Stock-based Compensation

Stock-based compensation expense for options granted, RSAs, and stock purchase rights are reflected in the consolidated statements of operations as follows:



	YEAR ENDED DECEMBER 31,
(in thousands)	2016		2015		2014
Research and development	$	3,781	$	2,500	$	1,339
General and administrative	13,013		10,445		7,839
Total	$	16,794	$	12,945	$	9,178

The estimated fair value of options granted is determined on the date of grant using the Black-Scholes option pricing model. Options granted to non-employees are revalued at each financial reporting period until the required service is performed. Compensation expense related to RSAs is based on the market value of Aerie’s common stock on the date of grant and is expensed on a straight-line basis over the vesting period. Compensation expense for stock purchase rights under the Company’s employee stock purchase plan is measured and recognized on the date that Aerie becomes obligated to issue shares of common stock and is based on the difference between the fair value of Aerie’s common stock and the purchase price on such date.

As of December 31, 2016, the Company had $26.7 million of unrecognized compensation expense related to options granted under its equity plans. This cost is expected to be recognized over a weighted average period of 2.4 years as of December 31, 2016. The weighted average remaining contractual life on all outstanding options as of December 31, 2016 was 7.4 years.

As of December 31, 2016, the Company had $2.3 million of unrecognized compensation expense, related to unvested RSAs. This cost is expected to be recognized over a weighted average period of 2.5 years as of December 31, 2016. The weighted average remaining contractual term on all unvested RSAs as of December 31, 2016 was 2.5 years.

Key weighted average assumptions utilized in the fair value calculation for the underlying common stock as of December 31, 2016, 2015 and 2014 appear on the table below.



	YEAR ENDED DECEMBER 31,
	2016		2015		2014
Expected term (years)	5.99		6.07		6.25
Expected stock price volatility	83.94	%	74.11	%	80.44	%
Risk-free interest rate	1.43	%	1.63	%	1.90	%
Dividend yield	—	%	—	%	—	%

Based on the Company’s historical experience of employee turnover, an annualized forfeiture rate was assumed for options and RSAs. Under the true-up provisions of the stock compensation guidance, additional expense is recognized as the awards vest if the actual forfeiture rate is lower than estimated, and a recovery of prior expense if the actual forfeiture is higher than estimated.

The Company utilized the guidance set forth in the SEC Staff Accounting Bulletin 107, Share-Based Payment (“SAB 107”), to determine the expected term of options, as it does not have sufficient historical exercise and post vesting termination data to provide a reasonable basis upon which to estimate the expected term of stock options granted to employees. The simplified method is based on the vesting period and the contractual term for each grant, or for each vesting-tranche for awards with graded vesting. The midpoint between the vesting date and the maximum contractual expiration date is used as the expected term under this method.

The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected time to liquidity.

Volatility is based on the historical volatility of the Company as well as several public entities that are similar to the Company. This peer group of companies utilized in 2016 remained consistent with that of 2015.

Equity Plans

The Company maintains three equity compensation plans, the 2005 Aerie Pharmaceutical Stock Plan (the “2005 Plan”), the 2013 Omnibus Incentive Plan (the “2013 Equity Plan”), which was amended and restated as the Aerie Pharmaceuticals, Inc. Amended and Restated Omnibus Incentive Plan (the “Amended and Restated Equity Plan”), as described below, and the Aerie Pharmaceuticals, Inc. Inducement Award Plan (the “Inducement Award Plan”), as described below. The 2005 Plan, the Amended and Restated Equity Plan and the Inducement Award Plan are referred to collectively as the “Plans.”

On October 30, 2013, the effective date of the 2013 Equity Plan, the 2005 Plan was frozen and no additional awards have been or will be made under the 2005 Plan. Any remaining shares available for future grant under the 2005 Plan were allocated to the 2013 Equity Plan.

At the 2015 Annual Meeting of Stockholders held on April 10, 2015, Aerie’s stockholders approved the adoption of the Amended and Restated Equity Plan and no additional awards have been or will be made under the 2013 Equity Plan. Any remaining shares available under the 2013 Equity Plan were allocated to the Amended and Restated Equity Plan.

The Amended and Restated Equity Plan provides for the granting of up to 5,729,068 equity awards in respect of common stock of Aerie, including equity awards that were available for issuance under the 2013 Equity Plan.

On December 7, 2016, Aerie’s Board of Directors approved the Inducement Award Plan which provides for the granting of up to 418,000 equity awards in respect of common stock of Aerie. Awards granted under the Inducement Award Plan are intended to qualify as employment inducement awards under NASDAQ Listing Rule 5635(c)(4).

The following table summarizes the stock option activity under the Plans:



	NUMBER OF SHARES		WEIGHTED AVERAGE EXERCISE PRICE		WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE (YEARS)	AGGREGATE INTRINSIC VALUE (000’s)
Options outstanding at December 31, 2015	4,583,586		$	12.86
Granted	993,836		20.51
Exercised	(166,295	)	5.71
Canceled	(155,197	)	19.33
Options outstanding at December 31, 2016	5,255,930		$	14.34	7.4	$	123,649
Options vested or expected to vest⁽¹⁾	5,198,266		$	14.25	7.4	$	122,751
Options exercisable at December 31, 2016	3,276,694		$	10.77	6.8	$	88,745

(1) Includes vested options and options that are expected to vest in the future after applying an estimated annual forfeiture rate.

The weighted-average fair values of all stock options granted for the years ended December 31, 2016, 2015 and 2014 was $20.51, $24.83 and $20.83 respectively. The aggregate intrinsic value of options exercised for the years ended December 31, 2016, 2015 and 2014 was $3.9 million, $4.3 million and $10.5 million, respectively. The intrinsic value is calculated as the difference between the fair market value and the exercise price per share of the stock options. The fair market value per share of common stock as of December 31, 2016 was $37.85.

The following table provides additional information about stock options that are outstanding and exercisable at December 31, 2016:



EXERCISE PRICE	OPTIONS OUTSTANDING	WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE (YEARS)	OPTIONS EXERCISABLE

$0.20 - $3.15	2,116,127	6.2	1,898,863
$10.44 - $15.97	419,188	8.9	105,380
$16.05 - $21.08	1,590,359	8.0	845,903
$22.31 - $26.76	317,781	8.3	125,372
$26.77 - $40.91	812,475	8.6	301,176
	5,255,930		3,276,694

The following table summarizes the RSA activity under the Plans:



	NUMBER OF SHARES		WEIGHTED AVERAGE FAIR VALUE PER SHARE

RSAs outstanding at December 31, 2015	119,993		$	20.31
Granted	112,655		15.98
Vested	(62,905	)	13.71
Canceled	(5,549	)	20.04
RSAs outstanding at December 31, 2016	164,194		$	19.87

The vesting of the RSAs is time and service based with terms of one to four years.