9. Stock-Based Compensation

Option and Equity Plans

In January 2014, the Company’s board of directors increased the aggregate number of shares issuable under the 2012 Employee, Director and Consultant Equity Incentive Plan (the “2012 Plan”) to 3,000,000, which was approved by the shareholders in February 2014.

The total number of shares available for grant under the 2012 Plan at September 30, 2014 was 178,343.

Stock Options

A summary of the Company’s stock option activity for the nine months ended September 30, 2014 was as follows:

The Company estimates the fair value of each stock option on the grant date using the Black-Scholes-Merton valuation model, which requires several estimates including an estimate of the fair value of the underlying common stock on grant date. The expected volatility was based on an average of the historical volatility of a peer group of similar companies. The expected term was calculated utilizing the simplified method. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option. There were no options granted to employees during the nine months ended September 30, 2013. The following weighted average assumptions were used in the calculation to estimate the fair value of options granted to employees during the nine months ended September 30, 2014:

Restricted Stock Units

Restricted stock unit (“RSU”) activity for the nine months ended September 30, 2014 was as follows:

The total fair value of RSUs vested during the nine months ended September 30, 2014 was $1.3 million.

The Company recorded $9.4 million of stock-based compensation for RSUs during the nine months ended September 30, 2014.  In August 2014, certain executives agreed to extend the sale and other restrictions set forth in the lock-up agreements entered into in connection with the IPO with respect to an aggregate of 1,059,745 RSUs until the earlier of November 15, 2014 or the filing of this quarterly report. These RSUs were not vested at September 30, 2014.  Pursuant to their terms, the RSUs vest upon termination of employment and accordingly, all of the stock-based compensation related to these RSUs was recorded during the nine months ended September 30, 2014.  

In February 2013, employees of the Company elected to exchange 93,968 stock options for an equal number of RSUs pursuant to a one-time tender offer approved by the board of directors. The RSUs vested upon the expiration of a lock-up period in connection with an underwritten public offering of shares of the Company’s common stock. The incremental fair value on the date of the exchange, representing the difference between the value of the original stock options and the value of the RSUs issued of approximately $758,000 was recognized during the nine months ended September 30, 2014.

Stock-Based Awards Granted to Nonemployees

The Company from time to time grants options to purchase common stock or restricted stock to non-employees for services rendered and records expense ratably over the vesting period of each award. The Company estimates the fair value of the stock options using the Black-Scholes-Merton valuation model at each reporting date. No options were granted to non-employees during the nine months ended September 30, 2013. The Company granted 165,387 options and 50,000 restricted shares to non-employees and recorded stock-based compensation expense of $711,000 during the nine months ended September 30, 2014.

The following assumptions were used in the Black-Scholes-Merton valuation model related to non-employee stock options granted during the nine months ended September 30, 2014:

Summary of Stock-Based Compensation Expense

Total stock-based compensation expense included in the condensed consolidated statements of operations and comprehensive loss was allocated as follows (in thousands):

Unrecognized stock-based compensation at September 30, 2014 was as follows (in thousands):