Share-Based Compensation

9 Months Ended

Sep. 30, 2011

Share-Based Compensation [Abstract]

Share-Based Compensation

Note 10. Share-based Compensation

The Company recorded the following amounts of share-based compensation expense, excluding expense for non-employee consultants, for the periods presented (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Research and development expense	$	86	$	136	$	277	$	2,139
General and administrative expense		566		1,433		2,242		4,859
Total	$	652	$	1,569	$	2,519	$	6,998

There were no options granted during the three or nine month periods ended September 30, 2011. The share-based compensation expense for the three and nine months ended September 30, 2011 and 2010 includes a stock option granted during the first quarter of 2010 to a Company officer to purchase an aggregate of 500,000 shares of common stock which vests over a four year period.

A summary of the Company's fully vested stock options is presented below (shares and aggregate intrinsic value in thousands):

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years		Aggregate Intrinsic Value
Options exercisable at September 30, 2011		4,279	$	5.87		5.1	$	0

Estimated fair values of stock options granted have been determined using the Black-Scholes option pricing model with the following assumptions for the periods presented:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Expected term (in years)		NA		NA		NA		5.0
Risk-free interest rate		NA		NA		NA		2.22	%
Expected stock price volatility		NA		NA		NA		95	%
Expected dividend rate		NA		NA		NA		0	%

Certain options that were granted to officers of the Company during 2006 and 2007 vest 50% in equal monthly installments over four years from the date of grant and vest 50% on the seven year anniversary of the date of grant, subject to accelerated vesting of up to 25% of such portion of the options, based on the Company's achievement of annual performance goals established under its management incentive plan, at the discretion of the equity awards subcommittee of the compensation committee of the Company's board of directors. Based on the overall achievement of corporate goals in 2009, the equity awards subcommittee accelerated vesting with respect to 25% of the shares subject to the seven year vesting schedule in the first quarter of 2010. As of September 30, 2011, the cumulative accelerated vesting for options subject to the seven year vesting schedule equals 85% of the shares granted in 2006 and 65% of the shares granted in 2007.

The Company's share-based compensation expense also includes RSUs awarded to employees and non-employee consultants. All RSUs awarded are subject to acceleration or forfeiture based upon the terms of their specific agreement. The table below summarizes RSU awards outstanding as of September 30, 2011 (RSUs in thousands):

	Restricted Stock Units (RSUs)																														Weighted Average Grant Date Fair Value per RSU
Award Date	Unvested as of Decem- ber 31, 2010		Awarded		Vested			Forfeited			Unvested as of March 31, 2011		Awarded		Vested			Forfeited		Unvested as of June 30, 2011		Awarded		Vested			Forfeited		Unvested as of Septe- mber 30, 2011
03/14/2011		0		224		0			0			224		0		(112	)		0		112		0		0			0		112	$	0.38	(A)
02/15/2011		0		2,430		0			0			2,430		0		0			0		2,430		0		0			0		2,430		0.39	(B)
06/09/2010		836		0		(32	)		0			804		0		(355	)		0		449		0		0			0		449		0.83
04/09/2010		550		0		0			(2	)		548		0		(274	)		0		274		0		0			0		274		1.14
10/06/2009		75		0		0			0			75		0		0			0		75		0		0			0		75		7.27
07/11/2009		85		0		0			0			85		0		0			0		85		0		(85	)		0		0		6.60
Total RSUs		1,546		2,654		(32	)		(2	)		4,166		0		(741	)		0		3,425		0		(85	)		0		3,340

(A) On March 14, 2011, the Company awarded 224,000 RSUs to an officer of the Company. The fair value of the RSU award was $0.38 per unit, or approximately $85,000 in total, based upon the closing market price of the Company's common stock on the award date. These RSUs vested 50% on April 9, 2011 and the remaining 50% will vest on April 9, 2012.

(B) On February 15, 2011, the Company awarded an approximate aggregate of 1,973,000 RSUs to officers and an approximate aggregate of 457,000 RSUs to non-officer employees of the Company as an incentive for future performance. The fair value of the RSU award was $0.39 per unit, or approximately $948,000 in total, based upon the closing market price of the Company's common stock on the award date. These RSUs vest on February 15, 2012, the one year anniversary of the award date.

On June 22, 2011, the board of directors of the Company, upon recommendation from the Compensation Committee of the board of directors, approved a resolution to modify the terms of all awards outstanding under the 2004 Plan such that 100% of awards outstanding under the 2004 Plan would be accelerated upon consummation of the Allozyne merger or, if earlier, upon termination of employment by the Company without cause. Management reviewed the resolution in conjunction with the specific terms of all outstanding awards (options and RSUs) and determined that a modification occurred. The modification, however, did not result in a change in accounting for the outstanding awards as the modification did not result in an increase in fair value of the awards nor would the expense be accelerated for the change of control until consummation of the merger.

Additionally, on June 22, 2011, the board of directors, upon recommendation from the Compensation Committee of the board of directors, approved a resolution to award the Company's Chief Executive Officer ("CEO") an RSU grant under the 2004 Plan in lieu of certain cash compensation payable to him under his severance and change of control agreements in the event of a qualifying termination of employment prior to or in connection with the merger. The RSU award is to be calculated as the equivalent number of shares of Company common stock equal to (i) the amount of accrued but unpaid vacation as of the effective date of termination and the total bonus severance amount payable to the CEO under his change of control agreement, divided by (ii) $9.08 (the 5-day average closing sales price of Company common stock prior to announcement of the Merger Agreement after giving effect to the 1-for-40 reverse stock split to be implemented subject to approval by the Company shareholders and prior to the consummation of the merger), rounded up to the nearest whole number of shares and the RSUs would vest and be settled in shares of Company common stock upon consummation of the merger. However, there is no guarantee that the reverse stock split or merger will occur. If the merger is not consummated, the CEO will forfeit the RSU award and will receive his accrued but unpaid vacation in cash at that time but will not be eligible to receive any portion of the bonus severance amount.

No income tax benefit has been recorded for share-based compensation expense as the Company has a full valuation allowance and management has concluded that it is more likely than not that the Company's net deferred tax assets will not be realized. As of September 30, 2011, total unrecognized costs related to employee share-based compensation is approximately $1,985,000. Unrecognized share-based compensation expense from outstanding stock options is approximately $808,000 and is expected to be recognized over a weighted average period of approximately 1.9 years. Unrecognized share-based compensation expense from outstanding RSUs is approximately $1,177,000 and is expected to be recognized over a weighted average period of approximately six months subject to acceleration with the occurrence of certain qualifying events.