Note 9 – Stock-Based Compensation

Stock Options

The Company has granted equity awards under several plans, two of which remain active. Under the Amended and Restated 2005 Stock Incentive Plan (the “2005 Plan”), equity awards may be granted to officers, directors, employees, consultants and advisors to the Company and any present or future subsidiary. The 2005 Plan, approved in May 2005 and amended most recently in June 2014 by the Company's stockholders, currently authorizes the grant of equity awards for up to 26,312,192 shares of common stock, which included, at the time of approval of the 2005 Plan, a maximum 5,746,468 shares of common stock subject to stock options outstanding under the Company's 1995 Stock Option Plan (the “1995 Plan”) that may revert to and become issuable under the 2005 Plan if such options expire or otherwise terminate unexercised. The Company received approval at its 2014 annual meeting of stockholders to increase the number of shares of common stock available for issuance under the 2005 Plan by 4,000,000 shares. The term of the Company's 1995 Plan has expired and no new awards will be made under the 1995 Plan; however, outstanding stock options remain in existence in accordance with their terms.

Under the 2005 Plan and the 1995 Plan, incentive stock options, having a maximum term of 10 years, can be or were granted at no less than 100% of the fair value of the Company's common stock at the time of grant and are generally exercisable over periods ranging from six months to four years.

Since the 2005 Plan expires in the first quarter of 2015, the Company intends to adopt a 2015 stock incentive plan and submit it for approval to its stockholders at the 2015 annual meeting of stockholders.

Stock Options Awards

The following is a summary of option activity under the 2005 Plan and the 1995 Plan for the six months ended September 30, 2014:

	2005 Stock Incentive Plan					1995 Stock Option Plan
	Stock Options			Weighted- Average Exercise Price		Stock Options			Weighted- Average Exercise Price
Outstanding at January 1, 2014		11,788,100		$	1.87		188,150		$	5.04
Granted		5,985,500		$	5.48		—		$	—
Exercised		(524,912	)	$	1.90		(32,450	)	$	4.81
Canceled		(268,775	)	$	3.17		(149,100	)	$	5.76
Outstanding at September 30, 2014		16,979,913		$	3.12		6,600		$	2.21
Shares exercisable at September 30, 2014		6,265,762		$	2.01		6,600		$	2.21

Shares available for grant at September 30, 2014		4,896,344

The fair value of stock options granted was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Weighted-average Black-Scholes fair value of stock options granted	$	1.92	$	1.41	$	2.41	$	1.02
Risk-free interest rate		1.43%-1.51%		1.12%-1.36%		1.24%-2.22%		0.54%-1.36%
Dividend yield		0%		0%		0%		0%
Volatility		52.75%-54.25%		56.75%-62.51%		52.47%-67.93%		55.81%-73.72%
Expected term (in years)		4.10-4.27		4.25		4.04-6.96		3.98-7.05
Expected forfeiture rate		14.18%-16.33%		23.15%		0%-23.15%		0%-23.15%

The aggregate intrinsic value and weighted-average remaining contractual term of stock options outstanding as of September 30, 2014 was approximately $25.8 million and 7.8 years, respectively. The aggregate intrinsic value and weighted-average remaining contractual term of stock options exercisable as of September 30, 2014 was approximately $14.0 million and 6.2 years, respectively. The aggregate intrinsic value represents the total intrinsic value (the difference between the Company's closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2014. This amount is subject to change based on changes to the closing price of the Company's common stock. The aggregate intrinsic value of options exercised for the nine months ended September 30, 2014 and 2013 was $1.8 million and $0.3 million, respectively.

Stock options issued to non-employees are measured at their estimated fair value. Stock-based compensation expense is recognized when services are rendered; however, the expense may fluctuate with changes in the fair value of the underlying common stock, until the award is vested. The Company recorded $0.3 million and less than $0.1 million in stock-based compensation expense related to stock options granted to non-employees in the nine months ended September 30, 2014 and 2013, respectively.

Employee Stock Purchase Plan

In 2013, the Company adopted an Employee Stock Purchase Plan (the “ESPP”), which authorized an aggregate of 2,000,000 shares of common stock to be purchased, which will increase 5% on each anniversary of its adoption up to a maximum of 3,000,000 shares. The ESPP allows employees to purchase shares of common stock of the Company at each purchase date through payroll deductions of up to a maximum of 15% of their compensation, at 85% of the lesser of the market price of the shares at the time of purchase or the market price on the beginning date of an option period (or, if later, the date during the option period when the employee was first eligible to participate). At September 30, 2014, there were 1,619,202 shares available for issuance under the ESPP.

The ESPP is considered compensatory for financial reporting purposes. As such, the fair value of ESPP shares was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Three Months Ended September 30, 2014		Nine Months Ended September 30, 2014
Range of Black-Scholes fair values of ESPP shares granted		$0.97-$2.08		$0.78-$2.08
Risk-free interest rate		0.05%-0.24%		0.04%-0.24%
Dividend yield		0%		0%
Volatility		51.10%-67.57%		50.80%-67.57%
Expected term (in years)		0.5-1.5		0.5-1.5
Expected forfeiture rate		5%		5%

Stock-based compensation related to the ESPP for the three and nine months ended September 30, 2014 was $0.2 million and $0.5 million, respectively.

Restricted Stock Awards

The following is a summary of restricted stock awards activity for the nine months ended September 30, 2014:

	Number of Shares		Per Share Weighted- Average Grant-Date Fair Value
Outstanding and Unvested at January 1, 2014		16,667	$	1.39
Restricted stock granted		15,000	$	4.48
Restricted stock vested		—	$	—
Restricted stock forfeited		—	$	—
Outstanding and Unvested at September 30, 2014		31,667	$	2.85

The Company recorded stock-based compensation expense in the consolidated statements of operations as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Research and development	$	780	$	316	$	1,955	$	829
General and administrative		911		347		2,628		955
Total stock-based compensation expense	$	1,691	$	663	$	4,583	$	1,784

As of September 30, 2014, there was approximately $13.3 million of total unrecognized compensation expense (net of estimated forfeitures) related to unvested options, ESPP and restricted stock awards. This unrecognized compensation expense is expected to be recognized over a weighted-average period of 1.5 years. This estimate does not include the impact of other possible stock-based awards that may be made during future periods.