measuring Date. Upon a change of control of the Company after the Measuring Date, any vested but exercisable Performance Options shall become exercisable. Upon a change of control prior to the Measuring Date, the Measuring Date shall become the effective date of the change of control and the amount of Performance Options that vest, if any, shall be based upon the common stock price as of the effective date of the change of control. For example, if a change of control occurs prior to August 14, 2018 and the price of the Company's Common Stock for the twenty trading days prior to the effective date of the change of control is $24 per share then each named executive officer would vest in 50% of the Performance Options.

The Company utilized a Monte Carlo Simulation to determine the grant date fair value of the awards. Compensation expense is recognized over the performance period of each tranche in accordance with ASC 718, Compensation - Stock Compensation. For the three and nine months ended September 30, 2015, the Company recorded $15,000 of share-based compensation expense related to these options.

The following table shows the option activity, described above, during the nine months ended September 30, 2015 (share and intrinsic values in thousands):

				Weighted Average
			Average	Remaining		Aggregate
			Exercise	Contractual Life		Intrinsic
	Shares		Price	years		Value
Options Outstanding at December 31, 2014	4,551	$	5.35
Granted	2,808		6.19
Exercised	(39)		3.92		$	211
Cancelled	(290)		8.50
Expired	-		-
Options outstanding at September 30, 2015	7,030	$	5.56	8.9	$	1,404
Options vested and expected to		$
vest as of September 30, 2015	6,104	$	5.52	8.9	$	1,260
Options vested and exercisable as of September 30, 2015	1,250	$	4.87	7.9	$	435

Restricted Stock

The following table shows the Company's non-vested restricted stock activity during the nine months ended September 30, 2015 (share and intrinsic values in thousands):

			Weighted Average		Aggregate
			Grant Date Fair		Intrinsic
	Shares		Value		Value
Non-vested restricted stock outstanding at December 31, 2014	140	$	4.52
Granted	-		-
Vested	(56)		6.10	$	539
Forfeited	(20)		3.18
Non-vested restricted stock outstanding at September 30, 2015	64	$	3.55

As of September 30, 2015, there was approximately $0 of total unrecognized compensation cost related to non-vested restricted stock issued to employees and directors of the Company due to the acceleration of restricted stock expense related to the restructuring during the nine months ended September 30, 2015.