Share-Based Payments

6 Months Ended

Jun. 30, 2011

Share-Based Payments [Abstract]

Share-Based Payments

8. Share-Based Payments

The Company records stock-based compensation expense at fair value in accordance with ASC 718-10, “Compensation – Stock Compensation” (“ASC 718-10”). The Company utilizes the Black-Scholes valuation method for determination of share-based compensation expense. Certain assumptions need to be made with respect to utilizing the Black-Scholes valuation model, including the expected life, volatility, risk-free interest rate and anticipated forfeiture of the stock options. The expected life of the stock options was calculated using the method allowed by the provisions of ASC 718-10. In accordance with ASC 718-10, the simplified method for “plain vanilla” options may be used where the expected term is equal to the vesting term plus the original contract term divided by two. The risk-free interest rate is based on the rates paid on securities issued by the U.S. Treasury with a term approximating the expected life of the options. Estimates of pre-vesting option forfeitures are based on the Company’s experience. The Company will adjust its estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods.

The Company accounts for stock-based transactions with non-employees in which services are received in exchange for the equity instruments based upon the fair value of the equity instruments issued, in accordance with ASC 718-10 and ASC 505-50, “Equity-Based Payments to Non-Employees.” The two factors that most affect charges or credits to operations related to stock-based compensation are the estimated fair market value of the common stock underlying stock options for which stock-based compensation is recorded and the estimated volatility of such fair market value. The value of such options is periodically remeasured and income or expense is recognized during the vesting terms.

2005 Equity Incentive Plan

The 2005 Equity Incentive Plan (the “2005 Plan”) was adopted on September 1, 2005, approved by stockholders on September 5, 2005 and became effective on January 4, 2006. The 2005 Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, to EpiCept’s employees and its parent and subsidiary corporations’ employees, and for the grant of nonstatutory stock options, restricted stock, restricted stock units, performance-based awards and cash awards to its employees, directors and consultants and its parent and subsidiary corporations’ employees and consultants. Options are granted and vest as determined by the Board of Directors. A total of 13,000,000 shares of EpiCept’s common stock are reserved for issuance pursuant to the 2005 Plan. No optionee may be granted an option to purchase more than 1,500,000 shares in any fiscal year. Options issued pursuant to the 2005 Plan have a maximum maturity of 10 years and generally vest over 4 years from the date of grant. The Company records stock-based compensation expense at fair value. During the six months ended June 30, 2011, the Company’s Board of Directors granted approximately 1.4 million options to purchase shares of the Company’s common stock at a weighted average exercise price of $0.86 per share to certain employees. The Company estimates that $0.9 million of stock based compensation related to 2011 options granted will be recognized as compensation expense over the vesting period.

Following the departure of a former director, the Company agreed to extend the period during which he would be entitled to exercise certain vested stock options to purchase the Company’s common stock from three months following the effective date of his resignation, June 14, 2011, to the expiration date of each option granted to the former director. Additionally, all options that were not vested on the date of his resignation will continue to vest. The Company recorded compensation expense related to the modification of the exercise period and vesting period of $32,000 in the second quarter of 2011. Additional compensation expense of $30,000 will be recognized over the remaining vesting period of one year for the non-vested options.

The following table presents the total employee, board of directors and third party stock-based compensation expense resulting from stock options, restricted stock, restricted stock units and the Employee Stock Purchase Plan included in the consolidated statement of operations for the three and six months ended June 30, 2011 and 2010:

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
	(in $000s)				(in $000s)
Selling, general and administrative	$	201	$	166	$	366	$	291
Research and development		67		75		134		143
Stock-based compensation expense before income taxes		268		241		500		434
Benefit for income taxes (1)		—		—		—		—
Net compensation expense	$	268	$	241	$	500	$	434

(1) The stock-based compensation expense has not been tax-effected due to the recording of a full valuation allowance against net deferred tax assets.

Summarized information for stock option grants for the six months ended June 30, 2011 is as follows:

						Weighted Average
				Weighted Average		Remaining Contractual		Aggregate Intrinsic
	Options			Exercise Price		Term (years)		Value
Options outstanding at December 31, 2010		3,044,073		$	7.11		7.13	$	34,358
Granted		1,445,000			0.86
Exercised		—			—
Forfeited		(15,883	)		2.36
Expired		(9,980	)		78.46
Options outstanding at June 30, 2011		4,463,210		$	4.94		7.59	$	—
Vested or expected to vest at June 30, 2011		4,252,599		$	5.12		6.27	$	—
Options exercisable at June 30, 2011		2,357,099		$	8.22		6.27	$	—

There were no stock option exercises during each of the six months ended June 30, 2011 and 2010. Intrinsic value is measured using the fair market value at the date of exercise (for shares exercised) or at June 30, 2011 (for outstanding options), less the applicable exercise price. The weighted average grant-date fair value of options granted for the six months ended June 30, 2011 and 2010 was $0.68 and $1.55, respectively.

As of June 30, 2011, the total remaining unrecognized compensation cost related to the non-vested stock options amounted to $1.8 million, which will be amortized over the weighted-average remaining requisite service period of 3.0 years. Summarized Black-Scholes option pricing model assumptions for stock option grants to employees and directors for the six months ended June 30, 2011 and 2010 are as follows:

	Six Months Ended June 30,
	2011	2010
Expected volatility	110%	108.0-109.0%
Risk free interest rate	1.93% – 2.06%	2.17 – 2.39%
Dividend yield	—	—
Expected life	5 Years	5 Years

Restricted Stock Units

Restricted stock units were issued to certain employees and non-employee members of the Company’s Board of Directors during each of the six months ended June 30, 2011 and 2010. Typically, restricted stock units entitle the holder to receive a specified number of shares of the Company’s common stock at the end of the vesting term, ranging from one year to four years. This restricted stock unit grant is accounted for at fair value at the date of grant and an expense is recognized during the vesting term. Summarized information for restricted stock unit grants for the six months ended June 30, 2011 is as follows:

	Restricted Stock			Weighted Average
	Units			Grant Date Value Per Share
Nonvested at December 31, 2010		75,441		$	3.72
Granted		258,750			0.52
Vested		(14,375	)		2.43
Forfeited		—			—
Nonvested at June 30, 2011		319,816		$	1.03

2009 Employee Stock Purchase Plan

The 2009 Employee Stock Purchase Plan (the “2009 ESPP”) was adopted by the Board of Directors on December 19, 2008, subject to stockholder approval, and was approved by the stockholders at the Company’s 2009 Annual Meeting held on June 2, 2009. The 2009 ESPP was effective on January 1, 2009 and a total of 1,000,000 shares of common stock have been reserved for sale. The 2009 ESPP is implemented by offerings of rights to all eligible employees from time to time. Unless otherwise determined by the Company’s Board of Directors, common stock is purchased for accounts of employees participating in the 2009 ESPP at a price per share equal to the lower of (i) 85% of the fair market value of a share of the Company’s common stock on the first day the offering or (ii) 85% of the fair market value of a share of the Company’s common stock on the last trading day of the purchase period. The initial period commenced January 1, 2009 and ended on June 30, 2009. Each subsequent offering period will have a six month duration.

The number of shares to be purchased at each balance sheet date is estimated based on the current amount of employee withholdings and the remaining purchase dates within the offering period. The fair value of share options expected to vest is estimated using the Black-Scholes option-pricing model. Share options for employees entering the ESPP were estimated using the Black-Scholes option-pricing model and the assumptions noted on the table below.

	Six Months Ended June 30,
	2011			2010
Expected life	.50 years			.50 years
Expected volatility		110.0	%		110.0	%
Risk-free interest rate		0.19	%		0.20	%
Dividend yield		0	%		0	%

For the six months ended June 30, 2011 and 2010, the Company recorded an expense of $0 and $23,000 respectively, based on the estimated number of shares to be purchased.