Accounting for Stock-Based Compensation

As of September 30, 2016, the Company had two shareholder-approved, share-based compensation plans: (i) the Amended and Restated 2010 Stock Incentive Plan, or the 2010 Plan, adopted as amended by the board of directors in March 2015 and approved by shareholders in May 2015 and (ii) the 2010 Employee Stock Purchase Plan, or the ESPP, adopted by the board of directors in April 2010 and approved by shareholders in June 2010.

During the nine months ended September 30, 2016, the Company’s board of directors granted options to purchase a total of 4,621,225 shares of the Company’s common stock to officers and employees of the Company, both under the 2010 Plan or in the form of inducement awards pursuant to NASDAQ Marketplace Rules. These options vest as to 25% of the shares underlying the award after the first year and as to an additional 6.25% of the shares underlying the award in each subsequent quarter, based upon continued employment over a four-year period, and are exercisable at a price equal to the closing price of the Company’s common stock on the NASDAQ Global Market on the grant dates.

During the nine months ended September 30, 2016, the Company’s board of directors also granted options to its non-employee directors to purchase 470,000 shares of common stock under the 2010 Plan, which will vest and become exercisable in equal monthly installments over a period of one year from the date of grant. These options were granted at an exercise price of $1.76 per share, which equals the closing market price of the Company’s common stock on the NASDAQ Global Market on the grant date.

Employee and Director Grants

Vesting Tied to Service Conditions

In determining the fair value of stock options, the Company generally uses the Black-Scholes option pricing model. As discussed below, for employee stock options with market performance conditions, the Company uses a Monte Carlo simulation valuation model. The Black-Scholes option pricing model employs the following key assumptions for employee and director options awarded during the nine months ended September 30, 2016 and 2015 based on the assumptions noted in the following table:



	Nine Months Ended September 30,
	2016	2015
Expected life (years) - employees	6	6
Expected life (years) – officers and directors	7	7
Risk-free interest rate	1.4-1.8%	1.5-1.9%
Volatility	63-70%	68-70%
Dividends	None	None

The expected volatility is based on the annualized daily historical volatility of the Company’s stock price for a time period consistent with the expected term of each grant. Management believes that the historical volatility of the Company’s stock price best represents the future volatility of the stock price.

The risk-free rate is based on the U.S. Treasury yield in effect at the time of grant for the expected term of the respective grant. The Company has not historically paid cash dividends, and does not expect to pay cash dividends in the foreseeable future.

The expected terms and stock price volatility utilized in the calculation involve management’s best estimates at that time, both of which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the life of the option. GAAP also requires that the Company recognize compensation expense for only the portion of options that are expected to vest. Therefore, management calculated an estimated annual pre-vesting forfeiture rate that is derived from historical employee termination behavior since the inception of the Company, as adjusted. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.

As of September 30, 2016, there were 15,487,348 stock options outstanding. The aggregate intrinsic value of employee options outstanding at September 30, 2016 was $9.2 million, of which $3.9 million related to exercisable options. The weighted average grant-date fair values of these stock options granted during the nine months ended September 30, 2016 and 2015 were $1.08 and $1.71, respectively. As of September 30, 2016, there was approximately $7.1 million, net of the impact of estimated forfeitures, of unrecognized compensation cost related to unvested employee stock option awards outstanding that is expected to be recognized as expense over a weighted-average period of 2.84 years. The intrinsic value of employee stock options exercised during the nine months ended September 30, 2016 and 2015 was $0.5 million and $0.1 million, respectively.

Employee Stock-Based Compensation Expense

During the three months ended September 30, 2016, Daniel Passeri resigned from his position as Vice Chairman of the Company's board of directors. In connection with the related letter agreement with the Company, the board of directors approved a modification to Mr. Passeri’s vested common stock options such that the exercise period for all such options shall be twenty-four months. As a result, $0.6 million of additional stock based compensation expense was recorded to account for this modification during the three months ended September 30, 2016.

The Company recorded a total of $1.6 million and $3.3 million in compensation expense for the three and nine months ended September 30, 2016, respectively and $1.0 million and $2.7 million in compensation expense for the three and the nine months ended September 30, 2015, respectively, related to employee and director stock option grants. The total fair values of vested stock options for the nine months ended September 30, 2016 and 2015 were $2.8 million and $2.1 million, respectively.

Non-Employee Grants

The Company has periodically granted stock options to consultants for services pursuant to the Company’s stock plans at the fair market value on the respective dates of grant. Should the Company terminate any of its consulting agreements, the unvested options underlying the agreements would also be cancelled.

The Company recognized expense related to non-employee stock options of $0.1 million and reversed expense of less than $0.1 million during the three and nine months ended September 30, 2016, respectively, and reversed expense of $0.1 million and recognized expense of $0.2 million during the three and nine months ended September 30, 2015, respectively.

Total Stock-Based Compensation Expense

For the three and nine months ended September 30, 2016 and 2015, the Company recorded stock-based compensation expense to the following line items in its costs and expenses section of the condensed consolidated statements of operations and comprehensive loss, including expense related to its ESPP:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Research and development expenses	$	205	$	170	$	531	$	771
General and administrative expenses	1,425		731		2,780		2,104
Total stock-based compensation expense	$	1,630	$	901	$	3,311	$	2,875