Stock-based Compensation

Stock Plans

In 2002, the Company adopted the 2002 Stock Plan (the “2002 Plan”), pursuant to which its board of directors issued incentive stock options, non-statutory stock options and stock purchase rights to its employees, officers, directors or consultants. In March 2010, the Company's board of directors and stockholders approved the 2010 Equity Incentive Award Plan (the “2010 Plan”), which became effective upon the completion of its IPO in April 2010. The 2010 Plan is similar to the 2002 Plan but allows for issuance of additional awards, such as a restricted stock unit (“RSU”), performance stock unit (“PSU”), deferred stock award and stock appreciation rights. A total of 1,100,000 shares of common stock were initially reserved for future issuance under the 2010 Plan and any shares of common stock reserved for future grant or issuance under the Company's 2002 Plan that remained unissued at the time of completion of the IPO became available for future grant or issuance under the 2010 Plan. In addition, the shares reserved for issuance pursuant to the exercise of any outstanding awards under the 2002 Plan that expire unexercised will also become available for future issuance under the 2010 Plan. The 2010 Plan also provides for automatic annual increases in the number of shares reserved for future issuance.

A summary of share-based activity is as follows (in thousands):



	Shares Available for Grant
December 31, 2012	3,767
Annual increase in shares available for grant	1,507
Option grants	(922	)
RSU award grants	(2,101	)
RSU award shares withheld for taxes	132
RSA award grants	(216	)
PSU award grants	(523	)
Options forfeited, cancelled or expired	2,603
RSU awards forfeited, cancelled or expired	165
PSU awards forfeited, cancelled or expired	496
December 31, 2013	4,908

Stock Options

Awards granted under the 2002 Plan and 2010 Plan expire no later than 10 years from the date of grant. For incentive stock options and nonstatutory stock options, the option price shall be at least 100% and 85%, respectively, of the fair value of the common stock on the date of grant, as determined by the board of directors. If, at the time of a grant, the optionee directly or by attribution owns stock possessing more than 10% of the total combined voting power of all of the Company's outstanding capital stock, the exercise price for these options must be at least 110% of the fair value of the underlying common stock. Options typically vest over a 4-year period at a rate of no less than 25% per year but may be granted with different vesting terms.

A summary of stock option activity for the years ended December 31, 2011, 2012 and 2013 is as follows (in thousands, except per share amounts and years):



	Options Outstanding
	Number of Options		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Terms (years)	Aggregate Intrinsic Value
December 31, 2010	7,796		$	6.27	6.57	$	34,228
Grants	1,751		9.33
Exercises	(1,167	)	2.21			9,077
Early exercised options repurchased	(476	)	9.51
Forfeited/Cancelled	—		—
December 31, 2011	7,904		7.35		6.77	6,570
Grants	1,521		3.42
Exercises	(708	)	1.78			925
Forfeited/Cancelled	(2,584	)	8.23
December 31, 2012	6,133		6.65		4.91	657
Grants	922		2.28
Exercises	(326	)	0.98			409
Forfeited/Cancelled	(2,603	)	7.35
December 31, 2013	4,126		5.68		5.75	87
Options vested and expected to vest at December 31, 2013	4,006		5.77		5.66	87

Options exercisable at December 31, 2013	2,805		$	6.76	4.37	$	87

The weighted-average grant date fair value of options granted during the years ended December 31, 2013, 2012 and 2011 was $1.34, $1.91, and $5.19, respectively.

The intrinsic value of options outstanding, vested and expected to vest, and exercisable as of December 31, 2013 is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of December 31, 2013. The aggregate intrinsic value of exercised stock options is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of the exercise date.

At December 31, 2013, there was $2,177,000 of unrecognized stock-based compensation cost for outstanding options which is expected to be recognized over an average period of 2.66 years.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2013 (amounts in thousands, except per share and years):



	Options Outstanding				Options Exercisable
Exercise Prices	Number of Options	Weighted Average Remaining Contractual Term (Years)	Weighted Average Exercise Price per Share		Number of Options	Weighted Average Exercise Price per Share
$0.68 - $2.32	869	7.30	$	1.96	199	$	0.96
$2.34 - $3.46	971	6.50	2.93		561	2.76
$3.56 - $7.40	719	5.30	5.31		595	5.60
$7.41 - $9.81	721	4.36	8.38		673	8.34
$9.82 - $11.87	846	4.88	10.66		777	10.67
	4,126	5.75	$	5.68	2,805	$	6.76

Restricted stock units

RSUs issued generally vest over four years with 25% of the RSUs vesting annually. The fair value of the RSUs was calculated based on the NASDAQ quoted stock price on the date of the grant with the expense recognized on a straight-line basis over the requisite service period.

A summary of RSU activity for the years ended December 31, 2011, 2012 and 2013 is as follows (in thousands, except per share amounts and years):



	RSUs Outstanding
	Number of RSUs		Weighted Average Grant Date Fair Value Per Share		Weighted Average Remaining Contractual Terms (years)	Aggregate Intrinsic Value
December 31, 2010	—
Grants	578		$	9.54
Shares released	—
Forfeited/Cancelled	(32	)
December 31, 2011	546				1.66	$	2,895
Grants	1,148		$	3.54
Shares released	(167	)
Forfeited/Cancelled	(569	)
December 31, 2012	958				1.21	$	2,117
Grants	2,101		$	1.80
Shares released	(325	)
Forfeited/Cancelled	(496	)
December 31, 2013	2,238				1.10	$	3,133

RSUs vested and expected to vest at December 31, 2013	2,015					$	2,821

The intrinsic value of RSUs outstanding and vested and expected to vest as of December 31, 2013 is calculated based on the fair value of the Company’s common stock as of December 31, 2013. The aggregate intrinsic value of RSUs released is calculated based on the fair value of the Company’s common stock as of the vesting date.

The fair value of RSUs released during the years ended December 31, 2013 and 2012 was $726,000 and $591,000, respectively. The majority of RSUs that vested in 2013 and 2012 were net-share settled such that the Company withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The Company pays the taxes on behalf of the restricted stock unit holder, returns the withheld restricted stock units to the shares available for grant pool and did not represent an expense to the Company.

At December 31, 2013, there was $3,385,000 of unrecognized stock-based compensation cost for outstanding RSUs which is expected to be recognized over an average period of 1.81 years.

Performance Stock Units

PSUs awarded may be conditional upon the attainment of one or more performance objectives over a specified period. Total compensation expense for PSUs is determined by the product of the number of shares eligible to be awarded and expected to vest, and the market price of the Company's common stock, commencing at the inception of the requisite service period. During the performance period, the compensation expense for PSUs is re-computed using the market price and the performance modifier at the end of a reporting period. At the end of the performance period, if the goals are attained, the awards are granted. The Company recognizes compensation expense of these awards on a straight-line basis over the vesting period.

The Company awarded 523,048 PSUs under the 2010 Plan during the year ended December 31, 2013 based upon achieving certain cashflow criteria for 2013. A 100% achievement of the performance goal would result in one common share issued for each vested PSU. In the third quarter of 2013, the Company revised its estimate of forecasted performance criteria and concluded that the performance target would not likely be achieved in 2013. As a result of the revised estimate of the performance goal, the PSU-related compensation expense of $298,000 recorded on a year to date basis was fully reversed at September 30, 2013. At December 31, 2013, there were 358,308 PSUs outstanding, which were cancelled in February 2014 based on not attaining the performance target.

Restricted Stock Awards

In June 2012, the Company granted 750,000 restricted stock awards and 400,000 options, pursuant to the employment agreement with its new chief executive officer, Mr. John Nicols. The restricted stock award of 750,000 shares vests over four years with 25% of the award vesting on each annual anniversary of Mr. Nichols' start date such that the restricted stock award would be fully vested on June 13, 2016.

In September 2012, the Company granted 50,000 restricted stock awards and 200,000 options, pursuant to the offer letter agreement with its new chief financial officer, Mr. David O’Toole. The restricted stock award of 50,000 shares vest over four years with 25% of the awards vesting on each annual anniversary of Mr. O’Toole’s start date such that the restricted stock award would be fully vested on September 4, 2016.

In January 2013, the Company granted a total of 215,515 restricted stock awards to specific non-employee members of its board of directors with a total value of $500,000. These awards vest over three years with 33% of the awards vesting on each annual anniversary of the grant date.

At December 31, 2013, there was $1,714,000 of unrecognized stock-based compensation cost for outstanding restricted stock awards which is expected to be recognized over an average period of 2.36 years.

Stock-Based Compensation Expense

The following table presents stock-based compensation expense included in the consolidated statements of operations (in thousands):



	Years Ended December 31,
	2013		2012		2011
Research and development	$	1,201	$	2,334	$	3,311
Selling, general and administrative	3,188		2,742		6,120
	$	4,389	$	5,076	$	9,431

Stock-based compensation expense attributable to cost of goods sold was immaterial. Stock-based compensation costs capitalized during the years ended December 31, 2013, 2012, and 2011 were insignificant.

There were no stock-based compensation tax benefits during the years ended December 31, 2013, 2012, and 2011.

The Company estimates the fair value of stock-based awards granted to employees and directors using the Black- Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of highly subjective and complex assumptions to determine the fair value of stock-based awards, including the expected life of the option and expected volatility of the underlying stock over the expected life of the related grants.

The Company used the following assumptions to estimate the fair value of its employee option grants:



	Years Ended December 31,
	2013		2012		2011
Weighted-average expected life (years)	6.0		6.0		6.1
Weighted-average expected volatility	65	%	61	%	58	%
Weighted-average risk free interest rate	1.2	%	1.0	%	2.2	%
Expected dividend yield	0.0	%	0.0	%	0.0	%

Since the Company was not a publicly traded entity prior to April 2010, sufficient company-specific historical volatility data was not available for reporting periods prior to the second quarter of 2012. As a result, for those periods, the Company estimated the expected volatility based on the historical volatility of a group of unrelated public companies within its industry. Effective for the second quarter of 2012, the Company determined it had sufficient company-specific historical volatility data. As a result, the Company estimates the expected volatility based on historical volatility of its common stock.

Due to the Company's limited history of grant activity, the expected life of options granted to employees is calculated using the “simplified method” permitted by the SEC as the average of the total contractual term of the option and its vesting period. The risk-free rate assumption was based on United States Treasury instruments whose terms were consistent with the terms of its stock options. The expected dividend assumption was based on the Company's history and expectation of dividend payouts.