10. STOCKHOLDER’S EQUITY (DEFICIT) AND STOCK-BASED COMPENSATION

Sale of Common and Preferred Stock

In May 2013, the Company issued 8,901,675 shares of common stock at $2.30 per share and 41,418 shares of Series 1 convertible preferred stock at $230 per share in a registered direct offering. Each share of Series 1 convertible preferred stock is convertible into 100 shares of common stock provided, however, that the holder is prohibited from converting Series 1 convertible preferred stock into shares of common stock if, as a result of such conversion, the holder, together with affiliates, would own more than 9.99% of the total shares of common stock then issued and outstanding. The Company may not pay any dividends on shares of common stock (other than dividends in the form of common stock) unless the holders of Series 1 convertible preferred stock shall first receive dividends on shares of Series 1 convertible preferred stock held by them (on an as-if-converted-to-common-stock basis) in an amount equal to and in the same form as any such dividends (other than dividends in the form of common stock) to be paid on shares of the common stock. Net proceeds from the offering were approximately $29.1 million, net of offering expenses.

Equity Incentive Plan

The Company's 1995 Equity Incentive Plan (the Equity Plan), as amended, is an equity plan under which equity awards, including awards of restricted stock, restricted stock units and incentive and nonqualified stock options to purchase shares of common stock may be granted to employees, consultants and directors of the Company by action of the Compensation Committee of the Board of Directors. Options are generally granted at the current fair market value on the date of grant, generally vest ratably over a 48-month period, and expire within ten years from date of grant. Restricted stock units are generally granted at the current fair market value on the date of grant, generally vest over a four-year period in equal installments on each anniversary of the grant date. The Equity Plan is intended to attract and retain employees and to provide an incentive for employees, consultants and directors to assist the Company to achieve long-range performance goals and to enable them to participate in the long-term growth of the Company. At September 30, 2013, a total of 4,119,641 shares were available for future grants under the Equity Plan.

Employee Stock Purchase Plan

The Company's Purchase Plan allows employees to purchase shares of the Company's common stock at a discount from fair market value. Under this Plan, eligible employees may purchase shares during six-month offering periods commencing on June 1 and December 1 of each year at a price per share of 85% of the lower of the fair market value price per share on the first or last day of each six-month offering period. Participating employees may elect to have up to 10% of their base pay withheld and applied toward the purchase of such shares, subject to the limitation of 875 shares per participant per quarter. The rights of participating employees under the Purchase Plan terminate upon voluntary withdrawal from the Purchase Plan at any time or upon termination of employment. The compensation expense in connection with the Plan was approximately $114,000 and $165,000 for the three and nine months ended September 30, 2013, respectively, and $15,000 and $32,000, respectively, for the three and nine months ended September 30, 2012. There were 45,001 and 48,748 shares purchased under the Plan during the nine months ended September 30, 2013 and 2012, respectively. At September 30, 2013, a total of 317,938 shares were reserved and available for issuance under this Plan.

Stock-Based Compensation Expense

The Company measures compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options was determined using the Black-Scholes valuation model. Such value is recognized as expense over the service period, net of estimated forfeitures and adjusted for actual forfeitures. The estimation of stock options that will ultimately vest requires significant judgment. The Company considers many factors when estimating expected forfeitures, including historical experience. Actual results and future changes in estimates may differ substantially from the Company's current estimates.

The following table reflects stock compensation expense recorded, net of amounts capitalized into inventory (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Compensation expense related to:
Equity Incentive Plan	$	1,410	$	733	$	4,188	$	2,744
Employee Stock Purchase Plan		114		15		165		32
	$	1,524	$	748	$	4,353	$	2,776

Stock-based compensation expense charged to:
Research and development	$	798	$	198	$	1,306	$	576

Selling, general and administrative	$	726	$	550	$	3,047	$	2,145

Restructuring charges	$	—	$	—	$	—	$	55

Stock-based compensation expense of $1,000 and $8,000 was capitalized into inventory for the three and nine months ended September 30, 2013, respectively, and $9,000 and $15,000 for the three and nine months ended September 30, 2012, respectively. Capitalized stock-based compensation is recorded in cost of product sales when the related product is sold.

Stock-based compensation expense for the three and nine months ending September 30, 2013 included $385,000 and $1.6 million, respectively, primarily related to the modification of certain stock options held by a former executive who ceased employment in March 2013. Stock-based compensation expense for the three and nine months ending September 30, 2012 included $46,000 and $428,000, respectively, related to the modification of certain stock options.