Note 9 - Stock-Based Compensation

Stock Options

The Company has granted equity awards under several plans, two of which remain active. Under the 2005 Stock Incentive Plan (the "2005 Plan"), equity awards may be granted to officers, directors, employees, consultants and advisors to the Company and any present or future subsidiary. The 2005 Plan, approved in May 2005 and amended in June 2007, June 2011, June 2012 and June 2013 by the Company's stockholders, currently authorizes the grant of equity awards for up to 22,312,192 shares of common stock, which included, at the time of approval of the 2005 Plan, a maximum 5,746,468 shares of common stock subject to stock options outstanding under the Company's 1995 Stock Option Plan (the "1995 Plan") that may revert to and become issuable under the 2005 Plan if such options expire or otherwise terminate unexercised. The Company received approval at its 2013 annual meeting of stockholders to increase the number of shares of common stock available for issuance under the 2005 Plan by 4,000,000 shares. The term of the Company's 1995 Plan has expired and no new awards will be made under the 1995 Plan; however, outstanding stock options remain in existence in accordance with their terms.

Under the 2005 Plan and the 1995 Plan, incentive stock options, having a maximum term of 10 years, can be or were granted at no less than 100% of the fair value of the Company's common stock at the time of grant and are generally exercisable over periods ranging from six months to four years. There is no minimum exercise price for non-statutory stock options.

Stock Options Awards

The following is a summary of option activity under the 2005 Plan and the 1995 Plan for the nine months ended September 30, 2013:

	2005 Stock Incentive Plan					1995 Stock Option Plan
	Stock Options			Weighted-Average Exercise Price		Stock Options			Weighted-Average Exercise Price
Outstanding at January 1, 2013		9,143,825		$	1.87		211,900		$	4.94
Granted		4,117,500		$	1.92		-		$	-
Exercised		(522,292	)	$	2.29		-		$	-
Canceled		(802,883	)	$	1.74		(23,750	)	$	4.05
Outstanding at September 30, 2013		11,936,150		$	1.88		188,150		$	5.04
Shares exercisable at September 30, 2013		4,647,873		$	2.12		188,150		$	5.04

Shares available for grant at September 30, 2013		6,461,494

The fair value of stock options granted was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Weighted-average fair value of stock options granted	$	1.41		$	1.09		$	1.02		$	0.71
Risk-free interest rate		1.12%-1.36	%		0.55	%		0.54%-1.36	%		0.55%-1.54	%
Dividend yield		0	%		0	%		0	%		0	%
Volatility		56.75%-62.51	%		76.60%-76.71	%		55.81%-73.72	%		75.47%-80.48	%
Expected term (in years)		4.25			4.24			3.98-7.05			3.34-7.09
Expected forfeiture rate		23.15	%		23.15	%		0%-23.15	%		0%-23.15	%

The aggregate intrinsic value and weighted-average remaining contractual term of stock options outstanding as of September 30, 2013 was approximately $15.9 million and 7.6 years, respectively. The aggregate intrinsic value and weighted-average remaining contractual term of stock options exercisable as of September 30, 2013 was approximately $5.5 million and 5.9 years, respectively. The aggregate intrinsic value represents the total intrinsic value (the difference between the Company's closing stock price on the last trading day of the period 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 September 30, 2013. This amount is subject to change based on changes to the fair value of the Company's common stock. The aggregate intrinsic value of options exercised for the nine months ended September 30, 2013 and 2012 was $0.3 million and less than $0.1 million, respectively.

Employee Stock Purchase Plan

The Company received approval at its 2013 annual meeting of stockholders to adopt an Employee Stock Purchase Plan (the "ESPP"), which currently authorizes an aggregate of 2,000,000 shares of Common Stock to be purchased. The ESPP allows employees to purchase shares of Common Stock of the Company at each purchase date through payroll deductions of up to a maximum of 15% of their compensation, at 85% of the lesser of the market price of the shares at the time of purchase or the market price on the beginning date of an option period (or, if later, the date during the option period when the employee was first eligible to participate). The first option period under the ESPP commenced on August 1, 2013.

The ESPP is considered compensatory for financial reporting purposes. As such, the fair value of ESPP shares was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Three Months Ended September 30,
		2013
Weighted-average fair value of ESPP shares granted	$	0.78
Risk-free interest rate		0.04	%
Dividend yield		0	%
Volatility		50.80	%
Expected term (in years)		0.5
Expected forfeiture rate		5	%

Restricted Stock Awards

Under the 2005 Plan, the Company has granted restricted stock awards subject to certain performance-based and/or time-based vesting conditions which, if not met, would result in forfeiture of the shares and reversal of any previously recognized related stock-based compensation expense.

The following is a summary of restricted stock awards activity for the nine months ended September 30, 2013:

	Number of Shares		Per Share Weighted-Average Grant-Date Fair Value
Outstanding and Unvested at January 1, 2013		33,334	$	1.39
Restricted stock granted		-	$	-
Restricted stock vested		-	$	-
Restricted stock forfeited		-	$	-
Outstanding and Unvested at September 30, 2013		33,334	$	1.39

The Company recorded stock-based compensation expense in the consolidated statements of operations as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Research and development	$	316	$	219	$	829	$	638
General and administrative		347		274		955		1,030
Total stock-based compensation expense	$	663	$	493	$	1,784	$	1,668

As of September 30, 2013, there was approximately $4.7 million of total unrecognized compensation expense (net of estimated forfeitures) related to unvested options and restricted stock awards. This unrecognized compensation expense is expected to be recognized over a weighted-average period of 1.5 years. This estimate does not include the impact of other possible stock-based awards that may be made during future periods.