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 at December 31, 2011 and 2010. 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, 2012 and 2011 there were zero 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, 2012 and 2011, 701,976 and 1,103,579 shares of common stock were available for future issuance under the Restated 2010 Plan, respectively.

The 2006 Plan and Restated 2010 Plan are intended to encourage ownership of stock by employees, consultants and non-employee directors of the Company and 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 issuance of new shares.

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, 2012 and 2011, a total of 463,973 and 577,852 shares of common stock are 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 first offering period under the Purchase Plan was from June 1, 2011 through May 31, 2012 with two purchase periods of six months each. A total of 138,826, 225,053 and 172,148 shares were purchased under the Purchase Plan in November 2012, May 2012 and November 2011, respectively.

Information with respect to the number and weighted average exercise price of stock options under the 2006 Plan and 2010 Plan is summarized as follows (number of shares in thousands):



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2011	3,517		$	4.01
Granted	6,698		$	1.94
Exercised	(18	)	$	1.86
Canceled/Forfeited	(296	)	$	3.24
Outstanding at December 31, 2012	9,901		$	2.64	8.8	$	39
Exercisable at December 31, 2012 (1)	3,081		$	3.13	8	$	39
Vested at December 31, 2012	9,423		$	2.66	8.75	$	39


(1)	Includes awards with early exercise provisions that permit optionee to exercise unvested options.

The intrinsic values above represent the aggregate value of the total pre-tax intrinsic value based upon a common stock price of $1.33 at December 31, 2012, and the contractual exercise prices.



	Years Ended December 31,
	2012		2011		2010
Stock Options and Restricted Stock Units
Weighted-average grant date fair value	$	1.35	$	2.88	$	11.52
Aggregate intrinsic value of options exercised	$	9,000	$	226,000	$	61,000
Total fair value of shares vested	$	3,564,000	$	2,340,000	$	660,000

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,
	2012	2011	2010
Stock Options and Restricted Stock Units
Risk free interest rate	0.2% to 1.2%	1.2% to 2.6%	1.7% to 2.3%
Expected term	5.0 to 6.1 years	5.1 to 6.1 years	5.0 to 6.1 years
Expected volatility	80.1% to 86.8%	72.3% to 89.7%	90.8% to 96.0%
Expected dividend yield	—%	—%	—%
Employee Stock Purchase Plan
Risk free interest rate	0.1%	0.1%	N/A
Expected term	0.5 to 1.0 years	0.5 to 1.0 years	N/A
Expected volatility	81.5% to 85.7%	75.2% to 77.1%	N/A
Expected dividend yield	—%	—%	N/A

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, 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,
	2012		2011		2010
Cost of sales	$	181	$	137	$	105
Research and development	921		768		393
Selling, general and administrative	5,055		3,904		2,009
Total	$	6,157	$	4,809	$	2,507

As of December 31, 2012, there was approximately $12,047,000 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 2.9 years.

At December 31, 2012, there were 157,000 unvested stock options outstanding to consultants, with approximately $138,000 of related unrecognized compensation expense based on a December 31, 2012 measurement date. These stock options outstanding to consultants are expected to vest over approximately 3.3 years. In accordance with accounting guidance for stock-based compensation, the Company re-measures 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. Expense recognized for stock options to consultants was immaterial for the years ended December 31, 2012, 2011 and 2010, respectively. Stock option expense for awards issued to consultants is included in the consolidated statement of operations and comprehensive loss within selling, general and administrative expense in the year ended December 31, 2012 and within research and development expense in the years ended December 31, 2011 and 2010.