Note 14. Stock Option and Purchase Plans

Stock Option Plan

On March 29, 2010, the Company's Board of Directors terminated the 2001 Stock Option Plan. In addition, the Board of Directors adopted and approved a new 2010 Equity Incentive Plan, or the 2010 Plan, with 32,000 shares remaining reserved and unissued under the 2001 Plan, subject to the approval of the Company's stockholders. The 2001 Plan, however, continues to govern awards previously granted under it. On June 25, 2010, the Company's stockholders approved the 2010 Plan at the Company's 2010 Annual Meeting of Stockholders. The 2010 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and performance units to employees, directors and consultants, to be granted from time to time as determined by the Board of Directors, the Compensation Committee of the Board of Directors, or its designees. The term of the option is determined by the Board of Directors on the date of grant but shall not be longer than 10 years. Options under this plan generally vest over four years, and all options expire after 10 years. The 2010 Plan's share reserve, which the stockholders approved, is 8,400,000 shares, plus any shares reserved but not issued pursuant to awards under the 2001 Plan as of the date of stockholder approval, or 99,975 shares, plus any shares subject to outstanding awards under the 2001 Plan that expire or otherwise terminate without having been exercised in full, or are forfeited to or repurchased by the Company, up to a maximum of 8,111,273 shares (which was the number of shares subject to outstanding options under the 2001 Plan as of March 11, 2010).

On April 30, 2010, the Company's Board of Directors granted an option to purchase 400,000 shares of the Company's common stock, or the Inducement Grant, to Michael P. Miller, the Company's Senior Vice President and Chief Commercial Officer. The Inducement Grant was granted outside of the Company's 2010 Plan and without stockholder approval pursuant to NASDAQ Listing Rule 5635(c)(4) and is subject to the terms and conditions of the Stand-Alone Stock Option Agreement between the Company and Michael P. Miller.

Restricted Stock Units

Beginning in 2012, the Company began issuing restricted units under the 2010 Plan on a limited basis. A summary of restricted stock unit award activity under the 2010 Plan is as follows:

			Weighted Average Grant Date Fair Value

Restricted stock units outstanding December 31, 2011	—			—
Granted	35,000		$	24.88
Vested	—			—
Forfeited	—			—

Restricted stock units outstanding, December 31, 2012	35,000		$	24.88
Granted	144,500		$	12.63
Vested	(33,296	)		(14.15	)
Forfeited	(146,204	)		(13.83	)

Restricted stock units outstanding, December 31, 2013	—		$	—

Stock Options

A summary of stock option award activity under these plans is as follows:

	Years Ended December 31,

	2013					2012					2011
	Number of Shares			Weighted- Average Exercise Price		Number of Shares			Weighted- Average Exercise Price		Number of Shares			Weighted- Average Exercise Price
Balance at beginning of year		8,510,917		$	10.33		8,575,434		$	6.17		7,919,013		$	5.71
Options:
Granted		4,166,292		$	12.86		2,850,118		$	17.80		1,289,790		$	8.72
Exercised		(2,375,688	)	$	5.79		(2,648,882	)	$	5.00		(482,172	)	$	4.88
Cancelled		(1,395,070	)	$	14.54		(265,753	)	$	9.28		(151,197	)	$	8.32

Balance at end of year		8,906,451		$	12.06		8,510,917		$	10.33		8,575,434		$	6.17


Exercisable at end of year		6,616,555		$	11.00		4,781,301		$	6.32		6,120,210		$	5.38


Weighted average grant-date fair value of options granted during the year				$	8.32				$	11.91				$	5.91

At December 31, 2013, stock options were outstanding and exercisable as follows:

	Options Outstanding					Options Exercisable

Range of Exercise Prices	Number Outstanding at December 31, 2013		Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number Exercisable December 31, 2013		Weighted- Average Exercise Price
$3.13 - $10.19		3,318,235	3.4 years	$	7.23		3,296,690	$	7.22
$12.04 - $12.84		3,215,931	5.2 years	$	12.29		2,466,649	$	12.22
$12.90 - $25.74		2,372,285	7.1 years	$	18.52		853,216	$	22.08

$3.13 - $25.74		8,906,451	5.1 years	$	12.06		6,616,555	$	11.00

The aggregate intrinsic value of outstanding options as of December 31, 2013, was $6.6 million, of which $6.6 million related to exercisable options.

At December 31, 2013, 1,976,823 options remained available for grant. In January 2014, awards exercisable for 1,128,100 shares were granted pursuant to the 2010 Plan.

Employee Stock Purchase Plan

Under the 1994 Employee Stock Purchase Plan, or the ESPP, the Company reserved 800,000 shares of common stock for issuance to employees pursuant to the ESPP, under which eligible employees may authorize payroll deductions of up to 10% of their base compensation (as defined) to purchase common stock at a price equal to 85% of the lower of the fair market value as of the beginning or the end of the offering period.

At the annual meeting held on June 4, 2003, the stockholders approved amendments to the ESPP to (i) extend the original term of the ESPP by an additional 10 years such that the ESPP will now expire in April 2014 (subject to earlier termination as described in the ESPP) and (ii) increase the number of shares of common stock reserved for issuance under the ESPP by 600,000 shares to a new total of 1,400,000.

On June 17, 2011, the Company's stockholders approved amendments to the Company's ESPP to increase the number of shares reserved for issuance under the ESPP by 600,000 shares to a new total of 2,000,000, to remove the Plan's 20-year term, and to include certain changes consistent with Treasury Regulations relating to employee stock purchase plans under Section 423 of the Internal Revenue Code of 1986, as amended, and other applicable law.

As of December 31, 2013, 1,501,905 shares have been issued to employees and there are 498,095 shares available for issuance under the ESPP. The weighted average fair value of shares issued under the ESPP in 2013, 2012 and 2011 was $3.53, $3.72 and $3.21 per share, respectively.

Share-Based Compensation Expense

Total estimated share-based compensation expense, related to all of the Company's share-based awards, recognized for the years ended December 31, 2013, 2012 and 2011 was comprised as follows (in thousands, except per share data):

	2013		2012		2011

Research and development	$	2,361	$	3,487	$	1,917
Selling, general and administrative		15,964		12,451		5,436
Non-recurring charges		14,072		—		—

Share-based compensation expense before taxes		32,397		15,938		7,353
Related income tax benefits		—		—		—

Share-based compensation expense, net of taxes	$	32,397	$	15,938	$	7,353

On July 18, 2013, the Company entered into a settlement agreement with First Manhattan Company, or First Manhattan, in connection with a proxy contest related to the Company's 2013 Annual Meeting of Stockholders. According to the terms of the settlement agreement, more than a majority of the members of the Company's Board of Directors resigned and new members were appointed. The change in the majority of the members of the Company's Board of Directors, effective July 19, 2013, triggered certain "change of control" benefits in accordance with the Amended and Restated Change of Control and Severance Agreements, or the Amended Agreements, with certain of the Company's employees; specifically, all unvested stock options held by these employees automatically vested in full and became immediately exercisable. In accordance with ASC 718, all unamortized expense for options that were expected to vest on the date of grant and the modified fair value of the options that were not expected to vest on the date of grant (due to expected forfeitures) were immediately expensed. As a result, in the year ended December 31, 2013, the Company recognized approximately $12.9 million in additional share-based compensation expense related to this event.

As part of the Company's ongoing efforts to reduce costs by eliminating expenses that are not essential to expanding the use of Qsymia, the Company implemented a cost reduction plan that reduced the Company's workforce by approximately 20 employees, or 17% of its workforce, excluding the sales force, in the year ended December 31, 2013. As a result, the Company incurred $1.2 million in additional share-based compensation expense in the year ended December 31, 2013, related to the automatic acceleration of vesting of unvested stock options held by the terminated employees.

Total share-based compensation cost capitalized as part of the cost of inventory was $480,000 and $196,000 for the years ended December 31, 2013 and 2012, respectively.

The following table summarizes share-based compensation, net of estimated forfeitures associated with each type of award (in thousands):

	2013		2012		2011

Share-based compensation, net of taxes:
Restricted stock units	$	471	$	292	$	—
Stock options		31,610		15,531		7,259
Employee stock purchase plan		316		115		94

	$	32,397	$	15,938	$	7,353

As of December 31, 2013, unrecognized estimated compensation expense totaled $12.2 million related to non-vested stock options and $66,000 related to the ESPP. The weighted average remaining requisite service period of the non-vested stock options was 1.3 years and of the ESPP was less than one month.

Valuation Assumptions

The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model, assuming no expected dividends and the following weighted average assumptions:



Expected life (in years)	4.88		5.54		5.93
Volatility	83.35	%	82.49	%	77.46	%
Risk-free interest rate	1.12	%	1.00	%	2.59	%
Dividend yield	—		—		—