12. Stock-Based Compensation

Equity Incentive Program

In 2007, the Company’s stockholders approved the Company’s 2007 Performance Incentive Plan (the “2007 Plan”), which provides for grants of options and other equity-based awards to the Company’s employees, directors and consultants. Options granted under this plan, and its predecessor plan, 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 (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 three months thereafter, if not exercised. Only nonqualified stock options have been granted under this plan to date. On January 1 of each calendar year during the term of the 2007 Plan, the shares of common stock available for issuance under the 2007 Plan will be increased by the lesser of (i) 2% of the total outstanding shares of common stock on December 31 of the preceding calendar year and (ii) 3,000,000 shares. The Board of Directors of the Company delayed the effectiveness of the January 1, 2015 increase in the number of shares available for issuance under the 2007 Plan until such time as (i) the Board determines otherwise, or (ii) the Company’s stockholders approve an increase in the authorized shares of common stock under the Company’s Certificate of Incorporation (as amended).

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, 2014, there was no remaining unrecorded deferred stock-based compensation expense related to the Purchase Plan. As of December 31, 2014, 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, 2014, 2013 and 2012 was as follows (in thousands):


	Year Ended December 31,
	2014		2013		2012
Stock-based compensation expense by type of award:
Employee stock options	$	890	$	926	$	891
Non-employee stock options Scientific Advisory Board stock options		1		8		56

Total stock-based compensation	$	891	$	934	$	947

Stock-based compensation included in expense line items in the Consolidated Statements of Operations for the year ended December 31, 2014, 2013 and 2012 was as follows (in thousands):


	Year Ended December 31,
	2014		2013		2012
Research and development	$	351	$	331	$	271
General and administrative		540		603		676

	$	891	$	934	$	947

During the years ended December 31, 2014 and 2013, respectively, the Company granted options to purchase 3,939,500 and 4,124,374 shares of common stock with an estimated total grant date fair value of $0.7 million and $0.9 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, 2014 and 2013, the Company estimated that the stock-based compensation for the awards not expected to vest was $0.2 million and $0.3 million, respectively.

As of December 31, 2014 and 2013, the unrecorded deferred stock-based compensation balances related to stock options were $1.0 million and $1.2 million, respectively, and will be recognized over an estimated weighted-average amortization period of 2.4 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	2014			2013			2012
Risk-free interest rate		1.7	%		0.9	%		0.7	%
Expected term (years)		5			5			5
Expected dividends		0.0	%		0.0	%		0.0	%
Volatility		88.1	%		89.9	%		90.9	%

The expected dividend yield was set at zero because the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility was based on the historical volatility of the Company’s common stock and 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 were 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 U.S. Treasury securities for terms equal to the expected term of the options. The expected term calculation was based on the terms utilized by the Company’s peers, observed historical option exercise behavior and 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, 2011		11,003,963		$0.41

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

Granted		3,939,500		0.27
Exercised		—		0.00
Forfeited		(108,190	)	0.33
Expired		(184,653	)	0.61

Outstanding at December 31, 2014		20,744,641		$0.37		6.82	$	—

Options vested and expected to vest at December 31, 2014		20,211,174		$0.37		6.76	$	—
Options exercisable at December 31, 2014		14,750,731		$0.39		6.04	$	—

At December 31, 2014, the Company had 3,513,717 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, 2014, 2013 and 2012 was $0.19, $0.21 and $0.29, respectively. No options were exercised during the year ended December 31, 2014, 2013 and 2012.

At December 31, 2013 and 2012, options to purchase 11,094,139 and 7,752,944 shares of common stock were exercisable at weighted-average exercise prices of $0.41 and $0.42, per share, respectively.