12.

Stock-Based Compensation

Equity Incentive Program

Prior to October 15, 2007, the Company granted options under a stock option plan adopted in 1994 and amended thereafter (the “1994 Plan”), that allowed for the grant of non-qualified stock options, incentive stock options and stock purchase rights to the Company’s employees, directors, and consultants. On October 15, 2007, the Company’s stockholders approved a new equity incentive plan, the 2007 Performance Incentive Plan (the “2007 Plan”), that provides for grants of options and other equity-based awards to the Company’s employees, directors and consultants. The Company’s authority to grant new awards under the 1994 Plan terminated upon stockholder approval of the 2007 Plan. Options granted under these plans 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 or a committee appointed by the Board (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 at the end of three months. 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 will be increased by the lesser of 2% of the total outstanding shares of Common Stock on December 31 of the preceding calendar year, or 3,000,000 shares.

Employee Stock Purchase Plans

The Company maintained an employee stock purchase plan, adopted in 1994 and amended thereafter (the “Purchase Plan”), until August 2009. In August 2009, the Purchase Plan was suspended. No new offering period will commence and no additional shares will be added to the Purchase Plan under its evergreen provision unless and until approved by the Company’s Board of Directors. The Purchase Plan operated in 24-month “offering periods” that are each divided into four six-month “purchase periods.” The Purchase Plan allowed eligible employees to purchase Common Stock at 85% of the lower of the fair market value of the Common Stock on the first day of the applicable offering period or the fair market value of the Common Stock on the last day of the applicable purchase period. Purchases were limited to 10% of each employee’s eligible compensation, subject to certain Internal Revenue Service restrictions. All of the Company’s employees were eligible to participate in the Purchase Plan after certain service periods were met. The number of shares available for issuance under the Purchase Plan was automatically increased on the first trading day in January each calendar year, by an amount equal to 0.5% of the total number of shares of Common Stock outstanding on the last trading day in December in the immediately preceding calendar year, but in no event will any such annual increase exceed 125,000 shares. No shares have been issued under the Purchase Plan since 2009. As of December 31, 2013, there was no remaining unrecorded deferred stock-based compensation expense related to the Purchase Plan. As of December 31, 2013, 515,183 shares were reserved for issuance under the Purchase Plan.

Stock-based Compensation

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. All of the Company’s stock compensation is accounted for as an equity instrument.

The effect of recording stock-based compensation for the years ended December 31, 2013, 2012 and 2011 was as follows (in thousands):


	Year Ended December 31,
	2013		2012		2011
Stock-based compensation expense by type of award:
Employee stock options	$	926	$	891	$	502
Scientific Advisory Board stock options		8		56		20

Total stock-based compensation	$	934	$	947	$	522

Stock-based compensation included in expense line items in the Consolidated Statements of Operations for the year ended December 31, 2013, 2012 and 2011 was as follows (in thousands):


	Year Ended December 31,
	2013		2012		2011
Research and development	$	331	$	271	$	141
General and administrative		603		676		381

	$	934	$	947	$	522

During the years ended December 31, 2013 and 2012, respectively, the Company granted options to purchase 4,124,374 and 4,047,500 shares of common stock with an estimated total grant date fair value of $0.9 million and $1.2 million. 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 years ended December 31, 2013 and 2012, the Company estimated that the stock-based compensation for the awards not expected to vest was $0.3 million and $0.2 million, respectively.

As of December 31, 2013 and 2012, the unrecorded deferred stock-based compensation balances related to stock options were $1.2 million and $1.3 million, respectively, and will be recognized over an estimated weighted-average amortization period of 2.2 years.

Fair Value Assumptions

The fair value of each option grant is estimated using the Black-Scholes valuation model on the date of grant and the graded-vesting method with the following weighted-average assumptions:


	Year ended
	December 31,
Stock Options	2013			2012			2011
Risk-free interest rate		0.9	%		0.7	%		0.9	%
Expected term (years)		5			5			5
Expected dividends		0.0	%		0.0	%		0.0	%
Volatility		89.9	%		90.9	%		89.7	%

The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based on the combination of historical volatility of the Company’s common stock and the common stock of the Company’s competitors, 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 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 competitors, observed historical option exercise behavior and post-vesting forfeitures of options by the Company’s employees.

The following is a summary of activity under the Company’s stock option plans 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, 2010		8,935,463		$	0.40		8.79	$	211

Granted		2,955,000			0.44
Exercised		(150,000	)		0.38
Forfeited		(455,000	)		0.33
Expired		(281,500	)		0.70

Outstanding at December 31, 2011		11,003,963			0.41		8.11		861

Granted		4,047,500			0.42
Exercised		—			0.00
Forfeited		(784,223	)		0.37
Expired		(901,718	)		0.38

Outstanding at December 31, 2012		13,365,522			0.42		7.69		156

Granted		4,124,374			0.31
Exercised		—			0.00
Forfeited		(323,479	)		0.33
Expired		(68,433	)		0.62

Outstanding at December 31, 2013		17,097,984		$	0.39		7.22	$	195

Options vested and expected to vest at December 31, 2013		16,614,008		$	0.39		7.17	$	189
Options exercisable at December 31, 2013		11,094,139		$	0.41		6.49	$	140

At December 31, 2013, the Company had 4,521,354 shares of common stock available for grant under its 2007 Plan. The weighted average grant date fair value of options granted during the years ended December 31, 2013, 2012 and 2011 was $0.21, $0.29 and $0.31, respectively. The total intrinsic value of options exercised during the year ended December 31, 2011 was $24,000. No options were exercised during the year ended December 31, 2013 and 2012.

At December 31, 2012 and 2011, options to purchase 7,752,944 and 4,718,014 shares of common stock were exercisable at weighted-average exercise prices of $0.42 and $0.43, per share, respectively.