(6) Stock-based Compensation

In February 2013, the Company’s board of directors and stockholders approved, effective upon the closing of the IPO, the 2013 Stock Incentive Plan (the “2013 Plan”). Under the 2013 Plan, the Company may grant incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards for the purchase of that number of shares of Common Stock equal to the sum of (i) 1,688,777 shares of Common Stock, (ii) 258,265 shares of Common Stock that were reserved for issuance under the 2006 Plan that remained available for issuance under the 2006 Plan upon the closing of the IPO, and (iii) any shares of Common Stock subject to awards under the 2006 Plan which awards expire, terminate or are otherwise surrendered, canceled, forfeited or repurchased by the Company without having been fully exercised or resulting in any Common Stock being issued. In addition, the number of shares of Common Stock that may be issued under the 2013 Plan is subject to automatic annual increases, to be added on January 1 of each year through and including January 1, 2023, equal to the number of shares that is the lesser of (a) 3,000,000, (b) 4% of the then outstanding shares of Common Stock or (c) an amount determined by the Company’s board of directors. In January 2014, the number of shares authorized for issuance under the 2013 Plan increased by 1,025,171 shares. In January 2015, the number of shares authorized for issuance under the 2013 Plan increased by 1,232,232 shares. In January 2016, the number of shares authorized for issuance under the 2013 Plan increased by 1,463,391 shares. As of March 31, 2016, 793,806 shares were available for future issuance under the 2013 Plan.

Terms of stock award agreements, including vesting requirements, are determined by the board of directors, subject to the provisions of the 2013 Plan. Options granted by the Company typically vest over a four year period. Certain of the options are subject to acceleration of vesting in the event of certain change of control transactions. The options are exercisable from the date of grant for a period of ten years. For options granted prior to the Company’s IPO, the exercise price equaled the estimated fair value of the Common Stock as determined by the board of directors on the date of grant. For options granted subsequent to the Company’s IPO, the exercise price equaled the closing price of the Company’s stock on the NASDAQ Global Select Market on the date of grant.

Stock option activity at March 31, 2016 and changes during the three months then ended is presented in the table and narrative below (in thousands except share and per share data):

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Options outstanding at December 31, 2015		3,833,806		$	22.72		7.80	$	5,439
Granted		1,045,450			8.47
Exercised		(14,437	)		1.07
Forfeited		(296,167	)		22.22
Options outstanding at March 31, 2016		4,568,652		$	19.56		7.95	$	1,082
Options vested or expected to vest at March 31, 2016 (1)		4,273,055		$	19.37		7.87	$	1,082
Options exercisable at March 31, 2016		1,671,101		$	14.05		6.24	$	1,067

(1)	This represents the number of vested options as of March 31, 2016, plus the number of unvested options that the Company estimated as of March 31, 2016 would vest, based on the unvested options at March 31, 2016, as adjusted for the estimated forfeiture rate.

The aggregate intrinsic value in the table above was calculated for all in-the-money options equal to the difference between the Company’s closing common stock price on March 31, 2016 and the exercise price of the options, multiplied by the number of in-the-money options. As of March 31, 2016, there was $30.4 million of total unrecognized stock-based compensation cost related to employee and non-employee unvested stock options granted under the 2006 Plan and the 2013 Plan. Total unrecognized compensation cost will be adjusted for future forfeitures. The Company expects to recognize that cost over a remaining weighted-average period of 2.8 years.

Since the Company completed its IPO in March 2013, it has not had sufficient historical data to support a calculation of volatility and expected life. As such, the Company has used a weighted-average volatility considering the Company’s own volatility and the volatilities of a representative group of publicly traded companies. For purposes of identifying similar entities, the Company selected a group of publicly traded life science/biotechnology companies based on their disease focus, stage of development, number of compounds in clinical trials and number of years as a publicly-traded company. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, commensurate with the expected life assumption. The expected life of stock options granted represents the weighted-average period of time that stock options granted are expected to be outstanding determined using the simplified method for employee grants. For non-employee grants, the expected life is equal to the remaining contractual term. The expected life is applied to the stock option grant group as a whole, as the Company does not expect substantially different exercise or post-vesting termination behavior among its employee population.

The Company estimates the fair value of each employee and director stock option award on the grant date using the Black-Scholes option-pricing model based on the following assumptions:

	Three Months Ended March 31,
	2016		2015
Volatility factor		85.77%	58.36-58.64%
Expected term (in years)	6.07		6.06-6.11
Risk-free interest rates		1.85%	1.35-1.78%
Dividend yield		—		—

Stock-based compensation expense recognized in the Company’s condensed consolidated statements of operations and comprehensive loss was as follows (in thousands):

	Three Months Ended March 31,
	2016		2015
Research and development	$	2,391	$	1,305
General and administrative		1,785		1,535
Total	$	4,176	$	2,840

Stock Option Grants to Non-employees

During the year ended December 31, 2014, the Company granted nonqualified options to purchase 110,000 shares of common stock to non-employee consultants, with an average exercise price of $12.56 per share. The Company initially valued these options using the Black-Scholes option-pricing model and revalues the options at each reporting period and as the options vest and are recognized as expense using the accelerated attribution method over the related service period. 100,000 of these options cancelled during the year ended December 31, 2015. The re-measurement of the remaining 10,000 non-employee options resulted in a reversal of expense of $(11,000) during the three months ended March 31, 2016. Stock-based compensation expense related to stock options granted to non-employees was $0.3 million for the three months ended March 31, 2015.

Restricted Stock Units

In October 2015, the Company granted restricted stock units to employees. These restricted stock units vest in full after one year subject to continued employment with the Company and had a grant date fair value of $7.81 per share, which was the closing price of the Company’s common stock on the date of grant. In January 2016, the Company granted additional restricted stock units to employees. These restricted stock units vest in annual increments over three years, subject to continued employment with the company and had a grant date fair value of $8.47 per share, which was the closing price of the Company’s common stock on the date of grant. The Company recorded stock based compensation expense of $0.8 million related to restricted stock units for the three months ended March 31, 2016. The restricted stock activity for the three months ended March 31, 2016 is as follows:

	Shares			Weighted- Average Grant Date Fair Value
Unvested at December 31, 2015		308,875		$	7.81
Granted		296,680			8.47
Cancelled		(8,750	)		7.90
Expired		-
Vested/Released		-			-
Unvested at March 31, 2016		596,805		$	8.14

As of March 31, 2016, there was $3.2 million of total unrecognized stock-based compensation expense related to restricted stock units granted under the 2013 Plan. The expense is expected to be recognized over a weighted-average period of 1.6 years.