Stock-based Compensation

Equity Incentive Plans

In March 2010, our board of directors (the "Board") and stockholders approved the 2010 Equity Incentive Award Plan (the "2010 Plan"), which became effective upon the completion of our initial public offering (“IPO”) in April 2010. The number of shares of our common stock available for issuance under the 2010 Plan is equal to 1,100,000 shares plus any shares of common stock reserved for future grant or issuance under the Company’s 2002 Stock Plan (the “2002 Plan”) that remained unissued at the time of completion of the initial public offering. The 2010 Plan also provides for automatic annual increases in the number of shares reserved for future issuance. All grants will reduce the 2010 Plan reserve by one share for every share granted. As of December 31, 2017, total shares remaining available for issuance under the 2010 Plan were approximately 6.8 million shares.

The 2010 Plan provides for the grant of incentive stock options, non-statutory stock options, RSUs, RSAs, PSUs, PBOs, stock appreciation rights, and stock purchase rights to our employees, non-employee directors and consultants.

Incentive stock options may be granted with an exercise price of not less than the fair value of our common stock on the date of grant, and the nonstatutory stock options may be granted with an exercise price of not less than 85% of the fair value of our common stock on the date of grant, as determined by the Board. Stock options granted to a stockholder owning more than 10% of our voting stock must have an exercise price of not less than 110% of the fair value of the common stock on the date of grant. Stock options are granted with terms of up to 10 years and generally vest over a period of 4 years from the date of grant, of which 25% vest at the end of one year, and 75% vest monthly over the remaining three years. We may grant options with different vesting terms from time to time. Unless an employee’s termination of service is due to disability or death, upon termination of service, any unexercised vested options will be forfeited at the end of the three months or the expiration of the option, whichever is earlier.

RSUs are granted to employees for no consideration (other than par value of a share of common stock). The fair values of RSUs are based upon the closing price of our common stock on the date of grant. RSUs generally vest over either a three year period with one-third of the shares subject to the RSUs vesting on each yearly anniversary of the vesting commencement date or over a four year period with 25% of the shares subject to the RSU vesting on each yearly anniversary of the vesting commencement date, in each case contingent upon such employee’s continued service on such vesting date. RSUs are generally subject to forfeiture if employment terminates prior to the release of vesting restrictions. We may grant RSUs with different vesting terms from time to time.

In 2015 and 2016, the compensation committee of the Board approved, and, in February 2017 solely in respect of non-executive employees, delegated to our Chief Executive Officer the authority to approve grants of PSUs. In February 2017, the compensation committee of the Board also approved grants of PBOs and PSUs to our executives for no consideration (other than par value of a share of common stock). The fair values of PSUs and PBOs are based upon the closing price of our common stock on the date of grant. The PSUs and PBOs generally vest over two years based upon both the successful achievement of certain corporate operating milestones in specified timelines and continued employment through the applicable vesting date. When the performance goals are deemed to be probable of achievement for these types of awards, recognition of stock-based compensation expense commences.

In the first quarter of 2017, our compensation committee and Chief Executive Officer granted PSUs (“2017 PSUs”) and our compensation committee granted PBOs (“2017 PBOs”), each of which commence vesting based upon the achievement of various weighted performance goals, including revenue growth, fundraising, service revenue, new platform license revenue, and strategic advancement of biotherapeutics pipeline. The number of shares underlying the 2017 PSUs and 2017 PBOs that are eligible to vest are based upon our achievement of the performance goals and, once the number of shares eligible to vest is determined, those shares vest in two equal installments with 50% vesting upon achievement and the remaining 50% vesting on the first anniversary of achievement, in each case, subject to the recipient’s continued service through the applicable vesting date. If the performance goals are achieved at the threshold level, the number of shares eligible to vest in respect of the 2017 PSUs and the 2017 PBOs would be equal to half the number of 2017 PSUs granted and one-quarter the number of shares underlying the 2017 PBOs granted. If the performance goals are achieved at the target level, the number of shares eligible to vest in respect of the 2017 PSUs and 2017 PBOs would be equal to the number of 2017 PSUs granted and half of the shares underlying the 2017 PBOs granted. If the performance goals are achieved at the superior level, the number of shares eligible to vest in respect of the 2017 PSUs would be equal to two times the number of 2017 PSUs granted and equal to the number of 2017 PBOs granted. The number of shares issuable upon achievement of the performance goals at the levels between the threshold and target levels for the 2017 PSUs and 2017 PBOs or between the target level and superior levels for the 2017 PSUs would be determined using linear interpolation. Achievement below the threshold level would result in no shares being eligible to vest in respect of the 2017 PSUs and 2017 PBOs. As of December 31, 2017, we estimated that the 2017 PSU and 2017 PBOs performance goals would be achieved at 134.2% of the target level. Accordingly, we recognized expense to reflect the target level.

In 2016, we awarded PSUs ("2016 PSUs") based upon the achievement of various weighted performance goals, including revenue growth, non-GAAP net income growth, new licensing collaborations, new research and development service revenue arrangements and novel therapeutic enzymes advancement. In the first quarter of 2017, we determined that the 2016 PSU performance goals had been achieved at 142.3% of the target level, and recognized expenses accordingly. Accordingly, one-half of the shares underlying the 2016 PSUs vested in the first quarter of 2017 and one-half of the shares underlying the 2016 PSUs will vest in the first quarter of 2018, in each case subject to the recipient’s continued service on each vesting date. No PBOs were awarded in 2016.

In 2015, we awarded PSUs ("2015 PSUs") based upon the achievement of various weighted performance goals, including revenue growth, non-GAAP net income growth, new licensing collaborations, and securing a drug development partnership, with other terms similar to the 2014 PSUs and 2016 PSUs. In the first quarter of 2016, we determined that the 2015 PSU performance goals had been achieved at 92.8% of the target level, and recognized expenses accordingly. One-half of the shares underlying the 2015 PSUs vested in the first quarter of each of 2016 and 2017, subject to the recipient’s continued service on each vesting date. No PBOs were awarded in 2015.

Stock-Based Compensation Expense:

Stock-based compensation expense is included in the consolidated statements of operations as follows (in thousands):



	Years Ended December 31,
	2017		2016		2015
Research and development	$	1,444	$	1,033	$	935
Selling, general and administrative	5,647		4,640		4,191
Total	$	7,091	$	5,673	$	5,126

Grant Award Activities:

Stock Option Awards

We estimated the fair value of stock options using the Black-Scholes-Merton option-pricing model based on the date of grant. The following summarize the ranges of weighted-average assumptions used to estimate the fair value of employee stock options granted:



	Years Ended December 31,
	2017		2016		2015
Expected life (years)	5.4		5.3		6.1
Volatility	62.2	%	64.2	%	66.1	%
Risk-free interest rate	2.0	%	1.3	%	1.7	%
Expected dividend yield⁽¹⁾	0.0	%	0.0	%	0.0	%

In October 2017, we granted an option to purchase 11,100 shares of common stock to a non-employee as compensation for services valued at $48,000. The option vests over a period of six months with one-sixth of total number of shares subject to the option vesting on each one month anniversary of the grant date. During the year ended December 31, 2016, we did not grant any options to purchase shares of common stock to non-employees.

For options granted to non-employees, the Black-Scholes option-pricing model was applied using the following assumptions during the year ended December 31, 2017:



	Year Ended December 31,
	2017
Remaining contractual option life (years)	9.78
Volatility	60.6	%
Risk-free interest rate	2.4	%
Expected dividend yield⁽¹⁾	0.0	%

⁽¹⁾ We do not currently pay dividends, and thus the dividend rate variable in the Black-Scholes-Merton option-pricing model is zero.

The following table summarizes stock option activities in 2017:



	Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
	(in thousands)				(in years)	(in thousands)
Balance at January 1, 2017	3,890		$	4.40
Granted	856		$	4.57
Exercised	(86	)	$	3.10
Forfeited/Expired	(81	)	$	7.72
Outstanding at December 31, 2017	4,579		$	4.40	6.37	$	19,188

Exercisable at December 31, 2017	3,006		$	4.48	5.21	$	12,722
Vested and expected to vest at December 31, 2017	4,372		$	4.40	6.26	$	18,357

The weighted average grant date fair value per share of stock options granted in 2017, 2016 and 2015 were $2.51, $2.32 and $2.09, respectively. The total intrinsic value of options exercised in 2017, 2016 and 2015 were $0.2 million, $0.6 million and $0.4 million, respectively.

As of December 31, 2017, there was $2.7 million unrecognized stock-based compensation cost related to non-vested options, which we expect to recognize over a weighted average period of 2.6 years.

Restricted Stock Awards (RSAs)

The following table summarizes RSA activity in 2017:



	Number of Shares		Weighted Average Grant Date Fair Value Per Share
	(in thousands)
Non-vested balance at January 1, 2017	230		$	3.82
Granted	143		$	4.75
Vested	(214	)	$	3.81
Forfeited/Expired	—		$	—
Non-vested balance at December 31, 2017	159		$	4.68

The weighted average grant date fair value per share of RSAs granted in 2017, 2016 and 2015 were $4.75, $4.21 and $4.10, respectively. The total fair value of RSAs vested in fiscal 2017, 2016 and 2015 were $1.0 million, $1.8 million and $2.3 million respectively.

As of December 31, 2017, there was $0.3 million unrecognized stock-based compensation cost related to non-vested RSAs, which we expect to recognize over a weighted average period of 0.5 years.

Restricted Stock Units (RSUs)

The following table summarizes RSU activities in 2017:



	Number of Shares		Weighted Average Grant Date Fair Value Per Share
	(in thousands)
Non-vested balance at January 1, 2017	617		$	3.69
Granted	275		$	4.22
Vested	(302	)	$	3.40
Forfeited/Expired	(30	)	$	4.12
Non-vested balance at December 31, 2017	560		$	4.08

The weighted average grant date fair value per share of RSUs granted in 2017, 2016 and 2015 were $4.22, $4.10 and $3.65, respectively. The total fair value of RSUs vested in fiscal 2017, 2016 and 2015 were $1.3 million, $1.0 million and $2.9 million respectively.

As of December 31, 2017, there was $1.1 million unrecognized stock-based compensation cost related to non-vested RSUs, which we expect to recognize over a weighted average period of 1.5 years.

Performance-Contingent Restricted Stock Units (PSUs)

The following table summarizes PSU activities in 2017:



	Number of Shares		Weighted Average Grant Date Fair Value Per Share
	(in thousands)
Non-vested balance at January 1, 2017	831		$	3.88
Granted	276		$	4.25
Vested	(651	)	$	3.84
Forfeited/Expired	(27	)	$	3.65
Non-vested balance at December 31, 2017	429		$	4.20

The weighted average grant date fair value per share of PSUs granted in 2017, 2016 and 2015 were $4.25, $4.10 and $3.45, respectively. The total fair value of PSUs vested in fiscal 2017, 2016, and 2015 were $2.7 million, $1.8 million, and $0.8 million, respectively.

As of December 31, 2017, there was $0.4 million unrecognized stock-based compensation cost related to non-vested PSUs, which we expect to recognize over a weighted average period of 0.4 years.

Performance Based Options (PBOs)

The following table summarizes PBO activities in 2017:



	Number of Shares	Weighted Average Grant Date Fair Value Per Share
	(in thousands)
Non-vested balance at January 1, 2017	—	$	—
Granted	1,720	$	2.54
Vested	—	$	—
Forfeited/Expired	—	$	—
Non-vested balance at December 31, 2017	1,720	$	2.54

The weighted average grant date fair value per share of PBOs granted in 2017 was $2.54. We had no PBOs vested in 2017.

As of December 31, 2017, there was $1.1 million unrecognized stock-based compensation cost related to non-vested PBOs, which we expect to recognize over a weighted average period of 1.2 years.