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 and 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 initial public offering ("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.

The following table presents the shares available for grant as of March 31, 2014 (in thousands):



	Shares available for grant
December 31, 2013	4,908
Annual increase in shares available for grant	1,525
Option grants	(870	)
Restricted stock unit grants	(75	)
Restricted stock award grants	(229	)
Performance stock unit grants	(775	)
Restricted stock unit award shares withheld for taxes	123
Options forfeited, cancelled or expired	195
Restricted stock units forfeited or cancelled	196
Performance stock units forfeited or cancelled	358
March 31, 2014	5,356

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 three months ended March 31, 2014 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, 2013	4,126		$	5.68	5.75	$	87
Grants	870		1.94
Exercises	(62	)	1.01			40
Forfeited/Cancelled	(601	)	6.77
March 31, 2014	4,333		$	4.84	6.72	$	245

The weighted-average grant date fair value of options granted during the three months ended March 31, 2014 and 2013 was $1.15, and $1.36, respectively.

The intrinsic value of options outstanding is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of the reporting date. 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 March 31, 2014, there was $1,783,000 of unrecognized stock-based compensation cost for outstanding options which is expected to be recognized over an average period of 3.12 years.

Restricted Stock Units

RSUs issued generally vest over four years with 25% of the RSUs vesting annually but may be granted with different vesting terms. 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 three months ended March 31, 2014 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, 2013	2,238				1.10	$	3,133
Grants	75		$	1.97
Shares released	(371	)
Forfeited/Cancelled	(196	)
March 31, 2014	1,746				1.07	$	3,562

The intrinsic value of RSUs outstanding is calculated based on the fair value of the Company’s common stock as of the reporting date. 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 three months ended March 31, 2014 and 2013 was $692,000 and $366,000, respectively. The majority of RSUs that vested in the first three months of 2014 and 2013 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 March 31, 2014, there was $2,909,000 of unrecognized stock-based compensation cost for outstanding RSUs which is expected to be recognized over an average period of 1.61 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. The fair value of such an award is equal to the closing price of our common stock on the grant date. 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 775,000 and 523,048 PSUs during the quarter ended March 31, 2014 and 2013, respectively, under the 2010 Plan based upon achieving certain cash flow performance goals for each respective year. These PSUs vest such that one-half of the PSUs subject to the award vest one year following the grant, and the remainder of the PSUs vest two years following the grant, subject to the recipient’s continued service to the Company on each vesting date and the Company achieving the performance goals. If the performance goals is achieved at the threshold level the number of shares issuable in respect of the PSUs would be equal to half the number of PSUs granted. If the performance goal is achieved at the target level, the number of shares issuable in respect of the PSUs would be equal to the number of PSUs granted. If the performance goal is achieved at the superior level, the number of shares issuable in respect of the PSUs would be equal to two times the number PSUs granted. The number of shares issuable upon achievement of the performance goal at the levels between the threshold and target levels or target level and superior levels is determined using linear interpolation. Achievement below the threshold level results in no shares being issuable in respect of the PSUs.

During 2013, the Company revised its estimate of forecasted performance criteria and concluded that the performance target would not likely be achieved for the PSUs that were granted in 2013. The 358,308 outstanding PSUs that were granted in 2013 were cancelled in February 2014 when the Company determined that it had not attained the threshold performance target for the 2013 awards. At March 31, 2014, there were 775,000 PSUs outstanding, all of which were granted in 2014.

Restricted Stock Awards

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.

In January 2014, the Company granted a total of 229,163 restricted stock awards to specific non-employee members of its board of directors with a total value of $356,000. Initial director awards vest over a three year period with 33% of the award vesting on the anniversary date the director commences service on the Company's board of directors, and annual awards vest over a one year period fully vesting on the anniversary of the grant date.

At March 31, 2014, there was $2,020,000 of unrecognized stock-based compensation cost for outstanding restricted stock awards which is expected to be recognized over an average period of 1.82 years.

Stock-Based Compensation Expense

The following table presents total stock-based compensation expense by functional areas included in the condensed consolidated statements of operations for the three months ended March 31, 2014 and 2013 (in thousands):



	Three Months Ended March 31,
	2014		2013
Research and development	$	239	$	527
Selling, general and administrative	990		945
Total	$	1,229	$	1,472

The following table presents total stock-based compensation expense by security types included in the condensed consolidated statements of operations for the three months ended March 31, 2014 and 2013 (in thousands):



	Three Months Ended March 31,
	2014		2013
Stock options	$	276	$	610
Restricted stock units	869		734
Performance stock units	84		128
Total	$	1,229	$	1,472

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:



	Three Months Ended March 31,
	2014		2013
Weighted-average expected life (years)	6.0		6.0
Weighted-average expected volatility	64	%	65	%
Weighted-average risk free interest rate	1.9	%	1.1	%
Expected dividend yield	0.0	%	0.0	%

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.