7. Stockholders’ Equity

Option activity under our stock-based compensation plans during the three months ended March 31, 2014 was as follows (in thousands except per share amounts):

	Shares Underlying Outstanding Options (in thousands)			Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Balance at December 31, 2013		15,765		$	3.17
Options granted		4,890			1.71
Options exercised		-			-
Options cancelled:
Options forfeited (unvested)		(89	)		2.71
Options cancelled (vested)		(461	)		3.71
Balance at March 31, 2014		20,105			2.80		6.25	$	1,566
Vested and expected to vest at March 31, 2014		20,105			2.80		6.25	$	1,566
Exercisable at March 31, 2014		10,899			3.32		3.76	$	969

Restricted stock unit activity under our stock-based compensation plans during the three months ended March 31, 2014 was as follows (in thousands except per share amounts):

	Number of Shares (In thousands)			Weighted-Average Grant-Date Fair Value
Non-vested as of December 31, 2013		1,275		$	3.93
Granted		1,505		$	1.80
Vested		-		$	-
Forfeited or expired		(1,000	)	$	4.22
Non-vested as of March 31, 2014		1,780		$	1.76

The aggregate intrinsic value of the restricted stock units outstanding as of March 31, 2014, based on our stock price on that date, was $3.2 million.

As of March 31, 2014, approximately 1,000,000 shares underlying stock options and restricted stock units awards with performance-based vesting criteria were outstanding.

Under our stock-based compensation plans, option awards generally vest over a four-year period contingent upon continuous service and expire ten years from the date of grant (or earlier upon termination of continuous service). The fair value-based measurement of each option is estimated on the date of grant using the Black-Scholes option valuation model.

The fair value-based measurements and weighted-average assumptions used in the calculations of these measurements are as follows:

	Stock Options						Employee Stock Purchase Plan
	Three Months Ended						Three Months Ended
	March 31,						March 31,
	2014			2013			2014			2013
Weighted-average fair value	$	1.57		$	2.70		$	0.92		$	1.46
Risk-free interest rate		1.8	%		1.1	%		0.2	%		0.2	%
Expected life (in years)		5.9			5.8			1.1			1.3
Volatility		1.4			1.4			0.9			0.7

Volatility is based on historical volatility of our stock price. The expected life of options granted is estimated based on historical option exercise and employee termination data, giving consideration to options that have not yet completed a full life cycle. Our senior management, who hold a majority of the options outstanding, and other employees were grouped and considered separately for valuation purposes. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is zero percent for all years and is based on our history and expectation of dividend payouts. All stock option awards to non-employees are accounted for at the fair value of the consideration received or the fair value of the equity instrument issued, as calculated using the Black-Scholes model.

Compensation expense is based on awards ultimately expected to vest and reflects estimated forfeitures. For equity awards with time-based vesting, the fair value is amortized to expense on a straight-line basis over the vesting periods. For equity awards with performance-based vesting criteria, the fair value is amortized to expense when the achievement of the vesting criteria becomes probable.

We recognized stock-based compensation expense of $1.3 million and $4.3 million for the three months ended March 31, 2014 and 2013, respectively. Stock-based compensation during the three months ended March 31, 2013 included $2.1 million of expense for accelerated vesting of stock options related to management continuity and severance arrangements with certain former employees and executive officers. The Company recorded stock-based compensation expense for awards to non-employees of $0.1 million for the three months ended March 31, 2014.

The components of stock-based compensation expense were (in thousands):

	Three Months Ended
	March 31,
	2014		2013
Research and development	$	692	$	1,323
General and administrative		578		2,943
Total	$	1,270	$	4,266

As of March 31, 2014, the total unrecognized compensation cost related to non-vested equity awards including all awards with time-based vesting amounted to $17.7 million, which is expected to be recognized over the remaining weighted-average vesting period of 3.19 years. Additionally, as of March 31, 2014, the total unrecognized compensation cost related to equity awards with performance-based vesting criteria not deemed probable of vesting amounted to $0.4 million.

Employee Stock Purchase Plan

As of March 31, 2014, 996,000 shares have been reserved and approved for issuance under the 2004 Employee Stock Purchase Plan, subject to adjustment for a stock split, any future stock dividend or other similar change in our common stock or capital structure. To date, employees have acquired 887,987 shares of our common stock under the 2004 Employee Stock Purchase Plan including 59,573 shares during the three months ended March 31, 2014. As of March 31, 2014, 108,013 shares of our common stock remained available for future purchases.

Warrants

As of March 31, 2014, warrants to purchase an aggregate of approximately 12,500,000 shares of our common stock were outstanding. The warrants are exercisable at a weighted average price of $1.96 per share. During the three months ended March 31, 2014 warrants were exercised to purchase an aggregate of approximately 100 shares of our common stock. There were no warrants exercised during the three months ended March 31, 2013.

Preferred Stock Outstanding

As of March 31, 2014, there were 5,000,000 shares of preferred stock authorized and 43,430 shares of $0.001 par value Series B Convertible Preferred Stock outstanding. Each share of Series B Convertible Preferred Stock is convertible into 1,000 shares of common stock at any time at the holder’s option. However, the holder is prohibited from converting the Series B Convertible Preferred Stock into shares of common stock if, as a result of such conversion, the holder and its affiliates would own more than 9.98% of the total number of shares of common stock then issued and outstanding. In the event of the Company’s liquidation, dissolution, or winding up, holders of Series B Convertible Preferred Stock will receive a payment equal to $0.001 per share before any proceeds are distributed to the common stockholders. Shares of Series B Convertible Preferred Stock generally have no voting rights, except as required by law and except that the consent of holders of a majority of the outstanding Series B Convertible Preferred Stock is required to amend the terms of the Series B Convertible Preferred Stock. Holders of Series B Convertible Preferred Stock are not entitled to receive any dividends, unless and until specifically declared by the Company’s board of directors. The Series B Convertible Preferred Stock ranks senior to the Company’s common stock as to distributions of assets upon the Company’s liquidation, dissolution or winding up, whether voluntarily or involuntarily. The Series B Convertible Preferred Stock may rank senior to, on parity with or junior to any class or series of the Company’s capital stock created in the future depending upon the specific terms of such future stock issuance.