11. Share-Based Payments

Stock Option Plans

The Company has adopted the Supernus Pharmaceuticals, Inc. 2012 Equity Incentive Plan (the 2012 Plan), which is stockholder-approved, and provides for the grant of stock options and certain other awards, including stock appreciation rights ("SAR"), restricted and unrestricted stock, stock units, performance awards, cash awards and other awards that are convertible into or otherwise based on the Company's common stock, to the Company's key employees, directors, and consultants and advisors. The 2012 Plan is administered by the Company's Board of Directors and provides for the issuance of up to 2,500,000 shares of the Company's Common Stock. Option awards are granted with an exercise price equal to the estimated fair value of the Company's Common Stock at the grant date; those option awards generally vest in four annual installments, starting on the first anniversary of the date of grant and have ten-year contractual terms. The 2012 Plan provides for the issuance of Common Stock of the Company upon the exercise of stock options. Share-based compensation recognized related to the grant of employee and non-employee stock option, SARS, and non-vested stock was as follows, in thousands:

	Year Ended December 31,

	2013		2012		2011
	(in thousands)
Research and development	$	417	$	208	$	63
Selling, general and administrative		1,291		131		(145	)


Total	$	1,708	$	339	$	(82	)

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model using the assumptions in the following table:

	Year Ended December 31,

	2013	2012	2011
Fair value of common stock	$5.40 - $7.90	$5.07 - $12.92	$2.56 - $3.36
Expected volatility	69.5% - 70.9%	68.3% - 71.6%	59.1% - 74.7%
Dividend Yield	0%	0%	0%
Expected term	6.25 - 9.60 years	6.25 years	0.41 - 6.25 years
Risk-free interest rate	1.20% - 2.94%	0.89% - 1.14%	0.15% - 2.93%
Expected forfeiture rate	5%	0% - 5%	0% - 5%

Fair Value of Common Stock—For all option grants prior to the completion of the Company's IPO on May 1, 2012, the fair value of the Common Stock underlying the option grants was determined by the Board, with the assistance of management, which intended all options granted to be exercisable at a price per share not less than the per share fair value of the Company's Common Stock underlying those options on the date of grant. The Company utilized methodologies, approaches and assumptions as set forth in the Technical Practice Aid, when estimating the fair value of Common Stock at each grant date.

Given the lack of an active public market for the Common Stock, the Board employed a third-party valuation firm to assist in the determination of fair value by completing contemporaneous valuations. In the absence of a public market, and as a clinical stage company with no significant revenues from product sales, the Company considered a range of factors to determine the fair market value of the Common Stock at each grant date. The factors include: (1) the achievement of clinical and operational milestones by the Company, (2) the status of strategic relationships with collaborators, (3) the significant risks associated with the Company's stage of development, (4) capital market conditions for life science companies, particularly similarly situated privately held, early-stage life science companies, (5) the Company's available cash, financial condition, and results of operations, (6) the most recent sales of the Company's preferred stock, and (7) the preferential rights of the outstanding preferred stock.

For option grants that occurred after the Company's IPO on May 1, 2012, the fair value of the Common Stock underlying the option grants was determined based on observable market prices of the Company's Common Stock.

Expected Volatility—Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company has identified several public entities of similar size, complexity, and stage of development and, accordingly, historical volatility has been calculated using the volatility of these companies. The Company will continue to use the guideline peer group volatility information until the historical volatility of its own Common Stock is relevant to measure expected volatility for future option grants.

Dividend Yield—The Company has never declared or paid dividends and has no plans to do so in the foreseeable future.

Expected Term—This is the period of time that the options granted are expected to remain unexercised. Options granted have a maximum term of ten years. The Company determines the average expected life of stock options according to the "simplified method" as described in Staff Accounting Bulletin 110, which is the mid-point between the vesting date and the end of the contractual term. Over time, management will track estimates of the expected life of the option term so that estimates will approximate actual behavior for similar options.

Risk-Free Interest Rate—This is the U.S. Treasury rate for the week of each option grant during the year, having a term that most closely resembles the expected term of the option.

Expected Forfeiture Rate—The forfeiture rate is the estimated percentage of options granted that are expected to be forfeited or canceled on an annual basis before becoming fully vested. The Company estimates the forfeiture rate based on turnover data with further consideration given to the class of employees to whom the options were granted.

The following table summarizes stock option and SAR activity:

			Weighted- Average Exercise Price

Outstanding, December 31, 2011	598,109		$	2.75	7.71
Granted	188,136		$	10.73
Exercised	(159,264	)	$	1.67
Forfeited or expired	(57,070	)	$	2.45


Outstanding, December 31, 2012	569,911		$	5.72	7.88
Granted	974,582		$	7.79
Exercised	(62,513	)	$	1.25
Forfeited or expired	(18,937	)	$	6.47


Outstanding, December 31, 2013	1,463,043		$	7.27	8.51




As of December 31, 2013:
Vested and expected to vest	1,425,752		$	7.26	8.50
Exercisable	256,227		$	4.47	6.44

The aggregate intrinsic value of options outstanding, vested and expected to vest, and exercisable as of December 31, 2011 is approximately $1.9 million, $1.8 million and $1.2 million, respectively. The aggregate intrinsic value of options outstanding, vested and expected to vest, and exercisable as of December 31, 2012 is approximately $1.6 million, $1.5 million and $1.0 million, respectively. The aggregate intrinsic value of options outstanding, vested and expected to vest, and exercisable as of December 31, 2013 is approximately $1.4 million, $1.4 million and $1.0 million, respectively.

The weighted-average, grant-date fair value of options granted for the years ended December 31, 2011, 2012 and 2013 was $3.64, $6.85, and $4.98 per share, respectively. The total fair value of the underlying Common Stock related to shares that vested during the years ended December 31, 2011, 2012 and 2013 was approximately $113,000, $218,000, and $512,000, respectively. The total intrinsic value of options exercised amounted to approximately $262,000, $748,000, and $377,000, respectively, during the years ended December 31, 2011, 2012 and 2013. As of December 31, 2012 and 2013, the total unrecognized compensation expense, net of related forfeiture estimates, was approximately $1,651,000 and $4,611,000, respectively, which the Company expects to recognize over a weighted-average period of 3.06 and 2.94 years, respectively.