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Stockholders' Equity
 12 Months Ended
Dec. 31, 2011
Notes to Financial Statements  
Stockholders' Equity

 

NOTE 8 STOCKHOLDERS’ EQUITY

Amendments to Articles of Incorporation

In June 2011, we amended our certificate of incorporation to increase the number of shares of authorized common stock to 1,500,000,000, par value $0.01 per share. Prior to the amendment, the number of shares of authorized common stock was 100,000,000, par value $0.01 per share. The certificate of amendment was approved by a majority of our stockholders on June 29, 2011.

Private Placements

In October 2009, in a private placement, we sold 7,954,543 shares of our common stock at $0.88 per share and warrants to purchase 3,977,270 shares of our common stock, exercisable through January 7, 2015, at $0.88 per share (Private Placement). The purchasers paid $0.125 per underlying share for the warrants. Additionally, the purchasers had the right to purchase up to an additional 5,165,286 shares at $0.97 per share prior to May 14, 2010 and paid $0.125 per underlying share for the right to purchase such additional shares. Total proceeds were approximately $7.9 million, after deducting costs associated with the issuance. We were required to prepare and file Form S-3 registration statements, as permissible under SEC rules and regulations, beginning within 30 days of October 22, 2009, with the SEC for the purpose of registering for resale of the securities sold in this Private Placement. We filed a Form S-3 covering 7,532,617 shares on November 6, 2009, which was declared effective by the SEC on November 17, 2009. However, if we fail to keep any registration statements continuously effective, we may be obligated to pay to the holders of the shares and warrants liquidated damages in the amount of 1% per month of the purchase price for the shares and warrants, up to a maximum cap of 8% of such purchase price. In addition, in connection with the closing of the Private Placement, Baker Brothers Investments was granted the right to designate a representative to our board of directors. In February 2010, Stephen R. Davis was appointed to our board of directors as the Baker Brothers Investments designee. Mr. Davis resigned effective February 23, 2011.

On May 14, 2010, the right of the investors to purchase up to an additional 5,165,286 shares of our common stock at $0.97 per share under the Private Placement expired unexercised. Additionally, the right granted to Baker Brothers Investments to designate an additional representative to our board of directors should they exercise their right to purchase designated additional shares of our common stock under the terms of the securities purchase agreements relating to the Private Placement also expired on May 14, 2010. On June 30, 2010, we filed a Form S-3 covering the remaining 421,926 shares of our common stock related to the October 2009 Private Placement and the 3,977,270 shares of our common stock underlying the warrants, which was declared effective by the SEC on July 8, 2010.

In June 2011, we entered into a Securities Purchase Agreement with certain purchasers (Securities Purchase Agreement), pursuant to which we agreed to sell for an aggregate price of $24.0 million, 160,000,006 shares of our common stock (Shares) and warrants to purchase 80,000,005 shares of our common stock (Warrants) with an exercise price of $0.18 per share (2011 Private Placement). The 2011 Private Placement closed on July 1, 2011. For each Share purchased, the investors received one Warrant to purchase 0.5 shares of common stock (together, a Unit), at a purchase price of $0.15 per Unit. The Warrants became exercisable on July 1, 2011, the date of issuance, and expire on the fifth anniversary of that date. The Warrants may be exercised for cash only or, if a registration statement is not then effective and available for the resale of the shares of common stock issuable upon exercise of the Warrants, by surrender of such Warrant, or a portion of such Warrant, by way of cashless exercise. There is no right to exercise the Warrants to the extent that after giving effect to such exercise the holder would beneficially own in excess of 9.99% of the outstanding shares of common stock following such exercise (or such other limit as may be designated by any particular purchaser). Each holder of the Warrants can amend or waive the foregoing limitation by written notice to us, with such waiver taking effect only upon the expiration of a 61-day notice period.

Under the terms of the Securities Purchase Agreement, on July 29, 2011, we filed a registration statement with the SEC to register for resale the Shares and the shares of common stock issuable upon the exercise of the Warrants (collectively, the Registrable Securities). The registration statement was declared effective on August 4, 2011. If we fail to keep the registration statement continuously effective for a designated time (with limited exceptions), we may be obligated to pay to the holders of the Registrable Securities liquidated damages in an amount equal to 1.0% per month of such holder's pro rata interest in the total purchase price of the 2011 Private Placement.

We received advance proceeds of approximately $20.3 million as of June 30, 2011. The remaining $3.7 million was received in July 2011 when the financing closed. Total proceeds are reported net of issuance costs of approximately $1.2 million as of December 31, 2011. The Shares and Warrants were recorded as equity at their relative fair values on the issuance date.

Shareholders’ Rights Plan

On December 18, 2006, we entered into a Preferred Shares Rights Agreement (the Rights Agreement). As part of this agreement, preferred stock purchase rights (the rights) were distributed to stockholders of record as of January 2, 2007 and to each person who acquired the company stock thereafter. The rights were exercisable only upon the acquisition, or the acquisition of the right to acquire, by a person or group of affiliated or associated persons, of 20% or more of the outstanding shares of the company’s common stock. In connection with the Private Placement in October 2009, we amended the Rights Agreement to permit Tang Capital Partners and Baker Brothers Investments, both purchasers under the Private Placement, to each beneficially own up to 34% and 30%, respectively, of our outstanding common stock. We had initially reserved 200,000 shares of preferred stock pursuant to the exercise of these rights, which would expire on December 31, 2016.

Concurrent with the approval of the offer and sale of the Convertible Notes in April 2011 (see Note 6), the Board of Directors approved the termination of the Rights Agreement effective immediately prior to the initial closing date. The rights were terminated as a result of the termination of the Rights Agreement. The Rights Agreement had not been triggered as of that date.

Stock-Based Compensation Plans

We have two types of stock-based compensation plans, which consist of an employee stock purchase plan and three stock option plans.

In 1997, our stockholders approved our 1997 Employee Stock Purchase Plan (the Purchase Plan). In December 2007, May 2009 and June 2011, our stockholders authorized increases in the number of shares reserved for issuance under the Purchase Plan by 100,000, 200,000 and 500,000 shares, respectively, for a total of 1,000,000 shares reserved at December 31, 2011. Under the terms of the Purchase Plan, employees can elect to have up to a maximum of 10% of their base earnings withheld to purchase our common stock. The purchase price of the stock is 85% of the lower of the closing prices for our common stock on: (i) the first trading day in the enrollment period, as defined in the Purchase Plan, in which the purchase is made, or (ii) the purchase date. The length of the enrollment period may not exceed a maximum of six months. Our compensation committee modified the Purchase Plan such that beginning in May 2008, the length of all offering periods was decreased from 24 months to six months. Enrollment dates are the first business day of May and November and the first enrollment date was April 30, 1997. Approximately 40% of eligible employees participated in the Purchase Plan in 2010. Under the Purchase Plan, we issued 77,982, 48,921 and 99,294 shares in 2011, 2010 and 2009, respectively. The weighted-average fair value per share of purchase rights granted during 2011, 2010 and 2009 was $0.20, $0.30 and $0.30, respectively. The weighted-average exercise price per share of the purchase rights exercised during 2011, 2010 and 2009 was $0.20, $0.61 and $0.42, respectively. We had 531,176, 109,158 and 158,079 shares reserved for issuance under the Purchase Plan at December 31, 2011, 2010 and 2009, respectively.

We currently have three stock option plans from which we can grant options and restricted stock awards to employees, officers, directors and consultants. In December 2007, the stockholders approved our 2007 Equity Incentive Plan (the 2007 Plan). In May 2010 and June 2011, our stockholders approved amendments to our 2007 Equity Incentive Plan to increase the maximum number of shares of common stock available for grant by 2,000,000 and 90,000,000 shares of common stock, respectively, resulting in an aggregate of 95,000,000 shares of common stock authorized for issuance pursuant to awards granted under our 2007 Equity Incentive Plan. We also grant stock options and restricted stock awards under the 2002 Stock Incentive Plan (the 2002 Plan) and the Non-Qualified Stock Plan (the NQ Plan). We are authorized to issue up to 425,000 shares under the 2002 Plan, 100,000 of which were approved by stockholders in May 2006, and 2,062,500 shares under the NQ Plan, a plan that has not undergone stockholder approval and can only be utilized to grant stock options and restricted stock awards as inducements to attract new employees, to which 1,000,000 shares were added by the Board of Directors in September 2007, and an additional 1,000,000 shares were added in July 2008. The options to purchase our common stock are granted with an exercise price which equals fair market value of the underlying common stock on the grant dates and expire no later than ten years from the date of grant. The options are exercisable in accordance with vesting schedules that generally provide for them to be fully vested and exercisable four years after the date of grant. Any shares that are issuable upon exercise of options granted that expire or become unexercisable for any reason without having been exercised in full are available for future grant and issuance under the same stock option plan.

As discussed in Note 1, we adopted ASC 718-20 on January 1, 2006. Accordingly, we record stock-based compensation expense based on the grant date or purchase date fair value of stock options and purchase rights issued to employees in conjunction with our stock option plans or the Purchase Plan. We also record compensation expense for warrants and stock options issued to non-employees and restricted stock awards to employees and directors.

The fair value of each employee and director grant of options to purchase common stock and purchase rights under the Purchase Plan is estimated on the date of the grant using the Black-Scholes option-pricing model assuming no dividends and the following weighted-average assumptions:

   2011  2010  2009
Expected term (years):               
Stock options   5.00    6.00    6.00 
Employee Stock Purchase Plan   .50    .50    .50 
Risk-free interest rate:               
Stock options   1.6%   2.6%   1.8%
Employee Stock Purchase Plan   0.8%   0.2%   0.5%
Volatility:               
Stock options   106%   164%   205%
Employee Stock Purchase Plan   142%   92%   129%

The expected term is based on historical data. The expected term for the Purchase Plan is based on the weighted-average purchase period of the Purchase Plan. The expected volatility is based on our historical stock prices, and the estimated forfeiture rate of the options is based on historical data.

The Black-Scholes option valuation model requires the input of highly subjective assumptions, including the expected life of the award and stock price volatility. The assumptions listed above represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if other assumptions had been used, our recorded stock-based compensation expense could have been materially different.

Stock-based compensation expense recorded for awards granted under the stock option plans and the Purchase Plan, net of estimated forfeitures, was as follows (in thousands, except per share amounts):

 

For the Years Ended December 31,  2011  2010  2009
                
Research and development  $819   $398   $260 
General and adminstrative   1,071    1,351    877 
                
Total  $1,890   $1,749   $1,137 
                
Impact on basic and diluted net loss per common share  $0.02   $0.04   $0.03 

In 2010, we recorded additional stock-based compensation expense as a result of accelerated vesting of stock options in connection with the resignation of our former chief executive officer. No tax benefit was recognized related to stock-based compensation expense since we have incurred operating losses and we have established a full valuation allowance to offset all the potential tax benefits associated with our deferred tax assets.

The following table summarizes option activity for the years ended December 31, 2011, 2010 and 2009:

   2011  2010  2009
              Weighted-    Aggregate                     
         Weighted-    Average    Intrinsic         Weighted-         Weighted- 
         Average    Remaining    Value as of         Average         Average 
         Exercise    Contractual    December 31,         Exercise         Exercise 
    Shares    Price    Term (Years)    2011    Shares    Price    Shares    Price 
                                         
Outstanding at beginning of year   3,217,240   $1.49              3,092,417   $1.91    2,701,073   $2.38 
Granted   48,070,000    0.26              1,087,700    1.45    991,500    0.67 
Exercised   —      —                (37,786)   1.24    (27,651)   0.71 
Expired or Forfeited   (1,180,953)   1.63              (925,091)   2.85    (572,505)   2.02 
Outstanding at end of year   50,106,287    0.31    9.42   $14,000    3,217,240    1.49    3,092,417    1.91 
                                         
Options exercisable at year end   6,740,497    0.53    8.92   $—      1,316,567    1.72    1,316,567    3.11 
                                         
Options vested or expected to vest   49,434,997    0.31    9.42   $13,715                     
                                         
Shares available for future grant at year end   44,261,608                   2,039,549         1,959,758      
                                         
Weighted-average fair value of stock options granted during the year       $0.21                  $1.39        $0.67 

As of December 31, 2011, there was approximately $9.5 million of total unrecognized compensation expense related to unvested stock options. This expense is expected to be recognized over a weighted-average period of 3.45 years. Cash received from option exercises for the years ended December 31, 2011, 2010 and 2009 was $0, $47,000 and $20,000, respectively. The total intrinsic value of options exercised in the year ended December 31, 2011, 2010 and 2009 was $0, $5,000, and $7,000, respectively. 

The following table summarizes information about stock options outstanding at December 31, 2011:

 

   OPTIONS OUTSTANDING  OPTIONS EXERCISABLE
      Weighted-         
      Average  Weighted-     Weighted-
      Remaining  Average     Average
Range of  Number  Contractual  Exercise  Number  Exercise
Exercise Prices  Outstanding  Life (Years)  Price  Exercisable  Price
                          
$0.19 - $0.19   350,000    9.99   $0.19    —     $—   
$0.26 - $0.26   47,720,000    9.52    0.26    5,345,839    0.26 
$0.60 - $6.20   1,989,848    7.10    1.27    1,348,219    1.38 
$6.40 - $6.40   18,876    3.95    6.40    18,876    6.40 
$6.52 - $6.52   5,813    3.03    6.52    5,813    6.52 
$6.96 - $6.96   2,500    4.42    6.96    2,500    6.96 
$7.00 - $7.00   5,000    1.67    7.00    5,000    7.00 
$9.36 - $9.36   2,500    0.39    9.36    2,500    9.36 
$9.80 - $9.80   9,250    2.04    9.80    9,250    9.80 
$11.756 - $11.756   2,500    2.40    11.76    2,500    11.76 
                          
$0.19 - $11.756   50,106,287    9.42   $0.31    6,740,497   $0.53 

As of December 31, 2011, there were no unvested restricted stock awards granted to employees and directors. The compensation cost that has been expensed in the statements of operations for the restricted stock awards issued to employees and directors and stock issued in lieu of fees was $98,000, $385,000 and $375,000 for 2011, 2010 and 2009, respectively.

The following table summarizes unvested restricted stock awards activity for the year ended December 31, 2011:

      Weighted-Average
      Grant Date
   Shares  Fair Value
           
Outstanding at beginning of year   318,758   $0.85 
Awarded   —        
Released   (143,835)  $0.73 
Forfeited   (174,923)  $0.94 
           
Outstanding at end of year   —     $0.00 

In November 2009, our Board of Directors extended the vesting period for certain restricted stock awards granted in May 2009 from December 31, 2009 to January 2, 2010. The modification of the restricted stock awards did not result in additional compensation expense.

 

The following table summarizes information about the Company’s warrants outstanding at December 31, 2011:

 

   Number of Shares Exercisable  Exercise Price  Expiration Date
       
Issued to PIPE investors in October 2009   3,977,270   $0.88   1/7/2015
Issued to PIPE investors in July 2011   80,000,005   $0.18   7/1/2016
Other   150,000   $0.19   8/10/2014
Total warrants outstanding at December 31, 2011   84,127,275   $0.21*
           
* Average exercise price          

Common Stock Reserved for Future Issuance

As of December 31, 2011, the Company had reserved shares of common stock for future issuance as follows:

   No. of Shares
      
Issuance upon exercise of outstanding stock options   50,106,287 
Issuance of future grants under stock option plans   44,261,608 
Issuance of future grants under employee stock purchase plan   531,176 
Issuance of common stock related to convertible notes*   200,359,458 
Issuance upon exercise of warrants   84,127,275 
      
Total   379,385,804 
      
      
*  Assumes additional $3.0 million principal amount of notes purchased as of
  January 1, 2012 and all interest payments are paid-in-kind