12. Stock award plans

As of December 31, 2012, the Company has three active stock-based compensation plans— the 2004 Equity Incentive Plan (the “Plan”), the 2004 Non-Employee Directors’ Stock Option Plan (the “NED Plan”), and the 2004 Employee Stock Purchase Plan (the “ESPP”). The Plan provides for the granting of stock awards including stock options and restricted stock units, to employees, directors and consultants. The NED Plan provides for the automatic, non-discretionary grant of options to the Company’s non-employee directors. The following table summarizes information about the Company’s stock-based award plans as of December 31, 2012:


	Outstanding Options		Outstanding Restricted Stock Units		Shares Available for Future Issuance
2004 Equity Incentive Plan		17,983,708		3,761,031		6,521,347
2004 Non-Employee Directors’ Stock Option Plan		690,831		—		109,169

Total		18,674,539		3,761,031		6,630,516

The Company’s board of directors determines eligibility, vesting schedules and exercise prices for stock awards granted under the Plan. The NED Plan provides for automatic, non-discretionary grant of options to the Company’s non-employee directors. Options and other stock awards under the Plan and the NED Plan expire not more than ten years from the date of the grant and are exercisable upon vesting. Stock options generally vest over four years. Current stock option grants vest and become exercisable at the rate of 25% after one year and ratably on a monthly basis over a period of 36 months thereafter. Restricted stock units generally vest at a rate of 25% per year over four years with consideration satisfied by service to the Company. Performance-based awards vest upon achieving pre-determined performance milestones which are expected to occur over periods ranging from 13 months to 96 months from the date of grant. All but one of the milestones is considered probable as of December 31, 2012. The Plan provides for full acceleration of vesting if an employee is terminated within thirteen months of a change in control, as defined in the Plan.

On May 17, 2012, the Compensation Committee also approved a management proposal designed to encourage employee retention. The proposal involved the grant of stock options and restricted stock units to employees, including executive officers of the Company. 3,942,500 options were granted with vesting terms subject to MannKind Corporation’s achievement of specified regulatory and business development milestones related to AFREZZA. 3,892,500 options were granted with time-based vesting terms of 25% every 6 months beginning November 1, 2012, to be fully vested on May 1, 2014. The performance-based options and time-based stock options had a grant date fair value of $0.60 and $1.12, respectively and stock compensation expense associated with these grants will be approximately $6.7 million over the award period.

On March 3, 2011, the Compensation Committee approved a management proposal designed to encourage employee retention. The proposal involved the issuance of restricted stock units and stock options to the majority of employees and executive officers of the Company. A total of 1,177,300 restricted stock units and 1,467,500 stock options were granted under the Plan. These units vest 50% annually for two years and will be fully vested on March 3, 2013. Stock compensation expense associated with these grants will be recorded on a straight line basis from March 3, 2011 through March 3, 2013 and will be approximately $8.2 million over the award period.

On May 21, 2009, June 2, 2011, and May 17, 2012 the Company’s stockholders approved amendments to the Plan to increase the number of shares of common stock available for issuance under the plan by 5,000,000, 6,000,000, and 10,000,000 shares, respectively.

On July 9, 2008, the Company announced an Offer to Exchange Outstanding Options to Purchase Common Stock (the “Offer”) under which the Company offered eligible employees the opportunity to exchange out-of-the money stock options covering up to an aggregate of 5,417,840 shares on a grant by grant basis for a reduced number of restricted stock units. The Offer expired on August 6, 2008. Pursuant to the Offer, the Company accepted for exchange options to purchase an aggregate of 4,493,509 shares of the Company’s common stock and issued restricted stock units covering an aggregate of 2,246,781 shares of the Company’s common stock. For the restricted stock units issued pursuant to the offer, both the remaining estimated unamortized stock compensation expense related to the exchanged options of approximately $13.9 million and the estimated incremental stock compensation expense resulting from the exchange of approximately $3.7 million was amortized over the vesting period ending on August 1, 2010.

In March 2004, the Company’s board of directors approved the ESPP, which became effective upon the closing of the Company’s initial public offering. Initially, the aggregate number of shares that could be sold under the plan was 2,000,000 shares of common stock. On January 1 of each year, for a period of ten years beginning January 1, 2005, the share reserve automatically increases by the lesser of: 700,000 shares, 1% of the total number of shares of common stock outstanding on that date, or an amount as may be determined by the board of directors. However, under no event can the annual increase cause the total number of shares reserved under the ESPP to exceed 10% of the total number of shares of capital stock outstanding on December 31 of the prior year. On January 1, 2010, 2011 and 2012 the ESPP share reserve was increased by 700,000, 700,000 and 700,000 shares, respectively. As of December 31, 2012, 2,674,003 shares were available for issuance under the ESPP. For the years ended December 31, 2010, 2011 and 2012 the Company sold 287,597, 282,816 and 422,260 shares, respectively, of its common stock to employees participating in the ESPP. The ESPP purchase for the period ending December 31, 2012 was initiated prior to year end but did not settle until January 3, 2013. As a result, the shares sold are reflected in the ESPP share reserves but is excluded from common stock outstanding as of December 31, 2012.

In accordance with ASC 718, share-based payment transactions are recognized as compensation cost based on the fair value of the instrument on the date of grant. The Company accounts for non-employee stock-based compensation expense based on the estimated fair value of the options, which is determined using the Black-Scholes option valuation model and amortizes such expense on a straight-line basis over the service period for time-based awards and over the expected dates of achievement for performance-based awards. These awards are subject to re-measurement until service is complete. As of December 31, 2012, there were options to purchase 243,033 shares of common stock outstanding to consultants.

During the years ended December 31, 2010, 2011 and 2012 the Company recorded stock-based compensation expense related to its stock award plans and the ESPP of $13.6 million, $11.2 million, and $13.3 million, respectively.

Total stock-based compensation expense recognized in the accompanying statements of operations is as follows (in thousands):


	Year Ended December 31,
	2010		2011		2012
Employee-related	$	13,478	$	11,202	$	13,224
Consultant-related		102		2		68

Total	$	13,580	$	11,204	$	13,292

Total stock-based compensation expense recognized in the accompanying statements of operations is included in the following categories (in thousands):


	Year Ended December 31,
	2010		2011		2012
Research and development	$	7,926	$	5,366	$	6,167
General and administrative		5,654		5,838		7,125

Total	$	13,580	$	11,204	$	13,292

The Company uses the Black-Scholes option valuation model to estimate the grant date fair value of employee stock options. The expected term of an option granted is based on combining historical exercise data with expected weighted time outstanding. Expected weighted time outstanding is calculated by assuming the settlement of outstanding awards is at the midpoint between the remaining weighted average vesting date and the expiration date.

The Company estimates volatility using the historical volatility of its stock. The Company has selected risk-free interest rates based on U.S. Treasury securities with an equivalent expected term in effect on the date the options were granted. Additionally, the Company uses historical data and management judgment to estimate stock option exercise behavior and employee turnover rates to estimate the number of stock option awards that will eventually vest. The Company calculated the fair value of employee stock options granted during the years ended December 31, 2010, 2011 and 2012 using the following assumptions:


	Year Ended December 31,
	2010		2011		2012
Risk-free interest rate		0.74% — 3.14%		0.10% — 2.43%		0.32% — 1.16%
Expected lives		2.6 — 6.1 years		1.1 — 6.1 years		1.4 — 6.1 years
Volatility		78% — 102%		76% — 83%		70% — 84%
Dividends		—		—		—

The following table summarizes information about stock options outstanding:


	Number of Shares			Weighted Average Exercise Price per Share		Aggregate Intrinsic Value ($000)
Outstanding at January 1, 2012		10,082,351			5.67	$	168
Granted		9,795,600			1.81
Exercised		(3,216	)		2.86
Forfeit		(715,131	)		3.96
Expired		(485,065	)		15.17

Outstanding at December 31, 2012		18,674,539			3.46	$	4,867

Vested and expected to vest at December 31, 2012		17,546,663			3.53	$	4,867
Exercisable at December 31, 2012		7,199,768			5.26	$	602

The weighted average grant date fair value of the stock options granted during the years ended December 31, 2010, 2011 and 2012 was $4.06, $2.04, and $0.99 per option, respectively. The total intrinsic value of options exercised during the years ended December 31, 2010, 2011 and 2012 was $1.6 million, $443,000, and $1,000, respectively. Intrinsic value is measured using the fair market value at the date of exercise (for options exercised) or at December 31 (for outstanding options), less the applicable exercise price.

Cash received from the exercise of options during the years ended December 31, 2010, 2011 and 2012 was approximately $924,000, $625,000, and $9,200, respectively. The weighted-average remaining contractual terms for options outstanding, vested and expected to vest, and exercisable at December 31, 2012 was 8.1 years, 8.0 years and 6.5 years, respectively.

A summary of restricted stock unit activity for the year ended December 31, 2012 is presented below:


	Number of Shares			Weighted Average Grant Date Fair Value per Share
Outstanding at January 1, 2012		4,137,688		$	4.47
Granted		1,371,455		$	2.25
Vested		(1,277,572	)	$	4.25
Forfeited		(470,540	)	$	4.49

Outstanding at December 31, 2012		3,761,031		$	3.73

The total restricted stock units expected to vest as of December 31, 2012 was 3,254,819 with a weighted average grant date fair value of $3.74. The total intrinsic value of restricted stock units expected to vest as of December 31, 2012 was $7.5 million. Intrinsic value of restricted stock units expected to vest is measured using the closing share price at December 31, 2012.

Total intrinsic value of restricted stock units vested during the years ended December 31, 2010, 2011 and 2012 was $10.5 million, $1.7 million, and $2.9 million, respectively. Intrinsic value of restricted stock units vested is measured using the closing share price on the day prior to the vest date. The total fair value of restricted stock units vested during the years ended December 31, 2010, 2011 and 2012 was $11.4 million, $1.6 million, and $3.0 million, respectively.

As of December 31, 2012, there was $12.2 million and $7.8 million of unrecognized compensation expense related to options and restricted stock units, respectively, which is expected to be recognized over the weighted average vesting period of 2.3 years. The Company evaluates stock awards with performance conditions as to the probability that the performance conditions will be met and estimates the date at which the performance conditions will be met in order to properly recognize stock-based compensation expense over the requisite service period. As of December 31, 2012, there was $107,000 and $3.7 million of unrecognized expenses related to performance-based options and restricted stock units, respectively, for milestones not considered probable of achievement.