7.Stock-Based Compensation

The Company currently has one equity compensation plan, the 2013 Incentive Plan, which was approved by shareholders at the Company’s Annual Meeting of Shareholders on May 23, 2013 (the “2013 Incentive Plan”). The 2013 Incentive Plan is administered by the Compensation Committee and the Board of Directors of the Company. Under the terms of the 2013 Incentive Plan, the Company is authorized to grant a variety of incentive awards based on its common stock, including stock options (both incentive stock options and non-qualified stock options), performance options/shares and other stock awards, as well as the payment of incentive bonuses to all employees and non-employee directors. As of March 31, 2015, 58,886 shares of the Company’s common stock were reserved for future grants (or issuances) of restricted stock, restricted stock units, stock options, and stock warrants under the 2013 Incentive Plan. The 2013 Incentive Plan will terminate on April 16, 2023 unless it is extended or terminated earlier pursuant to its terms. In addition, from time to time, the Company makes inducement grants of stock options. These awards are made pursuant to the NASDAQ inducement grant exception as a component of new hires’ employment compensation in connection with the Company’s equity grant program. For the quarter ended March 31, 2015, the Company granted 200,000 inducement stock options to new employees.

Stock Options - The Company calculates the fair value of stock options granted using the Black-Scholes valuation model.

The following table summarizes the Company’s grant date fair value and assumptions used in determining the fair value of all stock options granted:

	Three Months Ended March 31,
	2015	2014

Volatility	79%-82%	84%-86%
Risk-free interest rate	1.31%-1.57%	1.46%-1.76%
Dividend yield	0.0%	0.0%
Expected option term (in years)	6.25	6.25
Weighted-average fair value of stock options granted	$11.66	$14.35

For all periods presented, the volatility factor was based on the Company’s historical volatility since the closing of the Company’s merger with Transave on December 1, 2010. The expected life was determined using the simplified method as described in ASC Topic 718, “Accounting for Stock Compensation”, which is the midpoint between the vesting date and the end of the contractual term. The risk-free interest rate is based on the U.S. Treasury yield in effect at the date of grant. Forfeitures are based on actual percentage of option forfeitures since the closing of the Company’s merger with Transave on December 1, 2010, and this is the basis for future forfeiture expectations.

From time to time, the Company grants performance-condition options to certain of the Company’s employees. Vesting of these options is subject to the Company achieving certain performance criteria established at the date of grant and the individuals fulfilling a service condition (continued employment). As of March 31, 2015 the Company had performance options totaling 193,334 shares outstanding which have not met the recognition criteria to date. For the three months ended March 31, 2015, approximately $1.5 million of non-cash compensation expense was recorded related to certain performance based options as the recognition criteria was met upon the marketing authorization application (“MAA”) for ARIKAYCE being accepted for filing by the European Medicines Agency (“EMA”) in February 2015.

The following table summarizes the Company’s aggregate stock option activity for the three months ended March 31, 2015:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years	Aggregate Intrinsic Value (in thousands)
Options outstanding at December 31, 2014	4,400,106		$	10.59
Granted	619,150		$	16.83
Exercised	(178,071	)	$	8.28
Forfeited or expired	(19,750	)	$	14.49
Options outstanding at March 31, 2015	4,821,435		$	11.46	8.19	$	45,030
Vested and expected to vest at March 31, 2015	4,593,714		$	11.33	8.17	$	43,494
Exercisable at March 31, 2015	1,552,681		$	8.25	7.72	$	19,496

The total intrinsic value of stock options exercised during the three months ended March 31, 2015 and 2014 was $1.3 million and $0.6 million, respectively.

As of March 31, 2015, there was $25.6 million of unrecognized compensation expense related to unvested stock options which is expected to be recognized over a weighted average period of 2.6 years. Included above in unrecognized compensation expense was $1.5 million related to outstanding performance-based options. The following table summarizes the range of exercise prices and the number of stock options outstanding and exercisable:

Outstanding as of March 31, 2015					Exercisable as of March 31, 2015
			Weighted
			Average
			Remaining	Weighted
Range of Exercise		Number of	Contractual	Average	Number of	Weighted Average
Prices		Options	Term (in years)	Exercise Price	Options	Exercise Price
3.03	3.29	180,188	6.75	3.05	131,810	3.04
3.40	3.40	708,314	7.45	3.40	442,697	3.40
3.60	6.90	605,545	7.70	6.02	327,413	5.91
6.96	12.44	885,025	7.65	11.05	358,377	11.09
12.58	12.58	577,550	8.39	12.58	25,000	12.58
12.66	14.65	483,800	8.77	13.91	84,000	14.13
14.81	16.07	583,650	9.38	15.96	28,175	15.62
16.19	20.49	779,363	8.77	19.49	151,458	19.59
21.09	21.21	3,000	9.97	21.17	—	—
21.54	21.54	15,000	8.81	21.54	3,751	21.54

Restricted Stock and Restricted Stock Units — The Company may grant Restricted Stock (“RS”) and Restricted Stock Units (“RSUs”) to eligible employees, including its executives, and non-employee directors. Each RS and RSU represents a right to receive one share of the Company’s common stock upon the completion of a specific period of continued service or achievement of a certain milestone. RS and RSU awards granted are generally valued at the market price of the Company’s common stock on the date of grant. The Company recognizes noncash compensation expense for the fair values of these RS and RSUs on a straight-line basis over the requisite service period of these awards. The following table summarizes the Company’s RSU award activity during the three months ended March 31, 2015:

			Weighted
	Number of		Average
	RSUs		Grant Price
Outstanding at December 31, 2014	20,502		$	19.47
Granted	49,776		16.07
Released	(17,568	)	20.49
Outstanding at March 31, 2015	52,710		$	15.92
Expected to vest	52,710		$	15.92

The following table summarizes the aggregate stock-based compensation recorded in the Consolidated Statements of Comprehensive Loss related to stock options and RSUs during the three months ended March 31, 2015 and 2014:

	Three months ended March 31,
	2015		2014
	(in millions)

Research and development expenses	$	1.3	$	0.9
General and administrative expenses	3.2		1.5

Total	$	4.5	$	2.4