Stock-Based Compensation

9 Months Ended

Sep. 30, 2012

Stock-Based Compensation

Stock-Based Compensation

Note 7. Stock-Based Compensation

The Company recorded $0.9 million of stock-based compensation expense for both the three months ended September 30, 2012 and 2011. The Company recorded $3.0 million and $2.5 million of stock-based compensation expense for the nine months ended September 30, 2012 and 2011, respectively. The expense relating to stock-based awards is recognized on a straight-line basis over the requisite service period, usually the vesting period, based on the grant-date fair value. The unamortized compensation cost, net of expected forfeitures, as of September 30, 2012 was $5.7 million and is expected to be recognized as expense over a weighted average period of approximately 2.74 years.

The Company presents the tax benefits resulting from tax deductions in excess of the compensation cost recognized from the exercise of stock options as financing cash flows in the condensed consolidated statements of cash flows. For the three and nine months ended September 30, 2012 and 2011, there were no such tax benefits associated with the exercise of stock options due to the Company’s loss position.

Common Stock Options and Restricted Stock

A summary of the option and restricted stock unit activity under the Company’s Amended and Restated 2000 Stock Option and Equity Incentive Plan and 2010 Equity Incentive Plan (2010 Plan), referred to collectively as the “Plans,” is presented below (in thousands, except exercise price):

			Options Outstanding
	Available for Grant		Number of Shares		Weighted Average Exercise Prices
Balance at December 31, 2011	1,977		6,528		$	4.48
Additional shares authorized under the 2010 Plan	500		—		—
Options granted	(4	)	4		$	3.93
Options cancelled	111		(111	)	$	4.23
Options exercised	—		(34	)	$	2.85
Options expired	(55	)	—		—
Balance at March 31, 2012	2,529		6,387		$	4.50
Options granted	(430	)	430		$	3.23
Options cancelled	361		(361	)	$	6.70
Options exercised	—		(20	)	$	1.98
Options expired	(235	)	—		—
Balance at June 30, 2012	2,225		6,436		$	4.30
Options granted	(1,338	)	1,338		$	3.23
Options cancelled	356		(356	)	$	5.77
Options exercised	—		(78	)	$	2.29
Options expired	(209	)	—		—
Balance at September 30, 2012	1,034		7,340		$	4.04

The Company also has awarded options to new employees outside of the Plans and may continue to do so outside of the 2010 Plan, as material inducements to the acceptance of employment with the Company, as permitted under the Listing Rules of the Nasdaq Stock Market. These grants must be approved by the compensation committee of the board of directors, a majority of the independent directors or, below a specified share level, by an authorized executive officer.

A summary of the inducement grant option activity is presented below (in thousands, except exercise price):

	Options Outstanding
	Number of Shares		Weighted Average Exercise Prices
Balance at December 31, 2011	4,815		$	3.29
Granted	350		$	3.92
Cancelled	(103	)	$	1.54
Exercised	(111	)	$	1.54
Balance at March 31, 2012	4,951		$	3.41
Cancelled	(199	)	$	1.55
Exercised	(438	)	$	1.55
Balance at June 30, 2012	4,314		$	3.69
Cancelled	(248	)	$	1.55
Exercised	(597	)	$	1.55
Balance at September 30, 2012	3,469		4.21

The following table summarizes significant ranges of outstanding and exercisable options, excluding restricted stock awards and restricted stock unit activity, as of September 30, 2012 (in thousands, except contractual life and exercise price):

	Options Outstanding						Options Exercisable
Range of Exercise Price	Number Outstanding	Weighted Average Remaining Contractual Life (in Years)	Weighted Average Exercise Price		Aggregate Intrinsic value		Number Exercisable	Weighted Average Remaining Contractual Life (in Years)	Weighted Average Exercise Price		Aggregate Intrinsic value
$1.50 - $3.09	2,995	3.79	$	2.30	$	5,224	1,408	2.72	$	1.85	$	3,087
$3.10 - $3.92	3,048	4.73	$	3.62	1,291		1,042	3.96	$	3.71	339
$3.93 - $5.61	3,216	3.48	$	4.96	—		2,756	3.43	$	5.03	—
$5.62 - $15.00	1,550	2.93	$	6.70	—		1,043	2.17	$	7.03	—
	10,809	3.84	$	4.09	$	6,515	6,249	3.15	$	4.43	$	3,426

As of September 30, 2012, the Company had 9.9 million shares subject to outstanding options fully vested and expected to vest, after estimated forfeitures, with a remaining contractual life of 3.72 years, weighted average exercise price of $4.13 and aggregate intrinsic value of $6.0 million.

The total fair value of shares subject to outstanding options vested calculated using the Black-Scholes valuation method was $1.7 million and $1.2 million for the nine months ended September 30, 2012 and 2011, respectively. The total intrinsic value of employee stock options exercised during the nine months ended September 30, 2012 and 2011 was $2.3 million and $2.2 million, respectively.

Options to purchase 6.2 million and 5.8 million shares with weighted average exercised prices of $4.43 and $4.36 per share were exercisable at September 30, 2012 and 2011, respectively.

Valuation Assumptions and Expense Information

The fair value of the Company’s share-based payment awards for the three and nine months ended September 30, 2012 and 2011 was estimated on the grant date using a Black-Scholes valuation method and an option-pricing model with the following assumptions:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2012	2011	2012	2011
Employee stock options:
Risk-free interest rate	0.2% – 0.6%	0.2% – 0.7%	0.2% – 0.8%	0.2% – 1.7%
Volatility	65.2% – 73.1%	40.7% – 61.3%	65.2% – 73.1%	40.7% – 63.8%
Expected life (years)	4.0	4.0	4.0	4.0
Dividend yield	0%	0%	0%	0%

The risk-free interest rate was derived from the Daily Treasury Yield Curve Rates as published by the U.S. Department of the Treasury as of the grant date for terms equal to the expected terms of the options. The expected volatility was based on the combination of: 1) four-year historical volatility and 2) implied volatility of the Company’s stock price. The expected term of options granted was derived from historical data based on employee exercises and post-vesting employment termination behavior. A dividend yield of zero is applied because the Company has never paid dividends and has no intention to pay dividends in the near future.

The stock-based compensation expense recorded is adjusted based on estimated forfeiture rates. An annualized forfeiture rate has been used as a best estimate of future forfeitures based on the Company’s historical forfeiture experience. The stock-based compensation expense will be adjusted in later periods if the actual forfeiture rate is different from the estimate.

Employee Stock Purchase Plan

In June 2010, the Company’s stockholders approved the 2010 Employee Stock Purchase Plan (ESPP). A total of 2,000,000 shares of common stock has been reserved for issuance under the ESPP. The ESPP, which is intended to qualify under Section 423 of the Internal Revenue Code, is administered by the board of directors or the compensation committee of the board of directors. The ESPP provides that eligible employees may purchase up to $25,000 worth of the Company’s common stock annually over the course of two six-month offering periods. The purchase price to be paid by participants is 85% of the price per share of the Company’s common stock either at the beginning or the end of each six-month offering period, whichever is less.  On February 29, 2012, approximately 178,000 shares of common stock were issued at an aggregate purchase price of $579,000 under the ESPP.  On August 30, 2012, approximately 173,000 shares of common stock were issued at an aggregate purchase price of $501,000 under the ESPP.  As of September 30, 2012, there were approximately 1,335,000 shares authorized and unissued under the ESPP.