Note 5. Stock-Based Compensation

We currently grant stock-based compensation under two equity incentive plans approved by the Company’s stockholders and one plan adopted in 2012 pursuant to NASDAQ Listing Rule 5635(c)(4) concerning inducement grants for new employees (our “2012 Commencement Incentive Plan”). As of June 30, 2013, we had 157,190 shares available to grant under our two stockholder-approved plans, namely our 2004 Equity Incentive Plan and our 2006 Equity Incentive Plan. At our annual stockholders meeting held on June 12, 2007, our stockholders approved an amendment to our 2006 Equity Incentive Plan to provide for an annual increase in the number of shares of common stock available for issuance under the plan each January 1 (beginning January 1, 2008) equal to 4% of the outstanding common shares as of that date. The amendment further provided an aggregate limit of 3,000,000 shares issuable pursuant to incentive stock option awards under the plan. Under the two stockholder-approved plans we may grant incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, 401(k) Plan employer match in form of shares and performance-based shares to our employees, directors and consultants, at prices determined by our Board of Directors. Incentive stock options may only be granted to employees under these plans with a grant price not less than the fair market value on the date of grant. Under our 2012 Commencement Inducement Plan, we may only award options, restricted stock units and other equity awards to newly hired employees and newly engaged directors, in each case as allowed by NASDAQ listing requirements.

Our stock-based compensation expense for the three and six months ended June 30 was as follows:


	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012
Research and development expense	$	373,652		$	320,303		$	717,363		$	652,177
Selling, general and administrative expense		375,989			403,142			718,860			807,813

Total stock-based compensation	$	749,641		$	723,445		$	1,436,223		$	1,459,990

Effect on basic and diluted net loss per share	$	(0.02	)	$	(0.03	)	$	(0.04	)	$	(0.06	)

As of June 30, 2013, we had approximately $5,301,000 of total unrecognized compensation expense related to unvested awards of stock options and restricted stock units granted under our various equity incentive plans that we expect to recognize over a weighted-average vesting period of 3.3 years.

Stock Options

Generally, stock options granted to employees have a maximum term of ten years, and vest over a four year period from the date of grant; 25% vest at the end of one year, and 75% vest monthly over the remaining three-year service period. We may grant options with different vesting terms from time to time. Upon employee termination of service, any unexercised vested option will be forfeited three months following termination or the expiration of the option, whichever is earlier. Unvested options are forfeited on termination.

A summary of our stock option activity for the three months ended June 30, 2013 is as follows:


	Number of options			Weighted-average exercise price ($) per share
Balance at March 31, 2013		443,926			19.70
Granted		—			—
Exercised		(2,086	)		1.00
Cancelled		(1,714	)		4.78

Outstanding options at June 30, 2013		440,126			19.85

A summary of changes in unvested options for the three months ended June 30, 2013 is as follows:


	Number of options			Weighted-average exercise price ($) per share		Weighted-average grant date fair value ($) per option
Unvested options at March 31, 2013		51,466			10.61		8.45
Granted		—			—		—
Vested		(11,896	)		11.40		9.14
Cancelled		(473	)		10.76		7.82

Unvested options at June 30, 2013		39,097			10.37		8.25

The estimated fair value of options vested was approximately $109,000 in the three months ended June 30, 2013.

Restricted Stock Units

We have granted restricted stock units (RSUs) to certain employees and members of the Board of Directors which entitle the holders to receive shares of our common stock upon vesting of the RSUs. The fair value of restricted stock units granted is based upon the market price of the underlying common stock as if it were vested and issued on the date of grant.

A summary of changes in unvested restricted stock units for the three months ended June 30, 2013 is as follows:


	Number of RSUs			Weighted-average grant date fair value ($) per RSU
Unvested restricted stock units at March 31, 2013		1,236,982			2.38
Granted(1)		2,286,765			1.81
Vested		(153,131	)		9.04
Cancelled		(20,000	)		0.72

Balance unvested at June 30, 2013		3,350,616			1.70

(1)

11,765 of these restricted stock units vest and convert into shares of our common stock on the date of grant. 25,000 of these restricted stock units vest and convert into shares of our common stock after one year from the date of grant. 2,250,000 of these restricted stock units will vest and convert into shares of our common stock over a four year period from the date of grant; one-fourth of the award will vest on each grant date anniversary following the grant.

Stock Appreciation Rights

In July 2006, we granted cash-settled Stock Appreciation Rights (SARs) to certain employees that give the holder the right, upon exercise, to the difference between the price per share of our common stock at the time of exercise and the exercise price of the SARs.

The SARs have a maximum term of ten years with an exercise price of $20.00, which is equal to the market price of our common stock at the date of grant. The SARs vest 25% on the first anniversary of the grant date and 75% vest monthly over the remaining three-year service period. All of the outstanding SARs as of June 30, 2013 are fully vested. Compensation expense is based on the fair value of SARs which is calculated using the Black-Scholes option pricing model.

The stock-based compensation expense and liability are re-measured at each reporting date through the earlier of date of settlement or forfeiture of the SARs.

A summary of the changes in SARs for the three months ended June 30, 2013 is as follows:


	Number of SARs
Outstanding at March 31, 2013		110,593
Granted		—
Exercised		—
Forfeited and expired		—

Outstanding SARs at June 30, 2013		110,593

SARs exercisable at June 30, 2013		110,593

For the three months ended June 30, 2013 and 2012, the re-measured liability and expense for the respective periods related to the SARs were not significant.

The compensation expense related to the SARs recognized for the three months ended June 30, 2013 may not be representative of compensation expense for future periods and its resulting effect on net loss and net loss per share attributable to common stockholders, due to changes in the fair value calculation which is dependent on the stock price, volatility, interest and forfeiture rates, additional grants and subsequent periods of vesting. We will continue to recognize compensation cost each period, which will be the change in fair value from the previous period through the earlier date of settlement or forfeiture of the SARs.