Note 14. Stock-Based Compensation

Employee Stock Plans

Employee Stock Purchase Plan

The Company maintains an Employee Stock Purchase Plan (the “Purchase Plan”), which is intended to qualify as an employee stock purchase plan within the meaning of Section 423(b) of the Internal Revenue Code. Under the Purchase Plan, the Company’s Board of Directors may authorize participation by eligible employees, including officers, in periodic offerings. Although the Purchase Plan provides for an offering period to be no more than 27 months, the Company currently allows eligible employees to purchase shares of the Company’s common stock at the end of each six-month offering period at a purchase price equal to 85% of the lower of the fair market value per share on the start date of the offering period or the fair market value per share on the purchase date prior to 2012. Prior to June 6, 2012, the Purchase Plan, as amended by the Company’s stockholders, had authorized and provided for issuance an aggregate of 820,500 shares of common stock. On June 6, 2012, the stockholders approved a further amendment to the Purchase Plan to increase the aggregate number of shares of common stock authorized for issuance by 500,000 shares, such that the Purchase Plan has reserved for issuance an amount not to exceed 1,320,500 shares. At December 31, 2012, the Company had 581,879 shares available for future issuance.

2008 Equity Incentive Plan

The Company also maintains an equity compensation plan to provide long-term incentives for employees, contractors, and members of its Board of Directors. The Company currently grants equity awards from one plan, the 2008 Equity Incentive Plan (the “2008 Plan”). The 2008 Plan allows for the issuance of non-statutory and incentive stock options, restricted stock, restricted stock units, stock appreciation rights, other stock-related awards, and performance awards which may be settled in cash, stock, or other property. On June 1, 2011 and June 6, 2012, the stockholders approved amendments to the 2008 Plan (collectively the “Amended 2008 Plan”) which increased the aggregate number of shares of common stock authorized for issuance by 2,000,000 shares and 3,000,000 shares, respectively, such that the Amended 2008 Plan has reserved for issuance an amount not to exceed 13,540,940 shares. Awards under the 2008 Plan generally have a maximum term of 10 years from the date of the award. The 2008 Plan generally requires options to be granted at 100% of the fair market value of the Company’s common stock subject to the option on the date of grant and will generally vest over four years. Performance-based stock or cash awards granted under the Amended 2008 Plan are limited to either 500,000 shares of common stock or $1.0 million per recipient per calendar year. The attainment of any performance-based awards granted shall be conclusively determined by a committee designated by the Company’s Board of Directors. At December 31, 2012, 50,000 performance-based stock options were outstanding, of which 50,000 were granted during the year ended December 31, 2011.

1996 Equity Incentive Plan, 1998 Non-Officer Stock Option Plan, and 1999 Equity Incentive Plan

The Company continues to have equity awards outstanding under its previous stock plans: 1998 Non-Officer Stock Option Plan and 1999 Equity Incentive Plan (collectively, the “Prior Plans”) and 1996 Equity Incentive Plan (the “1996 Plan”). Equity awards issued under the Prior Plans and the 1996 Plan continues to adhere to the terms of those respective stock plans and no further options may be granted under those previous plans. However, at June 2, 2008, any shares that remained available for future grants under the Prior Plans became available for issuance under the 2008 Plan.

At December 31, 2012, the Company had an aggregate of approximately 12.9 million shares of its common stock remaining available for future issuance under the Amended 2008 Plan, the Prior Plans and the 1996 Plan, of which approximately 8.6 million shares were subject to outstanding options and other stock-based awards, and approximately 4.3 million shares were available for future issuance under the Amended 2008 Plan. The Company’s policy is to issue new shares of common stock upon the exercise of options.

Activity under the Company’s equity incentive plans related to stock options is set forth below (in thousands except weighted average exercise price):


	Number of Options Outstanding			Weighted Average Exercise Price per Share
Balances at December 31, 2009		6,565		$	7.38
Granted		981			2.90
Forfeited		(28	)		3.03
Expired		(309	)		19.20
Exercised		(202	)		1.62

Balances at December 31, 2010		7,007		$	6.42
Granted		2,169			2.36
Forfeited		(465	)		2.45
Expired		(1,237	)		11.52
Exercised		(112	)		0.81

Balances at December 31, 2011		7,362		$	4.70
Granted		1,782			3.68
Forfeited		(98	)		2.78
Expired		(386	)		30.44
Exercised		(156	)		1.30

Balances at December 31, 2012		8,504		$	3.40

Information regarding the Company’s stock options outstanding, stock options vested and expected to vest, and stock options exercisable at December 31, 2012, 2011 and 2010, was as follows (in thousands except weighted average exercise price and contractual term):


	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Balances at December 31, 2012
Stock options outstanding		8,504	$	3.40		6.59	$	5,433
Stock options vested and expected to vest		8,140	$	3.42		6.49	$	5,310
Stock options exercisable		5,150	$	3.77		5.43	$	3,582
Balances at December 31, 2011
Stock options outstanding		7,362	$	4.70		6.66	$	4,065
Stock options vested and expected to vest		6,900	$	4.86		6.47	$	3,835
Stock options exercisable		4,058	$	6.70		5.00	$	1,902
Balances at December 31, 2010
Stock options outstanding		7,007	$	6.42		6.22	$	2,761
Stock options vested and expected to vest		6,705	$	6.60		6.08	$	2,610
Stock options exercisable		4,323	$	8.93		4.83	$	922

The aggregate intrinsic value in the table above is calculated as the difference between the exercise price of the stock option and the Company’s closing stock price on the last trading day of each respective fiscal period. The total intrinsic value of options exercised for the years ended December 31, 2012, 2011 and 2010 was $0.3 million, $0.2 million and $0.3 million, respectively.

Restricted Stock Units

The Company has previously granted restricted stock units primarily to its senior management in accordance with the Amended 2008 Plan. Subject to each grantee’s continued employment, the restricted stock units generally vest in three annual installments from the date of grant and are generally issuable at the end of the three-year vesting term. The fair value of restricted stock units which vested during the years ended December 31, 2012, 2011 and 2010 was $0.04 million, $0.1 million and $0.05 million, respectively.

Activity under the Company’s equity incentive plans related to restricted stock units is set forth below:


	Number of RSUs			Weighted Average Grant-Date Fair Value
Balances at December 31, 2009		37,867		$	6.45
Granted		76,532			1.85
Forfeited		0			0.00
Vested		(25,999	)		6.20

Balances at December 31, 2010		88,400		$	2.54
Granted		0			0.00
Forfeited		(17,727	)		1.85
Vested		(37,378	)		3.48

Balances at December 31, 2011		33,295		$	1.85
Granted		2,000			3.03
Forfeited		0			0.00
Vested		(18,650	)		1.98

Balances at December 31, 2012		16,645		$	1.85

Stock-based Compensation Expense

Stock-based compensation expense recognized on the Company’s consolidated statements of operations for the years ended December 31, 2012, 2011 and 2010, was as follows (in thousands):


	Year Ended December 31,
	2012		2011		2010
Stock-based compensation expense by caption:
Research and development	$	554	$	450	$	376
Selling, general and administrative		1,987		1,400		1,452

Total stock-based compensation expense	$	2,541	$	1,850	$	1,828

Stock-based compensation expense in the above table does not reflect any income taxes as the Company has experienced a history of net losses since its inception and has a full valuation allowance on its deferred tax assets. In addition, there was neither income tax benefits realized related to stock-based compensation expense nor any stock-based compensation costs capitalized as part of an asset during the years ended December 31, 2012, 2011 and 2010. The Company has also not recorded any stock-based compensation associated with performance-based stock options during the years ended December 31, 2012, 2011 and 2010 as the performance criteria was not probable of being achieved.

As of December 31, 2012, the Company expects to recognize the remaining unamortized stock-based compensation expense of $4.3 million related to non-vested stock options, net of estimated forfeitures, over an estimated remaining weighted average period of 2.47 years

Valuation Assumptions for Stock-based Compensation

The Company currently uses the Black-Scholes option pricing model to determine the grant-date fair value of stock options and employee stock purchase plan shares. The Black-Scholes option-pricing model is affected by the Company’s stock price, as well as assumptions regarding a number of complex and subjective variables, which include the expected term of the grants, actual and projected employee stock option exercise behaviors, including forfeitures, the Company’s expected stock price volatility, the risk-free interest rate and expected dividends. The Company recognizes the grant-date fair value of the stock award as stock-based compensation expense on a straight-line basis over the requisite service period, which is the vesting period, and is adjusted for estimated forfeitures.

Expected Term

The Company estimates the expected term for stock options based on grouping the population of stock options into discreet, homogeneous groups and then analyzing employee exercise and post-vesting termination behavior. The Company may also average the vesting term and the contractual term of the stock options, as illustrated in SAB 107 and SAB 110, if the Company is unable to obtain sufficient information for a particular homogeneous group of stock options. The expected term for the shares issuable under the employee stock purchase plan is the term of each purchase period, which is six months.

Estimated Forfeiture Rate

The Company estimates the forfeiture rate of stock options at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest. The Company estimates the historic pre-vesting forfeiture rates by groups that possess a degree of homogeneity regarding average time to vest and expected term.

Estimated Volatility

The Company estimates the volatility of its common stock by using historical volatility of its common stock. The Company has used significant judgment in making these estimates and will continue to monitor the availability of actively traded stock options on its common stock. The Company may also consider a combination of historical and implied volatility, or solely implied volatility, if the Company determines that sufficient actively traded stock options on its common stock exists.

Risk-Free Interest Rate

The Company uses the risk-free interest rate based on the yield derived from United States Treasury zero-coupon issues with remaining terms similar to the expected term on the stock options.

Expected Dividend Yield

The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero.

The weighted average assumptions used to value the Company’s stock-based awards for the years ended December 31, 2012, 2011 and 2010, was as follows:


	Year Ended December 31,
	2012			2011			2010
Stock Options:
Expected term (in years)		5.54			5.30			5.40
Estimated volatility		67	%		68	%		82	%
Risk-free interest rate		1.03	%		1.23	%		1.40	%
Expected dividend yield		0	%		0	%		0	%
Employee Stock Purchase Plan Rights:
Expected term (in years)		0.50			0.50			0.50
Estimated volatility		101	%		48	%		61	%
Risk-free interest rate		0.14	%		0.08	%		0.89	%
Expected dividend yield		0	%		0	%		0	%

The weighted average grant-date fair value of stock options granted during the years ended December 31, 2012, 2011 and 2010, was $2.13 per share, $1.37 per share and $1.94 per share, respectively. The weighted average grant-date fair value of restricted stock units granted during the years ended December 31, 2012 and 2010 was $3.03 per share and $1.85 per share, respectively. The weighted average grant-date fair value of employee stock purchase rights during the years ended December 31, 2012, 2011 and 2010, was $1.43 per share, $0.68 per share and $0.90 per share, respectively.