7. Stock-Based Compensation

Stock Option Valuation

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Therefore, the Company estimates its expected stock volatility based on the historical volatility of its publicly-traded peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain vanilla” options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future. The relevant data used to determine the value of the stock option grants for the three months ended March 31, 2016 and 2015 are as follows:


	Three months ended March 31,
	2016			2015
Risk-free interest rates		1.39-1.90	%		1.51-1.83	%
Expected dividend yield		0.00	%		0.00	%
Expected term (in years)		6.1			6.0
Expected volatility		83.8-84.1	%		78.4-81.4	%

The following table summarizes stock option activity for the three months ended March 31, 2016:


(In thousands, except per share amounts and years)	Shares Issuable Under Options			Weighted Average Exercise Price
Outstanding as of December 31, 2015		1,657		$	14.28
Granted		533			17.92
Exercised		—			—
Canceled		(14	)		16.46

Outstanding as of March 31, 2016		2,176		$	15.16

Options vested and expected to vest at March 31, 2016		1,837		$	14.53

Options exercisable at March 31, 2016		899		$	10.79

In addition to the 533,000 common stock options, approximately 189,000 Restricted Stock Units (RSUs) were granted during the three months ended March 31, 2016. The RSUs are performance based awards which will begin vesting upon the achievement of a corporate performance based milestone. No outstanding performance awards were vested as of March 31, 2016.

The aggregate intrinsic value of options is calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock for those options that had exercise prices lower than the fair value of the Company’s common stock. No options were exercised during the three months ended March 31, 2016.

At March 31, 2016 and 2015, there were options for the purchase of 2,176,000 and 1,637,000 shares of the Company’s common stock outstanding, respectively, with a weighted average remaining contractual term of 8.2, and 8.4 years, respectively, and with a weighted average exercise price of $15.16 and $13.41 per share, respectively.

The weighted average grant date fair value of options granted during the three months ended March 31, 2016 and 2015 was $12.82 and $23.27, respectively.

Stock-based Compensation

The Company recorded stock-based compensation expense related to stock options for the three months ended March 31, 2016 is as follows:


	Three months ended March 31,
(In thousands)	2016		2015
Research and development	$	537	$	322
General and administrative		1,104		686

	$	1,641	$	1,008

As of March 31, 2016 unrecognized stock-based compensation expense for stock options outstanding was $10,838,000, which was expected to be recognized over a weighted average period of 2.9 years. As of March 31, 2015, unrecognized stock-based compensation expense for stock options outstanding was $12,643,000, which was expected to be recognized over a weighted average period of 3.2 years.

Restricted Stock Units

On January 4, 2016, the Company granted restricted common stock units with performance and time-based vesting conditions to certain executives. The restricted stock units vest, and the underlying shares of common stock become deliverable, in the event the Company receives approval from the U.S. Food and Drug Administration (“FDA”) of a new drug application (“NDA”) for Zilretta (the “Milestone”). Depending on when and if the Milestone is achieved, the maximum aggregate number of shares of the Company’s common stock available to be earned under the awards is 189,300 with an approximate value of $3,445,000 as of the grant date. The amount of earned shares decreases the closer that the Milestone date is to the termination date of the award. If the Milestone is not achieved prior to July 1, 2018, the termination date of the awards, the awards will not vest, will be forfeited in their entirety and no shares of common stock will be delivered. Since it is not possible for the Company to determine the probability of the performance condition being achieved, no compensation costs will be recorded until the Milestone is achieved. If the Milestone is achieved prior to the termination date, compensation costs will be recognized over the remaining requisite service period of the awards.