STOCKHOLDERS' EQUITY AND SHARE-BASED COMPENSATION EXPENSE

Convertible Preferred Stock

The Company's Board of Directors has authorized 5.0 million shares of convertible preferred stock, $0.01 par value. At December 31, 2013 and 2012, there were no such shares issued or outstanding.

Share-based Compensation Plans

The Company has a share-based compensation program that provides the Board of Directors broad discretion in creating equity incentives for employees, officers, directors and consultants. This program includes incentive and non-qualified stock options and RSAs, granted under various stock plans. Stock options are issued at a price of at least 100% of the fair value of the Company's common stock on the date of grant (110% in certain circumstances), as determined by the Board of Directors. Options generally expire 7 to 10 years from the grant date and may be granted with different vesting terms from time to time as determined by the Board of Directors, usually over a period of four years on each anniversary of the grant date. In general, RSAs vest on an annual basis over a period of three to four years on each anniversary of the grant date, are subject to the employees' continued employment and are paid upon vesting in shares of the Company's common stock on a one-for-one basis. As of December 31, 2013, the Company had approximately 4.7 million shares of common stock reserved for future issuance under its share-based compensation plans. A more detailed description of the Company's current share-based compensation plans follows below:

In 1998, the Board of Directors adopted the Affymetrix 1998 Stock Incentive Plan (the "1998 Stock Plan") under which nonqualified stock options and restricted stock may be granted to employees and outside consultants, except that members of the Board of Directors and individuals who are considered officers of the Company under the rules of the National Association of Securities Dealers shall not be eligible. Options granted under the 1998 Stock Plan expire no later than ten years from the date of grant. A total of 3.6 million shares of common stock are authorized for issuance under the 1998 Stock Plan.

In 2000, the Board of Directors adopted the Amended and Restated 2000 Equity Incentive Plan (the "2000 Stock Plan"), which was amended and restated in 2001, under which RSAs, stock options, performance-based shares and stock appreciation rights may be granted to employees, outside directors and consultants. In the second quarter of 2010, 4.5 million shares of common stock were added under the 2000 Stock Plan bringing the total shares of common stock authorized for issuance under the 2000 Stock Plan to 16.2 million.

In June 2012, the Board of Directors adopted the 2012 Inducement Plan (the "2012 Inducement Plan"), under which RSAs, stock options, performance-based shares and stock appreciation rights may be granted to employees. A total of 2.0 million shares of common stock are authorized for issuance under the 2012 Inducement Plan.

The following table sets forth the share-based compensation expense included in the accompanying Consolidated Statements of Operations (in thousands):



	Year Ended December 31,
	2013		2012		2011
Costs of product sales	$	1,002	$	1,554	$	1,143
Research and development	1,331		1,337		1,850
Selling, general and administrative (1)	5,394		14,316		5,778
Total share-based compensation expense	$	7,727	$	17,207	$	8,771

(1) Includes $8.3 million of share-based compensation expense related to the acceleration of unvested stock options in connection with the Acquisition during the year ended December 31, 2012.

As of December 31, 2013, $16.0 million of total unrecognized share-based compensation expense related to non-vested awards is expected to be recognized over the respective vesting terms of each award through 2016. The weighted‑average term of the unrecognized share-based compensation expense is 2.44 years.

Stock Options

The fair value of options was estimated at the respective dates of grant using the BSM option pricing model with the following weighted‑average assumptions:



	Year Ended December 31,
	2013		2012		2011
Risk free interest rate	1.0	%	0.6	%	1.5	%
Expected dividend yield	—	%	—	%	—	%
Expected volatility	68	%	67	%	67	%
Expected option term (in years)	4.6		4.6		4.5

The risk free interest rate for periods within the contractual life of the Company's stock options is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term is derived from an analysis of the Company's historical exercise trends over ten years. The expected volatility for the years ended December 31, 2013 and 2012 is based on a blend of historical and market‑based implied volatility. Using the assumptions above, the weighted‑average grant date fair value of options granted during the years ended December 31, 2013, 2012 and 2011 was $2.42, $2.14 and $2.86 per option, respectively.

Activity under the Company's stock plans for the year ended December 31, 2013 is as follows (in thousands, except per share amounts):



	Shares		Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Terms	Aggregate Intrinsic Value
					(in years)	(in thousands)
Outstanding at December 31, 2012	6,101		$	7.75
Grants	988		4.43
Exercises	(424	)	4.03
Forfeitures or expirations	(1,523	)	10.02
Outstanding at December 31, 2013	5,142		$	6.75	3.87	$	15,475

Exercisable at December 31, 2013	2,979		$	8.36	2.68	$	6,761

Vested and expected to vest at December 31, 2013	4,808		$	6.91	3.72	$	14,121

The following table summarizes information concerning currently outstanding and exercisable options at December 31, 2013:



Range of Exercise Prices				Options Outstanding				Options Exercisable
					Weighted-Average	Weighted-Average			Weighted-Average
					Remaining	Exercise Price			Exercise Price
Lower		Upper		Number	Contractual Life	Per Share		Number	Per Share
				(in thousands)	(in years)			(in thousands)
$	2.63	$	3.84	897	5.07	$	3.52	243	$	2.97
$	3.86	$	4.16	686	5.34	$	3.93	200	$	3.93
$	4.21	$	4.44	629	3.75	$	4.24	387	$	4.22
$	4.46	$	5.29	672	4.42	$	4.84	390	$	4.94
$	5.31	$	6.51	634	4.38	$	5.73	345	$	5.77
$	6.57	$	8.29	709	3.66	$	7.54	500	$	7.75
$	8.71	$	19.92	734	1.07	$	12.66	733	$	12.66
$	21.36	$	37.22	181	1.05	$	25.82	181	$	25.81
Total				5,142	3.87	$	6.75	2,979	$	8.36

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the Company's closing stock price on the last trading day of its fourth quarter of 2013 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2013. The aggregate intrinsic value changes based on the fair market value of the Company's common stock. For the years ended December 31, 2013, 2012 and 2011, total intrinsic value of options exercised was $0.8 million, $0.1 million and $0.4 million, respectively.

Reserved Shares

At December 31, 2013, the Company has shares reserved for future issuance as follows (in thousands):



Options outstanding	5,142
Options available for future grants	4,684
Convertible notes	17,857
Total at December 31, 2013	27,683

Restricted Stock

The following tables summarize the Company's restricted stock activity for the year ended December 31, 2013 (in thousands, except per share amounts):



	Number of Shares		Weighted-Average Grant Date Fair Value per Share
Restricted stock awards
Outstanding at December 31, 2012	167		$	5.89
Granted	—		—
Vested	(130	)	5.68
Forfeited	(28	)	6.77
Outstanding at December 31, 2013	9		$	6.11

Restricted stock units
Outstanding at December 31, 2012	2,511		$	4.51
Granted	1,972		6.30
Vested	(692	)	4.62
Forfeited	(588	)	4.49
Outstanding at December 31, 2013	3,203		$	5.59

For the years ended December 31, 2013 and 2012, total fair value of RSAs vested was $3.9 million and $5.2 million, respectively.

Performance-Based Restricted Stock

The Company's share-based awards program includes performance-based restricted stock awards that reference performance criteria.

2011 CEO grants In 2011, the Compensation Committee of the Company's Board of Directors approved a grant of performance-based restricted stock units ("PRSUs") under the Plan to the Company's Chief Executive Officer ("CEO") that is earned annually in four equal tranches based on his performance in the applicable fiscal year (the "Performance Period"). The PRSUs entitle the CEO to receive a certain number of shares of the Company's common stock based on the Company's satisfaction of certain financial and strategic performance goals as set and approved by the Board of Directors annually during the first quarter of the Company's fiscal year. Based on the achievement of the performance conditions during each Performance Period, the final settlement of the PRSU award will vest twelve months following the end of each Performance Period. The PRSU award will be forfeited if the performance goals are not met or if the executive officer is no longer employed at the vest date.

The number of shares underlying the PRSUs that were granted to the CEO during 2011 totaled 240,000 shares of PRSUs of which (i) 60,000 shares of PRSUs relating to the Performance Period ending December 31, 2011 and with a grant date fair value of $6.71 per PRSU vested at December 31, 2012; (ii) 25,000 shares of PRSUs relating to the Performance Period ending December 31, 2012 and with a grant date fair value of $4.63 per PRSU vested December 31, 2013. The Company expects that an additional 36,000 shares of the PRSUs, with a grant date fair value of $4.67 per PRSU, will vest with respect to the Performance Period ending December 31, 2013 and the fair value of such PRSU's is being amortized on a straight-line basis over the related service period ending December 31, 2014. The total compensation cost related to PRSUs granted but not yet recognized was less than $0.1 million as of December 31, 2013.

2012 Program During July 2012, the Compensation Committee granted certain PRSUs following the acquisition of eBioscience referred to as an Acquisition Performance Share Program (the "2012 Program"). The purpose of the 2012 Program is to align key management and senior leadership with stockholders' interests and to retain key employees. The measurement periods for the 2012 Program are the twelve month periods ended June 30, 2013 and June 30, 2014, respectively. Members of eBioscience management and other key employees are participating in the 2012 Program. Awards granted under the 2012 Program are granted in the form of performance shares pursuant to the terms of our 2012 Inducement Plan. If pre-determined eBioscience specific performance goals are met, shares of stock will be granted to the recipient, vesting one month following the performance period representing the date of certification of achievement, contingent upon the recipient's continued service to the Company.

In 2012, the Company awarded 911,500 PRSUs under the 2012 Program at a grant date fair value of $4.16 per PRSU and 164,255 shares of PRSUs relating to the twelve month period ended June 30, 2013 vested during fiscal 2013. The Company expects 115,275 shares of PRSUs will vest and the fair value is being amortized on a straight-line basis over the related service period. The total compensation cost related to PRSUs granted but not yet recognized was approximately $0.1 million as of December 31, 2013.

2013 Program During the first quarter of 2013, the Compensation Committee granted certain PRSUs following the most recent restructuring referred to as the 2013 Program. The purpose of the 2013 Program is to retain key employees. The measurement period for the 2013 Program is the twelve month period ended December 31, 2013 and the awards granted under the 2013 Program are granted in the form of performance shares pursuant to the terms of our 2000 Plan. Dependent on the level of achievement of pre-determined financial performance goals, shares of stock will vest in equal installments over two or four years. The level of achievement of financial performance will be assessed during the first quarter of fiscal 2014 after which the share of stock will be issued to the participants, contingent upon the recipient’s continued service to the Company.

In 2013, the Company awarded 340,000 PRSUs under the 2013 Program at a grant date fair value of $3.84 per PRSU. The Company expect 94,500 shares of PRSUs will vest and the fair value is being amortized on a straight-line basis over the related service period. The total compensation cost related to PRSUs granted but not yet recognized was approximately $0.3 million as of December 31, 2013.

2013 Product Launch Initiative Program During the third quarter of 2013, the Compensation Committee granted certain PRSUs associated with product launch and promotion initiative referred to as the 2013 Product Launch Initiative Program. The purpose of the 2013 Product Launch Initiative Program is to incentivize specific employees to sell specific products. The measurement period for the 2013 Product Launch Initiative Program is the six month period ended December 31, 2013 and the awards granted under the 2013 Product Launch Initiative Program are granted in the form of performance shares pursuant to the terms of our 2000 Plan. Dependent on the level of achievement of pre-determined financial performance goals, shares of stock will vest in equal installments over eight to twelve months. The level of achievement of financial performance will be assessed during the first quarter of fiscal 2014 after which the share of stock will be issued to the participants, contingent upon the recipient’s continued service to the Company.

In 2013, the Company awarded 146,750 shares of PRSUs under the 2013 Product Launch Initiative Program at a grant date fair value of $5.51 per PRSU and expect 79,750 shares of PRSUs will vest and the fair value of the PRSUs is being amortized on a straight-line basis over the related service period. The total compensation cost related to PRSUs granted but not yet recognized was approximately $0.2 million as of December 31, 2013.

The following table summarizes the Company's PRSU activity for the year ended December 31, 2013 (in thousands, except per share amounts):



	Number of Shares		Weighted-Average Grant Date Fair Value per PRSU
Performance based restricted stock awards
Outstanding at December 31, 2012	1,056		$	3.98
Granted	487		4.34
Vested	(189	)	4.22
Forfeited	(405	)	4.24
Outstanding at December 31, 2013	949		$	4.01

For the years ended December 31, 2013 and 2012, total fair value of PRSUs vested was $0.8 million and $2.7 million, respectively. The total compensation cost related to all PRSUs granted but not yet recognized was approximately $0.6 million as of December 31, 2013.

Employee Stock Purchase Plan

In August 2011, the Company's Board of Directors adopted the 2011 Employee Stock Purchase Plan ("ESPP") that was approved by the Company's stockholders on May 11, 2012. The ESPP reserved a total of 7.0 million shares of the Company's common stock for issuance under the plan and permits eligible employees to purchase common stock at a discount through payroll deductions.

The price at which stock is purchased under the ESPP is equal to 85% of the fair market value of the common stock on the first day of the offering period or the last day of the purchase period, whichever is lower. The offering periods are twelve months and include two six month purchase periods that result in a look-back for determining the purchase price of up to 12 months. Employees can invest up to 15% of their gross compensation through payroll deductions. In no event would an employee be permitted to purchase more than 750 shares of common stock during any six-month purchase period. The initial offering period commenced in November 2011. As of December 31, 2013, there were 405 participants in the ESPP and approximately 0.4 million shares were issued under the ESPP during the period at an average subscription date fair value of $2.59 per share. Included in total share-based compensation expense for the year ended December 31, 2013 was $0.7 million, related to the ESPP.

During the years ended December 31, 2013 and 2012, the fair value of shares under the ESPP was estimated using the following assumptions:



	2013		2012
Risk free interest rate	0.16	%	0.1	%
Expected dividend yield	—	%	—	%
Expected volatility	60	%	64	%
Expected term (in years)	0.75		0.7