7. Equity Incentive Plans

2003 Stock Incentive Plan

The 2003 Stock Incentive Plan (the 2003 Plan) provided for the grant of incentives and nonqualified stock options and restricted stock awards. The exercise price for incentive stock options must be at least equal to the fair value of the common stock on the grant date. Unless otherwise stated in a stock option agreement, 25% of the shares subject to an option grant will vest upon the first anniversary of the vesting start date and thereafter at the rate of one forty-eighth of the option shares per month as of the first day of each month after the first anniversary. Upon termination of employment by reasons other than death, cause, or disability, any vested options shall terminate 60 days after the termination date. Stock options terminate 10 years from the date of grant. The 2003 Plan expired on May 21, 2013.

A summary of the Company’s stock option activity under the 2003 Plan for the nine months ended September 30, 2015 is as follows:



				Weighted-Average
		Weighted-		Remaining	Aggregate
	Outstanding	Average		Contractual Term	Intrinsic Value
	Options	Exercise Price		(Years)	(In Thousands)
Outstanding as of December 31, 2014	857,391	$	1.26	5.2
Options granted	—		—
Options exercised	(97,295)		1.14
Options forfeited	(177)		1.98
Outstanding as of September 30, 2015	759,919		1.27	4.5	$	3,289
Vested or expected to vest as of September 30, 2015	759,352		1.27	4.5	$	3,287
Exercisable as of September 30, 2015	743,107		1.25	4.4	$	3,235

As of September 30, 2015, there was $27,380 of total unrecognized compensation expense related to unvested options under the 2003 Plan that will be recognized over a weighted-average period less than one year. Total intrinsic value of the options exercised during the nine months ended September 30, 2015 and 2014 was $669,196 and $606,279, respectively. The total fair value of shares underlying options which vested in the nine months ended September 30, 2015 and 2014 was $38,223 and $49,573, respectively.

2013 Equity Incentive Plan

The Company’s board of directors adopted, and its stockholders approved, its 2013 Equity Incentive Plan (the 2013 Plan). The 2013 Plan provides for the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code to the Company’s employees and its parent and subsidiary corporations’ employees, and for the grant of nonstatutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards and other forms of stock compensation to its employees, including officers, consultants and directors. The 2013 Plan also provides for the grant of performance cash awards to the Company’s employees, consultants and directors. Unless otherwise stated in a stock option agreement, 25% of the shares subject to an option grant will typically vest upon the first anniversary of the vesting start date and thereafter at the rate of one forty-eighth of the option shares per month as of the first day of each month after the first anniversary. Upon termination of employment by reasons other than death, cause, or disability, any vested options will terminate 90 days after the termination date, unless otherwise set forth in a stock option agreement. Stock options generally terminate 10 years from the date of grant.

Authorized Shares

The maximum number of shares of common stock that initially could be issued under the 2013 Plan was 1,000,000 shares, plus any shares subject to stock options or similar awards granted under the 2003 Plan that expire or terminate without having been exercised in full or are forfeited to or repurchased by the Company. The number of shares of common stock reserved for issuance under the 2013 Plan automatically increases on January 1 of each year until January 1, 2023, by 3% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by the Company’s board of directors. The maximum number of shares that may be issued pursuant to exercise of incentive stock options under the 2013 Plan is 20,000,000. As of January 1, 2015, the number of shares of common stock that may be issued under the 2013 Plan was automatically increased by 568,195 shares, representing 3% of the total number of shares of common stock outstanding on January 1, 2015, increasing the number of shares of common stock available for issuance under the 2013 Plan to 1,568,195 shares.

Shares issued under the 2013 Plan may be authorized but unissued or reacquired shares of common stock. Shares subject to stock awards granted under the 2013 Plan that expire or terminate without being exercised in full, or that are paid out in cash rather than in shares, will not reduce the number of shares available for issuance under the 2013 Plan. Additionally, shares issued pursuant to stock awards under the 2013 Plan that the Company repurchases or that are forfeited, as well as shares reacquired by the Company as consideration for the exercise or purchase price of a stock award or to satisfy tax withholding obligations related to a stock award, will become available for future grant under the 2013 Plan.

A summary of the Company’s stock option activity under the 2013 Plan for the nine months ended September 30, 2015 is as follows:


				Weighted-Average
ccc		Weighted-		Remaining	Aggregate
	Outstanding	Average		Contractual Term	Intrinsic Value
	Options	Exercise Price		(Years)	(In Thousands)
Outstanding as of December 31, 2014	949,589	$	8.88	9.1
Options granted	576,000		7.23
Options exercised	—
Options forfeited	(42,750)		7.86
Outstanding as of September 30, 2015	1,482,839		8.26	8.7	$	—
Vested or expected to vest as of September 30, 2015	1,475,733		8.26	8.7	$	—
Exercisable as of September 30, 2015	394,797		8.80	8.3	$	—

The weighted-average fair value of the options granted during the nine months ended September 30, 2015 and 2014 was $5.09 per share and $6.71 per share, respectively, applying the Black-Scholes-Merton option pricing model utilizing the following weighted-average assumptions:


	Nine Months Ended	Nine Months Ended
	September 30, 2015	September 30, 2014
Expected term (years)	6.25	6.25
Expected volatility	80.83%	90.32%
Risk-free interest rate	1.70%	2.14%
Expected dividend yield	0%	0%

As of September 30, 2015, there was $5,793,294 of total unrecognized compensation expense related to unvested options under the 2013 Plan that will be recognized over a weighted-average period of approximately 3.0 years. The total fair value of shares underlying options which vested in the nine months ended September 30, 2015 and 2014 was $2,314,557 and $0, respectively.

A restricted stock unit (RSU) is a stock award that entitles the holder to receive shares of the Company’s common stock as the award vests. The fair value of each RSU is based on the closing price of the Company’s stock on the date of grant. The Company has granted RSUs with service conditions (service RSUs) that vest in three equal annual installments provided that the employee remains employed with the Company. As of September 30, 2015, there was $37,809 of unrecognized compensation costs related to unvested service RSUs.

The following is a summary of RSU activity under the 2013 Plan for the nine months ended September 30, 2015:



			Weighted-Average
			Grant Date Fair
	Number of Shares			Value
Unvested at December 31, 2014		7,250	$	7.62
Granted		—		—
Forfeited		—		—
Vested		—		—
Unvested at September 30, 2015		7,250		7.62

Stock-based compensation expense was classified on the statement of operations as follows for the three and nine months ended September 30, 2015 and 2014:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Research and development expense	$	209,359	$	140,227	$	590,633	$	359,351
General and administrative expense		423,565		301,549		1,088,035		793,069
Total stock-based compensation expense	$	632,924	$	441,776	$	1,678,668	$	1,152,420