Stock-Based Compensation

Stock Option Plans

During 2006, the Company adopted the 2006 Equity Incentive Award Plan (as amended, the 2006 Plan) under which 1,134,000 shares of common stock were reserved for issuance to employees, directors and consultants of the Company. The 2006 Plan provides for the grant of incentive stock options, non-qualified stock options and rights to purchase restricted stock to eligible recipients. Recipients of stock options are eligible to purchase shares of the Company’s common stock at an exercise price equal to no less than the estimated fair market value of such stock on the date of grant. The maximum term of options granted under the 2006 Plan is ten years.

Options granted pursuant to the 2006 Plan generally vest over four years at a rate of 25% upon the first anniversary of the vesting commencement date and 1/48th per month thereafter. The 2006 Plan allows the option holders to exercise their options early and acquire option shares, which are then subject to repurchase by the Company at the original exercise price of such options. At December 31, 2014 and 2013 there were no unvested shares of common stock issued to employees of the Company in connection with the early exercise of stock option grants.

During 2010, the Company adopted the 2010 Equity Incentive Award Plan (the 2010 Plan), which became effective immediately prior to the completion of the IPO. An initial 2,243,668 shares were reserved for issuance to employees, directors and consultants of the Company under the 2010 plan. The number of shares initially reserved were subsequently increased by the number of shares of common stock related to awards granted under the 2006 Plan that are repurchased, forfeited, expired or are cancelled on or after the effective date of the 2010 Plan, as well as an annual increase pursuant to an evergreen provision. The 2010 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock units and rights to purchase restricted stock to eligible recipients. Recipients of stock options are eligible to purchase shares of the Company’s common stock at an exercise price equal to no less than the estimated fair market value of such stock on the date of grant. The maximum term of options granted under the 2010 Plan is ten years.

Options granted pursuant to the 2010 Plan generally vest over four years and vest at a rate of 25% upon the first anniversary of the vesting commencement date and 1/48th per month thereafter. Restricted stock units granted pursuant to the 2010 Plan vest on the first anniversary of the vesting commencement date.

In June 2012, the Company amended and restated the 2010 Plan (the Restated 2010 Plan). Pursuant to the Restated 2010 Plan, the number of shares that are reserved for issuance under the 2010 Plan was increased to 9,300,000, plus any shares related to outstanding options granted under the 2006 Plan that are repurchased, forfeited, expire or are canceled on or after the effective date of the Restated 2010 Plan. Further, the 2010 Plan's evergreen provision was amended such that, commencing on January 1, 2013, and on each January 1 thereafter during the term of the Restated 2010 Plan, the aggregate number of shares available for issuance under the Restated 2010 Plan shall be increased by that number of shares of the Company's common stock equal to the lower of:


•	4% of the Company’s outstanding common stock on the applicable January 1; or


•	an amount determined by the board of directors.

At December 31, 2014 and 2013, 2,953,953 and 456,854 shares of common stock were available for future issuance under the Restated 2010 Plan, respectively.

On December 4, 2013, the Company adopted the Employment Inducement Equity Incentive Award Plan (the Inducement Plan). The terms of the Inducement Plan are substantially similar to the terms of the Company’s 2010 Equity Incentive Award Plan with two principal exceptions: (1) incentive stock options may not be granted under the Inducement Plan; and (2) the annual compensation paid by the Company to specified executives will be deductible only to the extent that it does not exceed $1,000,000, as the conditions of Section 162(m) of the Internal Revenue Code will not be met. The Inducement Plan was adopted by the board of directors without stockholder approval pursuant to Rule 5635(c)(4) of the NASDAQ Listing Rules.

The Company has initially reserved 2,700,000 shares of the Company’s common stock for issuance pursuant to awards granted under the Inducement Plan. In accordance with Rule 5635(c)(4) of the NASDAQ Listing Rules, awards under the Inducement Plan may only be made to an employee who has not previously been an employee or member of the board of directors of the Company or any parent or subsidiary, or following a bona fide period of non-employment by the Company or a parent or subsidiary, if he or she is granted such award in connection with his or her commencement of employment with the Company or a subsidiary and such grant is an inducement material to his or her entering into employment with the Company or such subsidiary. At December 31, 2014 and 2013 there were 708,500 and 1,728,000 shares of common stock available for future issuance under the Inducement Plan, respectively.

The 2006 Plan, Restated 2010 Plan and Inducement Plan are intended to encourage ownership of stock by employees, consultants and non-employee directors of the Company, as applicable, and with respect to the 2006 Plan and Restated 2010 Plan, to provide additional incentives for them to promote the success of the Company’s business. The board of directors is responsible for determining the individuals to receive equity grants, the number of shares subject to each grant, the exercise price per share and the exercise period of each option. The Company satisfies option exercises through the issuance of new shares.

Information with respect to the number and weighted average exercise price of stock options under the 2006 Plan, 2010 Restated Plan and Inducement Plan is summarized as follows:



	Shares (in thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2013	13,529		$	2.46
Granted	5,291		$	3.23
Exercised	(150	)	$	2.29
Canceled/Forfeited	(1,757	)	$	2.97
Outstanding at December 31, 2014	16,913		$	2.65	7.7	$	48
Exercisable at December 31, 2014	8,829		$	2.63	7.0	$	31
Vested and unvested expected to vest at December 31, 2014	16,667		$	2.65	7.7	$	48

At December 31, 2014 there were no restricted stock units outstanding. There were no grants of restricted stock units, 1,321,000 restricted stock units vested and released and 10,000 restricted stock units forfeited for the year ended December 31, 2014. At December 31, 2013, 1,331,000 restricted stock units were outstanding with a weighted average remaining contractual term of 0.4 years and an aggregate intrinsic value of $4,577,000. All restricted stock units outstanding were granted during the year ended December 31, 2013. No restricted stock units were exercisable at December 31, 2013, but 1,301,000 unvested restricted stock units were expected to vest at December 31, 2013.

The intrinsic values for stock options and restricted stock units above represent the aggregate value of the total pre-tax intrinsic value based upon a common stock price of $1.37 at December 31, 2014, and the contractual exercise prices.



	Years Ended December 31,
	2014		2013		2012
Stock Options and Restricted Stock Units
Weighted-average grant date fair value	$	2.33	$	1.58	$	1.35
Aggregate intrinsic value of options exercised	$	297,000	$	370,000	$	9,000
Total fair value of shares vested	$	8,231,000	$	4,895,000	$	3,564,000

Employee Stock Purchase Plan

During 2010, the Company adopted the 2010 Employee Stock Purchase Plan (the Purchase Plan), which allows employees to purchase shares of the Company’s common stock during a specified offering period. The purchase price is 85% of the lower of the closing price of the stock on the first day of the offering period or the closing price of the stock on the date of purchase. Eligible employees may elect to withhold up to 20% of their compensation during any offering period for the purchase of stock up to a maximum of 20,000 shares per purchase period. At December 31, 2014 and 2013, a total of 1,163,553 and 409,646 shares of common stock were reserved for issuance under the Purchase Plan, respectively. The length of the offering period is determined by the compensation committee and may be up to 27 months long. The offering periods under the Purchase Plan generally have been from June through May of the subsequent year with two purchase periods of six months each. A total of 503,897, 304,327, and 363,879 shares were purchased under the Purchase Plan during the years ended December 31, 2014, 2013 and 2012, respectively.

Stock-Based Compensation

The Company uses the Black-Scholes option-pricing model for determining the estimated fair value and stock-based compensation for stock-based awards to employees and the board of directors. The assumptions used in the Black-Scholes option-pricing model are as follows:



	Year Ended December 31,
	2014	2013	2012
Stock Options
Risk free interest rate	1.6% to 2.0%	0.8% to 1.8%	0.2% to 1.2%
Expected term	5.1 to 6.1 years	5.0 to 6.1 years	5.0 to 6.1 years
Expected volatility	79.7 to 84.9%	82.8 to 87.9%	80.1% to 86.8%
Expected dividend yield	—%	—%	—%
Employee Stock Purchase Plan
Risk free interest rate	0.1%	0.1%	0.1%
Expected term	0.5 to 1.0 years	0.5 to 1.0 years	0.5 to 1.0 years
Expected volatility	65.0% to 83.2%	74.3% to 125.6%	81.5% to 85.7%
Expected dividend yield	—%	—%	—%

The risk-free interest rate assumption was based on the rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. The weighted average expected term of options was calculated using the simplified method as prescribed by accounting guidance for stock-based compensation. This decision was based on the lack of relevant historical data due to the Company’s limited historical experience. In addition, due to the Company’s limited historical data, when necessary, the estimated volatility was calculated based upon the Company's historical volatility, supplemented with historical volatility of comparable companies whose share prices are publicly available for a sufficient period of time.

The Company recognized stock-based compensation expense as follows (in thousands):



	Year Ended December 31,
	2014		2013		2012
Cost of sales	$	467	$	333	$	181
Research and development	1,236		1,138		921
Selling, general and administrative	7,789		6,535		5,055
Total	$	9,492	$	8,006	$	6,157

As of December 31, 2014, there was approximately $13,194,000 of total unrecognized compensation costs related to outstanding employee and board of director options, which is expected to be recognized over a weighted average period of 2.4 years.

At December 31, 2014, there were 153,000 unvested stock options and no restricted stock units outstanding to consultants, with approximately $173,000 of related unrecognized compensation expense based on a December 31, 2014 measurement date. These unvested stock options outstanding to consultants are expected to vest over approximately 3.5 years. In accordance with accounting guidance for stock-based compensation, the Company remeasures the fair value of stock option grants to non-employees at each reporting date and recognizes the related income or expense during their vesting period. (Income) expense recognized for stock options and restricted stock units to consultants was $(169,000) and $323,000 for the years ended December 31, 2014 and 2013, respectively, and was immaterial for the year ended December 31, 2012. Stock option expense for awards issued to consultants is included in the consolidated statement of operations and comprehensive income (loss) within selling, general and administrative expense.