Stock-Based Compensation

6 Months Ended

Jun. 30, 2011

Stock-Based Compensation

Stock-Based Compensation

Note 15.  Stock-Based Compensation

Description of Plans

Stock Option Plan

On July 21, 2010, our stockholders approved our 2010 Stock Incentive Plan (our “2010 Plan”), which constituted an amendment, restatement and renaming of our Third Amended and Restated 1998 Plan and which increased the shares available for issuance under the Stock Incentive Plan by an additional 1,500,000 shares.  Our 2010 Plan allows for the granting of stock options, restricted stock, restricted stock units and other equity awards with respect to up to 3,800,000 shares of our common stock.  At June 30, 2011, we had 286,501 shares reserved for future grant under this plan, and 2,695,777 shares reserved for outstanding options and RSUs.

Options may be granted to our employees, officers, directors, consultants and advisors. Under the terms of the option plan, incentive stock options are to be granted at the fair market value of our common stock at the date of grant, and nonqualified stock options are to be granted at a price determined by our Board of Directors.  In general, our Board has authorized vesting periods of one to three years and terms of varying length but in no case more than 10 years.  Our stock option program is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests.  We consider our option program critical to our operation and productivity; essentially all of our employees participate.

Restricted Stock Unit Arrangements

Our 2010 Plan permits the grant of restricted stock units (“RSUs”) to our employees, officers, directors and other service providers.  We use RSUs to (i) align our employees’ interests with those of the Company, (ii) motivate our employees to achieve key product development milestones and thus create stockholder value, (iii) retain key employees by providing equity to such employees and (iv) conserve cash, by paying bonuses in the form of RSUs, rather than in cash, but with the number of such RSUs calculated on a discounted basis to compensate for the reduced liquidity as compared to cash.  With respect to the RSUs that are granted in lieu of cash bonuses, the number of RSUs granted are based on performance, and are automatically converted into shares of common stock in four equal tranches in the fiscal year following the year of performance. Certain other RSUs are granted to our officers as a form of equity incentive, are not tied to performance, and vest over a three-year period in equal quarterly installments.  There are also other performance-based restricted stock units (PSUs) granted to our officers which become vested or payable on account of attainment of one or more performance goals established annually by the Board over such performance periods as the Board may designate, with such vesting events subject to the recipient officer being employed by us during the period ending with the milestones. The unvested portion of any RSU or PSU grant is subject to forfeiture upon the holder’s resignation or termination for cause.  As of June 30, 2011, and December 31, 2010, certain RSUs granted under the officer employment agreements were vested but stock could not be issued under the terms of the RSU agreements because the trading window was closed to insiders as of the respective vesting dates.

Restricted stock unit activity for the six months ended June 30, 2011, and for the year ended December 31, 2010, is as follows:

	Six months ended June 30,2011	Year ended December 31,2010
	(number of shares)
Shares issued related to vested RSUs:
Based on prior year grants	2,633	3,705
Vested RSUs not yet converted to stock (i)	564	2,069
RSU’s granted but not vested:
Related to 2009 executive officer agreement	1,129	2,255
Related to performance-based executive plan – 2010 grant (ii)	55,029	55,029
Related to performance-based executive plan – 2011 grant (ii)	62,500	—

(i) RSUs vesting September 30 and December 31, 2010, were issued on March 16, 2011.

(ii) Vesting of the performance-based RSUs (PSUs) is subject to the achievement of performance requirements and the continued employment of the officer as of the determination date.

Employee Stock Purchase Plan

Our Employee Stock Purchase Plan (the “ESPP”) allows substantially all of our employees to purchase shares of our common stock at a discount through payroll deductions.  All regular, full-time employees employed by us for at least three months on the dates the exercise periods begin (each May 1 and November 1) are eligible to participate in this plan. Participating employees may purchase our common stock at a purchase price equal to 85% of the lower of the fair market value of our common stock at the beginning of an offering period or on the exercise date.  Employees may designate up to 10% of their base compensation for the purchase of common stock under this plan.  The ESPP provides for the purchase of up to 200,000 shares of our common stock.  At June 30, 2011, we had 78,143 shares reserved for future issuance under this plan.

Stock Option Plan Schedules

Stock option activity for the six months ended June 30, 2011, is as follows:

	Number ofShares		Weighted-AverageExercisePrice			Weighted-AverageFairValue
Outstanding, December 31, 2010	1,660,791		$	8.09
Granted	1,330,413		$	2.31		$	1.20
Exercised	—		$	—
Canceled, forfeited or expired	(65,648	)	$	(7.02	)
Outstanding, June 30, 2011	2,925,556		$	5.48

The following table summarizes information about stock options outstanding at June 30, 2011:

Exercise Price	Number of Options Outstanding	Weighted- Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number of Options Vested	Vested Weighted- Average Exercise Price
$1.00 - $3.10	1,334,813	9.72	$	2.32	160,740	$	2.44
$3.11 - $4.10	288,799	8.70	$	3.60	100,952	$	3.59
$4.11 - $5.10	289,593	7.94	$	4.59	183,612	$	4.64
$5.11 - $8.10	342,071	3.99	$	7.10	341,004	$	7.10
$8.11 - $93.10	670,280	5.01	$	12.17	669,563	$	12.17
Total	2,925,556	7.69	$	5.48	1,455,871	$	8.36

Stock Compensation

We account for our stock compensation in accordance with ASC Topic 718. We use the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan shares. The valuations determined using this model are affected by our stock price as well as assumptions we make regarding a number of complex and subjective variables, including our stock price volatility, expected life of the option, risk-free interest rate and expected dividends, if any.

We estimate the volatility of our common stock by using historical volatility.  We estimate the expected term of the option grant, and determine a risk-free interest rate based on U.S. Treasury issues with remaining terms similar to the expected term of the stock or options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in our valuation model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods. All stock-based payment awards are amortized as they are earned over the requisite service periods of the awards, which are generally the vesting periods.

Restricted stock units (RSUs) are valued at the stock price at date of grant, and expensed ratably over the performance period or vesting period, as appropriate.  The number of PSUs for which stock compensation expense is calculated is based upon management’s assessment of the likelihood of achieving the performance targets.

During 2010, an employee terminated his employment with the Company to pursue an advanced degree. The former employee voluntarily forfeited his employee stock options upon his resignation. Based on this employee’s unique skills, we have retained his services as a consultant, and have granted him 7,000 options with various vesting dates and exercise prices that are consistent with those he had previously been granted as an employee.  An additional 10,000 options were granted to him during the first quarter of 2011. These options are accounted for under ASC Topic 505-50, “Equity-Based Payments to Non-Employees,” and the measurement dates for these options were determined to be the vesting dates. At the end of each reporting period, these options are revalued at their current fair value until a measurement date has been established by virtue of the option vesting, and a pro-rata portion of the resulting expense is recognized. The useful lives of the options granted to this consultant range from .75 years to 3.5 years.

The assumptions used to value stock option grants for the three and six months ended June 30, 2011, and 2010, were as follows:

	Three months ended June 30,		Six months ended June 30,
	2011	2010	2011	2010
Risk-free interest rate	.72%	1.11% - 1.67%	.72% - 1.31%	1.11% - 1.67%
Expected life of option	3.5 years	3.5 years	.75 - 3.5 years	3.5 years
Expected dividend payment rate	0%	0%	0%	0%
Assumed volatility	89%	81% - 91%	62% - 89%	81% - 91%
Expected forfeitures	8.3%	8.3%	8.3%	8.3%

Stock-based compensation expense recognized on our consolidated statement of operations for the three and six months ended June 30, 2011, and 2010 is as follows:

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
Operations and maintenance	$	70,603	$	14,609	$	93,197	$	29,681
Research and development	152,578		67,241		227,187		106,522
Selling, general and administrative	215,312		166,355		403,865		239,118
Total stock compensation expense	$	438,493	$	248,205	$	724,249	$	375,321
Components of stock compensation expense:
Compensation expense related to RSUs	$	1,987	$	3,877	$	3,580	$	8,960
Compensation expense related to stock options	436,506		244,328		720,669		366,361
Total stock compensation expense	$	438,493	$	248,205	$	724,249	$	375,321

As of June 30, 2011, there was approximately $1,282,000 of unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock-based payments granted to our employees, consultant and directors. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and recognized over the remaining vesting periods of the stock option grants.