Stock-Based Compensation

6 Months Ended

Jun. 30, 2012

Stock-Based Compensation [Abstract]

Stock-Based Compensation

Note 2. Stock-Based Compensation

Equity Incentive Program

In 2007, the Company’s stockholders approved the Company’s 2007 Performance Incentive Plan (the “2007 Plan”), which provides for grants of options and other equity-based awards to the Company’s employees, directors and consultants. Options granted under this plan, and its predecessor plan, expire 10 years after the date of grant and become exercisable at such times and under such conditions as determined by the Company’s Board of Directors (generally, with 25% vesting after one year and the balance vesting on a daily basis over the next three years of service). Upon termination of the optionee’s service, unvested options terminate and vested options generally expire three months thereafter, if not exercised. Only nonqualified stock options have been granted under these plans to date. On January 1 of each calendar year during the term of the 2007 Plan, the shares of common stock available for issuance under the 2007 Plan will be increased by the lesser of (i) 2% of the total outstanding shares of common stock on December 31 of the preceding calendar year and (ii) 3,000,000 shares.

Stock-based Compensation

The Company’s stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period.

The effect of recording stock-based compensation for the three and six months ended June 30, 2012 and 2011 was as follows (in thousands):

	Three months ended June  30,				Six months ended June  30,
	2012		2011		2012		2011
Stock-based compensation expense by type of award:
Employee stock options	$	206	$	132	$	401	$	266
Non-employee stock options		17		—		34		—
Total stock-based compensation expense	$	223	$	132	$	435	$	266

Stock-based compensation included in expense line items in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011 was as follows (in thousands):

	Three months ended June  30,				Six months ended June  30,
	2012		2011		2012		2011
Research and development	$	67	$	24	$	129	$	56
General and administrative		156		108		306		210
	$	223	$	132	$	435	$	266

During the six months ended June 30, 2012 and 2011, the Company granted options to purchase 2,197,500 and 1,662,500 shares of common stock, respectively, with an estimated total grant date fair value of $738,000 and $483,000, respectively. Based on the Company’s historical experience of option pre-vesting cancellations and estimates of future forfeiture rates, the Company has assumed an annualized forfeiture rate of 10% for its options for all periods disclosed. Accordingly, for the quarters ended June 30, 2012 and 2011, the Company estimated that the stock-based compensation for the awards not expected to vest was $300,000 and $281,000, respectively.

As of June 30, 2012, unrecorded deferred stock-based compensation balance related to stock options was $1.6 million and will be recognized over an estimated weighted-average amortization period of 2.4 years.

Valuation assumptions

The Company estimates the fair value of stock options using a Black-Scholes valuation model using the graded-vesting method with the following weighted-average assumptions:

	Three months ended June  30,						Six months ended June  30,
Stock Options	2012			2011			2012			2011
Risk-free interest rate		0.9	%		1.6	%		0.8	%		2.0	%
Expected term (years)		5			5			5			5
Expected dividends		0.0	%		0.0	%		0.0	%		0.0	%
Volatility		91.2	%		90.5	%		90.7	%		89.2	%

The expected dividend yield is set at zero because the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based on the historical volatility of the Company’s common stock and the expected moderation in future volatility over the period commensurate with the expected life of the options and other factors. The risk-free interest rates are taken from the Daily Federal Yield Curve Rates as of the grant dates as published by the Federal Reserve and represent the yields on actively traded U.S. Treasury securities for terms equal to the expected term of the options. The expected term calculation is based on the terms utilized by the Company’s peers, observed historical option exercise behavior and post-vesting forfeitures of options by the Company’s employees.

The following is a summary of activity for the indicated periods:

	Number of shares			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2011		11,003,963		$	0.41
Granted		2,197,500			0.48
Exercised		—			0.00
Forfeited		(37,500	)		0.40
Expired		(180,000	)		0.40
Outstanding at June 30, 2012		12,983,963		$	0.42		8.06	$	228
Options vested and expected to vest at June 30, 2012		12,321,673		$	0.42		8.00	$	227
Options exercisable at June 30, 2012		5,846,575		$	0.42		7.08	$	190

At June 30, 2012, the Company had 5,996,355 shares of common stock available for grant or issuance under its 2007 Plan. The weighted average grant date fair value of options granted during the six months ended June 30, 2012 and 2011 was $0.34 and $0.28 per share, respectively. No options were exercised during the six months ended June 30, 2012 and 2011.

The following table details the Company’s nonvested option activity for the period ended June 30, 2012:

	Number of shares			Weighted-Average Grant-Date Fair Value
Outstanding at December 31, 2011		6,285,949		$	0.27
Granted		2,197,500			0.34
Vested		(1,308,561	)		0.24
Forfeited		(37,500	)		0.28
Outstanding at June 30, 2012		7,137,388		$	0.27