11. Stockholders' Equity

Common Stock

On July 26, 2011, the Company completed a private placement under a Securities Purchase Agreement pursuant to which the Company issued "Units" for an aggregate purchase price of approximately $20.2 million, at a per Unit price of $1.72. Each Unit was comprised of one share of common stock and a warrant to purchase 0.5 shares of common stock (representing 50% warrant coverage on the shares to be issued) (the "Warrants"). The price of each Unit was based on the July 21, 2011 consolidated closing bid price of the Company's common stock on the NASDAQ Global Market of $1.65 per share, and represented a purchase price of $1.65 for the one share of common stock issued for each Unit and a Warrant purchase price of $0.07 for the 0.5 shares of common stock underlying the Warrants issued for each Unit (resulting in a purchase price for the Warrants of $0.14 per whole share of common stock underlying such Warrants). The total number of Units issued in connection with the transaction was 11,749,552, representing an aggregate issuance of 11,749,552 shares of common stock and Warrants to purchase an aggregate of 5,874,782 shares of common stock. The Warrants have a term of five years, contain a net-exercise provision, and have an exercise price of $1.65 per share. In addition, the Warrants contain terms that prevent the Warrants from being exercised to the extent that such exercise would cause a stockholder's beneficial ownership (along with its affiliates and others with whom such stockholder's holdings would be aggregated for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended) to exceed 19.999% of the total number of then issued and outstanding shares of common stock of the Company. The fair value of the warrants issued was approximately $5.9 million based on a Black-Scholes valuation model. The net proceeds to the Company in connection with the Securities Purchase Agreement were $18.6 million, after deducting expenses of approximately $1.6 million.

Pursuant to a Registration Rights Agreement entered into in connection with the Securities Purchase Agreement, the Company filed a registration statement covering the resale of the common stock and the shares of common stock underlying the Warrants issued and issuable to the purchasers of Units on August 24, 2011. The registration statement was declared effective on September 8, 2011.

Warrants to Purchase Common Stock

In May 2007, the Company completed its IPO as a result of which all of the existing shares of the Company's preferred stock were converted to common stock. At the time of the completion of the IPO, the Company had outstanding warrants to purchase 33,600 shares of its Series A preferred stock, 20,000 shares of its Series B preferred stock, and 840,000 shares of its Series C2 preferred stock. Upon closing of the Company's IPO, warrants to purchase 893,600 shares of its preferred stock converted to warrants to purchase 59,573 shares of the Company's common stock. These warrants remain outstanding at December 31, 2011. Of these warrants to purchase 59,573 shares of the Company's stock, warrants to purchase 56,000 shares of the Company's common stock automatically exercise in the event of an acquisition of the Company. The Company performed a final re-measurement to determine the fair value of such financial instruments immediately prior to the conversion. The resulting fair value of $0.4 million was reclassified to additional paid-in capital during the year ended December 31, 2007.

In connection with private placements of common stock in December 2007 and January 2008, the Company issued to the investors warrants to purchase 1,206,273 shares of common stock at $8.034 per share. The warrants became exercisable immediately upon issuance and expire five years from issuance. The fair value of the warrants to purchase 1,091,622 shares of common stock issued in conjunction with the first closing of the private placement in December 2007 was approximately $3.4 million and was determined using the Black-Scholes method with the following assumptions: expected volatility of 67%, a dividend yield of 0%, a risk-free interest rate of 3.52%, and an expected life of five years. The fair value of the warrants to purchase 114,651 shares of common stock issued in conjunction with the second closing of the private placement in January 2008 was approximately $0.4 million and was determined using the Black-Scholes method with the following assumptions: expected volatility of 67%, a dividend yield of 0%, a risk-free interest rate of 3.26%, and an expected life of five years. The fair value of the warrants issued was allocated from the proceeds of the financing. All of the 1,206,273 warrants remain outstanding at December 31, 2011.

2000 Stock Incentive Plan

The Company's 2000 Stock Incentive Plan (the "2000 Plan") provides for the grant of incentive and nonstatutory stock options by the board of directors to employees, officers, directors, and consultants of the Company. Incentive stock options may be granted with exercise prices not less than estimated fair value, and nonstatutory stock options may be granted with an exercise price of not less than 85% of the estimated fair value of the common stock on the date of grant. Options granted under the 2000 Plan expire no later than 10 years from the date of grant. Options granted and shares underlying stock purchase rights issued under the 2000 Plan vest over periods determined by the board of directors, generally over four to six years. Unvested shares of common stock purchased under stock purchase rights are subject to a repurchase option by the Company upon termination of the purchaser's employment or services. The repurchase right lapses over a period of time, as determined by the board of directors. At December 31, 2011 and 2010, there were no stock purchase rights outstanding that were subject to a repurchase right by the Company. For certain options, vesting accelerates upon the achievement of specified milestones.

The 2000 Plan automatically terminated on June 5, 2010 as the plan provisions included an automatic termination 10 years after its adoption by the board of directors. The termination does not impact unexercised stock options outstanding.

The 2000 Plan allowed for the early exercise of stock options prior to vesting. The Company issued an aggregate of 11,945 shares of common stock pursuant to the early exercise of stock options, which were not deemed to be issued until those shares vested. As of December 31, 2011 and 2010, all early exercised shares were fully vested.

2007 Stock Plan

The Company's 2007 Stock Plan provides for the grant of incentive stock options by the Company's board of directors to employees and for the grant of nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to its employees, directors and consultants.

The Company's board of directors has the authority to determine the terms of the awards, including exercise price, the number of shares subject to each such award, the exercisability of the awards and consideration payable upon exercise. Incentive stock options may be granted with exercise prices at least equal to the fair market value of the Company's common stock on the date of grant. The term of an incentive stock option granted under this plan may not exceed ten years, except that with respect to any participant who owns 10% of the voting power of all classes of the Company's outstanding stock as of the grant date, the term must not exceed five years and the exercise price must equal at least 110% of the fair market value on the date of grant.

Upon adoption of the plan, the Company reserved 1,333,333 shares of its common stock for issuance under the 2007 Stock Plan. Any shares returned to the 2000 Plan as a result of termination of options or the repurchase of shares issued under the 2000 Plan are added to the 2007 Stock Plan. In addition, the 2007 Stock Plan provides for annual increases in the number of shares available for issuance thereunder on the first day of each fiscal year, beginning with the Company's 2008 fiscal year, equal to the lesser of:

•

5% of the outstanding shares of the Company's common stock on the last day of the immediately preceding fiscal year;

•

1,333,333 shares; or

•

such other amount as the Company's board of directors may determine.

The Company's 2007 Stock Plan also provides for the automatic grant of non-statutory options to the Company's non-employee directors. Each non-employee director that is newly appointed to the board of directors will receive an initial option to purchase 20,000 shares upon such appointment. Additionally, non-employee directors who have been directors for at least six months will receive a subsequent option to purchase 10,000 shares immediately following each annual meeting of the Company's stockholders.

The following table summarizes stock option activity under both the 2000 Plan and 2007 Stock Plan:


				Options Outstanding
	Shares Available for Grant			Number of Shares			Weighted-Average Exercise Price
Balance at December 31, 2008		1,578,202			1,393,545		$	5.31
Additional shares authorized		878,459			—			—
Options granted		(1,061,642	)		1,061,642		$	3.85
Options exercised		—			(105,247	)	$	2.76
Options canceled		85,405			(85,405	)	$	7.68

Balance at December 31, 2009		1,480,424			2,264,535		$	4.65
Additional shares authorized		886,297			—			—
Options granted		(1,109,539	)		1,109,539		$	7.39
Options exercised		—			(79,869	)	$	3.23
Options canceled		291,712			(291,712	)	$	7.08

Balance at December 31, 2010		1,548,894			3,002,493		$	5.47
Additional shares authorized		1,893,455			—			—
Options granted		(3,017,468	)		3,017,468		$	2.70
Options exercised		—			(22,207	)	$	1.84
Options canceled		2,960,715			(2,960,715	)	$	5.46

Balance at December 31, 2011		3,385,596			3,037,039		$	2.75

The options granted in 2011 in the table above include options granted to certain employees and officers to purchase a total of 580,000 shares of the Company's common stock in the form of market-based stock options with vesting tied to stock price targets. The grant date fair value of these options was $2.1 million as estimated using a Monte Carlo valuation methodology, using the following assumptions: expected volatility of 88.7%; expected risk-free interest rate of 1.45%; median range of expected life of 3.7 years to 4.3 years; and expected dividend yield of zero percent. The fair value of these options is expected to be amortized through 2015. Employees were granted 90,000 market-based stock options with a fair value of $0.3 million, and officers were granted 490,000 market-based stock options with a fair value of $1.8 million. For the year ended December 31, 2011, the Company recognized $0.5 million of stock-based compensation expense related to these market-based options.

The options granted and canceled in 2011 in the table above include options that were exchanged and replaced under the Company's option exchange program executed in December 2011. Under the exchange offer, the Company accepted for cancellation options to purchase an aggregate of 2,110,821 shares of its common stock, which were cancelled as of December 12, 2011, and, in exchange, granted new options to purchase an aggregate of 1,225,468 shares of its common stock. The exercise price per share of the new options granted in the offer was $1.07, the closing price of the Company's common stock as reported by the NASDAQ Global market on December 12, 2011. The unamortized value of the cancelled grants was added to the incremental grant date fair value of the replacement grants, and the combined value will be amortized over the vesting period of the new grant. The incremental grant date fair value of the replacement grants is approximately $0.4 million.

On April 29, 2011, the Company announced the planned retirement of Anthony DiTonno, the Company's President and Chief Executive Officer, by December 31, 2011. In connection with Mr. DiTonno's retirement, the Company's board of directors approved accelerating the vesting of options to purchase the Company's common stock held by Mr. DiTonno by 12 months upon termination of his employment or consulting services, if any, and the extension of time to exercise such options up to 24 months. The Company recorded a non-cash charge of $0.1 million in the 2011 selling, general and administration expense related to the acceleration.

The Company's board of directors granted 899,000 restricted common stock units ("RSUs") to its officers and employees. The RSUs vest 50% on September 1, 2012 and 12.5% on each of December 1, 2012, March 10, 2013, June 1, 2013 and September 1, 2013. The fair market value of the Company's common stock on the date of grant was $1.60. The grant date fair value of these RSUs was $1.4 million and it is being amortized over the vesting period. Employees were granted 809,000 RSUs with a fair value of $1.3 million, and officers were granted 90,000 RSUs with a fair value of $0.1 million. In addition, the Company's board of directors granted 75,000 RSUs to an officer, in which the fair market value of the Company's common stock on the date of grant was $1.07. These RSUs vest 25% per year on the anniversary grant date.

The following table summarizes restricted stock unit activity under the 2007 Stock plan:


	Number of RSUs			Weighted-Average Grant Date Fair Value
Non-vested balance at December 31, 2010		—			—
Awards granted		974,000		$	1.56
Awards released		(159,000	)	$	1.60
Awards canceled		(34,000	)	$	1.60

Balance at December 31, 2011		781,000		$	1.55

In October 2011, the Company's board of directors approved a restructuring plan whereby it reduced its workforce by 26 individuals. The Company communicated the plan to the impacted employees on October 28, 2011 and their last day of employment was November 2, 2011. The impacted employees are eligible to receive severance contingent on their signing of a general release with the Company. Part of the severance given included a full acceleration of vesting on their RSUs and an extension of the exercise period for vested stock options. The Company recorded a non-cash charge of $0.2 million in 2011 related to these modifications. In March 2012, the Company undertook an additional restructuring. The severance associated with such restructuring included acceleration of RSU vesting for terminated employees in addition to other modifications of equity grants.

2011 Inducement Stock Plan

On September 20, 2011, the Company's board of directors adopted the 2011 Inducement Stock Plan (the "Inducement Plan"). The purposes of the Inducement Plan are to provide a material inducement for the best available individuals to enter into the employment of the Company and thereby to promote the success of the Company's business. The Inducement Plan provides for the grant of nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares by the Company's board of directors its employees. The term of the Inducement Plan is ten years from the date adopted by the board of directors.

The Company's independent compensation committee has the authority to determine the terms of the awards, including exercise price, the number of shares subject to each such award, individuals to whom awards may be granted, the exercisability of the awards and consideration payable upon exercise.

Upon adoption of the plan, the Company reserved 1,000,000 shares of its common stock for issuance under the Inducement Plan. At December 31, 2011, 1,000,000 shares were available for grant. In connection with the hiring of the Company's new Chief Executive Officer on January 2, 2012, the Company has issued 600,000 shares under the Inducement Plan.

Stock-Based Compensation Expense

The Company recognizes stock-based compensation expense for all share-based payments granted subsequent to December 31, 2005. Stock-based compensation expense for awards made to employees and directors is measured at the date of grant, based on the fair value of the award, and is recognized as expense on a straight-line basis over the requisite service period. The following table summarizes stock-based compensation expense for the years ended December 31, 2011, 2010 and 2009:


	Year Ended December 31,
	2011		2010		2009
Research and development	$	877	$	679	$	1,068

Selling, general and administrative		2,549		1,675		1,424

Total	$	3,426	$	2,354	$	2,492

The fair value for the Company's employee stock options was estimated at the date of grant using the Black-Scholes valuation model with the following average assumptions:


	Year Ended December 31,
	2011			2010			2009
Expected volatility		67	%		66	%		70	%
Expected term (years)		6.0			6.0			6.0
Risk-free interest rate		1.8	%		2.8	%		2.2	%
Dividend yield		0	%		0	%		0	%

The Company's computation of expected volatility for the years ended December 31, 2011, 2010 and 2009 is based on an average of the historical volatility of a peer-group of similar companies. The Company's computation of expected term in the years ended December 31, 2011, 2010 and 2009 utilizes the simplified method. The risk-free interest rate for periods within the term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Stock compensation expense relating to options with acceleration of vesting dependent upon the achievement of milestones is recognized on a straight-line basis over a period which is the shorter of:

•

the Company's evaluation of the probability of achievement of each respective milestone and the related estimated date of achievement; or

•

the otherwise stated time-based vesting period.

The following table represents stock options activity for the year ended December 31, 2011:


	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contract Life		Aggregate Intrinsic Value
Outstanding options at beginning of period		3,002,493		$	5.47
Granted		3,017,468			2.70
Exercised		(22,207	)		1.84
Forfeited		(1,396,840	)		5.46
Expired		(1,563,875	)		5.45

Outstanding options at end of period		3,037,039		$	2.75		6.9	$	—

Vested and expected to vest at December 31, 2011		2,858,590		$	2.77		6.8	$	—

Exercisable options at end of period		1,259,845		$	3.41		5.2	$	—

The weighted-average grant date fair value of stock options granted during the years ended December 31, 2011, 2010 and 2009 was $1.75, $4.53 and $2.47 per share, respectively. Total intrinsic value of options exercised for the years ended December 31, 2011, 2010 and 2009 was less than $0.1 million, $0.3 million, and $0.5 million, respectively. Cash received from stock option exercises and employee stock purchases under the employee stock purchase plan for the years ended December 31, 2011, 2010 and 2009 was $0.2 million, $0.6 million and $0.4 million, respectively. Because of the Company's net operating losses, it did not realize any tax benefits for the tax deductions from share-based payment arrangements during the years ended December 31, 2011, 2010 and 2009. As of December 31, 2011, the total unamortized compensation expense related to stock-based awards granted to employees and directors was $5.0 million and it is expected to be amortized over the next 4.3 years. As of December 31, 2011, the total unamortized compensation expense related to RSUs granted to employees and directors was $0.9 million and it is expected to be amortized over the next 1.08 years.

2007 Employee Stock Purchase Plan

Under the Company's 2007 Employee Stock Purchase Plan (the "Purchase Plan"), eligible employees can participate and purchase common stock semi-annually through accumulated payroll deductions. The Purchase Plan is administered by the Company's board of directors or a committee appointed by the Company's board of directors. Under the Purchase Plan eligible employees may purchase stock at 85% of the lower of the fair market value of a share of Common Stock on the offering date or the exercise date. The Purchase Plan provides for consecutive, overlapping twelve-month offering periods generally starting on the first trading day on or after May 15 and November 15 of each year. There are two 6-month purchase periods in each offering period. Eligible employees may contribute up to 15% of their eligible compensation which includes a participant's straight time gross earnings, commissions, overtime and shift premium, exclusive of payments for incentive compensation, bonuses and other compensation. A participant may purchase a maximum of 1,333 shares of common stock per purchase period. If the fair market value of the Company's common stock at the end of a purchase period is less than the fair market value at the beginning of the offering period, participants will be withdrawn from the then current offering period following the purchase of shares on the purchase date and automatically will be re-enrolled in a new offering period.

The Purchase Plan was effective upon the completion of the Company's IPO, at which time a total of 333,333 shares of the Company's common stock were made available for sale. Annual increases in the number of shares available for issuance will be made on the first day of each fiscal year, beginning with the Company's 2008 fiscal year. The annual increases will be equal to the lesser of:

•

2% of the outstanding shares of the Company's common stock on the first day of the fiscal year;

•

533,333 shares; or

•

such other amount as may be determined by the Company's board of directors. During the years ended December 31, 2011, 2010 and 2009, 97,319, 63,280 and 52,510 shares were issued, respectively.

The Company accounts for its Purchase Plan as a compensatory plan and recorded compensation expense of approximately $0.2 million, $0.2 million and $0.1 million for the years ended December 31, 2011, 2010 and 2009, respectively. The estimated fair value of shares granted under the Purchase Plan was determined at the date of grant using the Black-Scholes pricing model with the following assumptions:


	Year Ended December 31,
	2011	2010	2009
Expected dividend yield	0%	0%	0%
Expected volatility	55 – 58%	50 – 89%	56 – 89%
Expected life (in years)	0.5 to 1.0	0.5 to 1.0	0.5 to 1.0
Risk-free interest rate	0.1 – 0.4%	0.21 – 0.5%	0.2 – 2.1%

As of December 31, 2011, 1,458,906 shares were reserved for future issuance under the Purchase Plan.