Stock-Based Compensation

Options to Purchase Shares of Common Stock — The company follows the provisions ASC 718, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, non-employee directors, including employee stock options. Stock compensation expense based on the grant date fair value estimated in accordance with the provisions of ASC 718 is recognized as an expense over the requisite service period.

For stock options and warrants granted in consideration for services rendered by non-employees, the company recognizes compensation expense in accordance with the requirements of ASC Topic 505-50. Non-employee option and warrant grants that do not vest immediately upon grant are recorded as an expense over the vesting period. At the end of each financial reporting period prior to vesting, the value of these options and warrants, as calculated using the Black-Scholes option-pricing model, is re-measured using the fair value of the company’s common stock and the non-cash compensation recognized during the period is adjusted accordingly. Since the fair market value of options and warrants granted to non-employees is subject to change in the future, the amount of the future compensation expense will include fair value re-measurements until the stock options and warrants are fully vested.

The following table summarizes the components of stock-based compensation expense in the condensed consolidated statements of comprehensive loss for the three and six months ended June 30, 2015 and 2014, respectively (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Research and development	$	93	$	187	$	170	$	347
Selling, general, and administrative	550		1,265		1,102		2,789
Total stock-based compensation	$	643	$	1,452	$	1,272	$	3,136

The company uses the Black-Scholes option-pricing model and the following weighted-average assumptions to determine the fair value of all its stock options granted:



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Risk free interest rate	1.69	%	—	%	1.50	%	2.06	%
Volatility	73.32	%	—	%	74.20	%	78.53	%
Expected lives (years)	5.76		0		6.09		6.25
Expected dividend yield	0.00	%	0.00	%	0.00	%	0.00	%

The weighted-average fair value of options granted during the three and six months ended June 30, 2015 were $1.09 per share and $1.14 per share, respectively.

The company’s expected common stock price volatility assumption is based upon the company's own implied volatility in combination with the implied volatility of a basket of comparable companies. The expected life assumptions for employee grants were based upon the simplified method provided for under ASC 718-10, which averages the contractual term of the company’s options of ten years with the average vesting term of four years for an average of six years. The expected life assumptions for non-employees were based upon the contractual term of the option. The dividend yield assumption is zero, because the company has never paid cash dividends and presently has no intention to do so. The risk-free interest rate used for each grant was also based upon prevailing short-term interest rates. The company has estimated an annualized forfeiture rate of 15% for options granted to its employees, 8% for options granted to senior management and zero for non-employee directors. The company will record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior expense if the actual forfeiture rates are higher than estimated.

As of June 30, 2015, there was $5,582,000 of unrecognized compensation cost related to outstanding options that is expected to be recognized as a component of the company’s operating expenses over a weighted-average period of 2.54 years.

As of June 30, 2015, an aggregate of 26,500,000 shares of common stock were reserved for issuance under the company’s 2007 Incentive Plan, including 11,411,000 shares subject to outstanding common stock options granted under the plan and 10,066,000 shares available for future grants. The administrator of the plan determines the times when an option may become exercisable. Vesting periods of options granted to date have not exceeded four years. The options will expire, unless previously exercised, no later than ten years from the grant date.

The following table summarizes option activity of the company:



	Total Number of Shares (In Thousands)		Weighted Average Exercise Price		Aggregate Intrinsic Value (In Thousands)
Outstanding at January 1, 2015	8,590		$	3.25	$	820
Granted	3,682		1.73		89
Exercised	(1	)	0.85		1
Cancelled	(860	)	2.48		16
Outstanding at June 30, 2015	11,411		$	2.82	$	892
Options exercisable at June 30, 2015	6,169		$	3.41	$	749

The aggregate intrinsic values of outstanding and exercisable options at June 30, 2015 were calculated based on the closing price of the company’s common stock as reported on The NASDAQ Capital Market on June 30, 2015 of $1.70 per share. The aggregate intrinsic value equals the positive difference between the closing fair market value of the company’s common stock and the exercise price of the underlying options.