8. Stock-Based Compensation

Stock Option Valuation

The fair value of each of the Company’s stock option grants is estimated on the date of grant using the Black-Scholes option-pricing model. The Company currently 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 publicly-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, 2017 and 2016 are as follows:

	Three months ended March 31,
	2017			2016
Risk-free interest rates	2.23-2.29%			1.39-1.90%
Expected dividend yield		0.00	%		0.00	%
Expected term (in years)		6.0			6.1
Expected volatility	71.0-71.6%			83.8-84.1%

The following table summarizes stock option activity for the three months ended March 31, 2017:

(In thousands, except per share amounts)	Shares Issuable Under Options			Weighted Average Exercise Price
Outstanding as of December 31, 2016		3,268		$	14.84
Granted		280			19.74
Exercised		(59	)		9.47
Cancelled		(23	)		17.86
Outstanding as of March 31, 2017		3,466		$	16.20
Options vested and expected to vest at March 31, 2017		3,466		$	16.20
Options exercisable at March 31, 2017		1,337		$	13.28

Approximately 189,300 outstanding restricted stock units (“RSUs”) are included in outstanding at March 31, 2017. The RSUs are performance based awards which will only begin vesting if and when a specified corporate performance based milestone is achieved. No outstanding performance awards were vested as of March 31, 2017.

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. A total of approximately 59,000 options, with an aggregate intrinsic value of approximately $666,000, were exercised during the three months ended March 31, 2017.

At March 31, 2017 and 2016, there were options for the purchase of approximately 3,466,000 and 2,176,000 shares of the Company’s common stock outstanding, respectively, with a weighted average remaining contractual term of 8.2 years and with a weighted average exercise price of $16.20 and $15.16 per share, respectively.

The weighted average grant date fair value of options granted during the three months ended March 31, 2017 and 2016 was $12.70 and $12.82, respectively.

Stock-based Compensation

The Company recorded stock-based compensation expense related to stock options for the three months ended March 31, 2017 and 2016 as follows:

	Three months ended March 31,
(In thousands)	2017		2016
Research and development	$	879	$	537
General and administrative		1,499		1,104
	$	2,378	$	1,641

As of March 31, 2017 unrecognized stock-based compensation expense for stock options outstanding was approximately $22,088,000, which was expected to be recognized over a weighted average period of 3.0 years.

Restricted Stock Units

On January 4, 2016, the Company granted RSUs with performance and time-based vesting conditions to certain executives. These RSUs 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 these awards is 189,300 with an approximate value of $3,997,000 as of the grant date. The amount of earned shares decreases the longer it takes to achieve the Milestone. If the Milestone is not achieved prior to July 1, 2018, these 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 these awards, beginning on the Milestone achievement date.