Note 7. Stock-Based Compensation

The expense relating to stock options is recognized on a straight-line basis over the requisite service period, usually the vesting period, based on the grant-date fair value. The unamortized compensation cost, net of expected forfeitures, as of September 30, 2016 was $2.9 million related to stock options and is expected to be recognized as expense over a weighted average period of approximately 2.8 years. The expense related to restricted stock units (RSUs) is recognized over a three-to-five year vesting period and is based on the fair value of the underlying stock on the dates of grant. The unamortized compensation cost, net of expected forfeitures, as of September 30, 2016 was $0.7 million related to RSUs which is expected to be recognized as expense over a weighted average period of approximately 2.3 years.

The Company presents the tax benefits resulting from tax deductions in excess of the compensation cost recognized from the exercise of stock options as financing cash flows in the condensed consolidated statements of cash flows. For the three and nine months ended September 30, 2016 and 2015, there were no such tax benefits associated with the exercise of stock options due to the Company’s loss positions.

Valuation Assumptions

The fair value of the Company’s stock options granted for the three and nine months ended September 30, 2016 and 2015 was estimated on the grant dates using the Black-Scholes valuation option-pricing model with the following assumptions:



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
Employee stock options:	2016	2015	2016	2015
Risk-free interest rate	1.0% -1.2%	1.4%	1.0% -1.2%	0.6% - 1.7%
Volatility	61.4% - 63.8%	59.3%	61.4% - 63.8%	55.7% - 59.3%
Expected life (years)	4.0 - 5.0	4.0	4.0 - 5.0	4.0 - 5.0
Dividend yield	0%	0%	0%	0%

The risk-free interest rate was derived from the Daily Treasury Yield Curve Rates, as published by the U.S. Department of the Treasury as of the grant date for terms equal to the expected terms of the options. The expected volatility was based on the historical volatility of the Company’s stock price over the expected term of the options. The expected term of options granted was derived from historical data based on employee exercises and post‑vesting employment termination behavior. A dividend yield of zero is applied because the Company has never paid dividends and has no intention to pay dividends in the near future.

The stock‑based compensation expense recorded is adjusted based on estimated forfeiture rates. An annualized forfeiture rate has been used as a best estimate of future forfeitures based on the Company’s historical forfeiture experience. The stock‑based compensation expense will be adjusted in later periods if the actual forfeiture rate is different from the estimate.

Common Stock Options and Restricted Stock

A summary of the option and RSU activity under the Company’s Amended and Restated 2000 Stock Option and Equity Incentive Plan (Amended 2000 Plan) and Amended and Restated 2010 Equity Incentive Plan (Amended 2010 Plan), referred to collectively as the “Plans,” is presented below (in thousands, except exercise price):


		Options outstanding
			Weighted
	Shares		Average
	Available	Number of	Exercise
	for Grant	Shares	Prices
Balance at December 31, 2015	1,059	6,749	$	3.51
Additional shares authorized under the Amended 2010 Plan	500	—		—
Restricted stock units cancelled and returned to Plan	14	—		—
Options cancelled and returned to Plan	232	(232)	$	3.30
Options cancelled and expired	—	(80)	$	4.18
Balance at March 31, 2016	1,805	6,437	$	3.51
Additional shares authorized under the Amended 2010 Plan	2,000	—		—
Restricted stock units cancelled and returned to Plan	2	—		—
Options cancelled and returned to Plan	413	(413)	$	3.87
Options cancelled and expired	—	(500)	$	4.53
Balance at June 30, 2016	2,220	5,524	$	3.40
Restricted stock units granted	(1,439)	—		—
Restricted stock units cancelled and returned to Plan	43	—		—
Options granted	(3,778)	3,778	$	0.70
Options cancelled and returned to Plan	3,726	(3,726)	$	3.50
Balance at September 30, 2016	772	5,576	$	1.50

The Company also has awarded options to new employees outside of the Plans and may continue to do so, as material inducements to the acceptance of employment with the Company, as permitted under the Listing Rules of the Nasdaq Stock Market. These grants must be approved by the compensation committee of the board of directors, a majority of the independent directors or, below a specified share level, by an authorized executive officer.

A summary of the inducement grant option activity is presented below (in thousands, except exercise price):


	Options Outstanding
		Weighted
		Average
	Number of	Exercise
	Shares	Prices
Balance at December 31, 2015	1,640	$	4.37
Cancelled	(139)	$	3.87
Balance at March 31, 2016	1,501	$	4.42
Cancelled	(366)	$	3.83
Balance at June 30, 2016	1,135	$	4.61
Cancelled	(1,135)	$	4.61
Balance at September 30, 2016	—	$	—

A summary of RSU activity under the Plans is presented below (in thousands, except for fair value):


		Weighted
		Average
	Number of	Grant-Date
	Shares	Fair Value
Non-vested shares at December 31, 2015	241	$	4.61
Vested	(107)	$	4.62
Cancelled	(14)	$	4.62
Non-vested shares at March 31, 2016	120	$	4.61
Vested	(13)	$	4.58
Cancelled	(2)	$	4.13
Non-vested shares at June 30, 2016	105	$	4.62
Granted	1,439	$	0.53
Cancelled	(43)	$	0.80
Non-vested shares at September 30, 2016	1,501	$	0.81

The total intrinsic value of the restricted stock units outstanding as of September 30, 2016 was $1.1 million.

The following table summarizes significant ranges of outstanding and exercisable options as of September 30, 2016 (in thousands, except contractual life and exercise price):


	Options Outstanding				Options Exercisable
		Weighted
		Average
		Remaining	Weighted			Weighted
		Contractual	Average			Average		Aggregate
	Number	Life	Exercise		Number	Exercise		Intrinsic
Range of Exercise Price	Outstanding	(in Years)	Price		Exercisable	Price		value
$0.53 - $0.71	388	8.99	$	0.53	51	$	0.53
$0.72 - $0.76	3,278	9.89	$	0.72	93	$	0.72
$0.77 - $3.09	1,097	6.04	$	2.28	812	$	2.43
$3.10 - $5.42	713	3.00	$	3.82	699	$	3.81
$5.43 - $6.10	60	0.81	$	5.43	60	$	5.43
$6.11 - $6.11	40	0.57	$	6.11	40	$	6.11
$0.53 - $6.11	5,576	8.03	$	1.50	1,755	$	3.02	$	184
Vested and expected to vest	5,158	7.89	$	1.56				$	166
Exercisable	1,755	4.36	$	3.02				$	14

There were no stock options exercised during the nine months ended September 30, 2016. The intrinsic value of stock options exercised during the nine months ended September 30, 2015 was approximately $0.3 million.

On July 26, 2016, the Company initiated a one-time option exchange program pursuant to which employees (excluding the chief executive officer and non-employees, including members of the Company’s board of directors) who held certain options to purchase shares of the Company’s common stock (such options, “eligible options”) were given the opportunity to exchange such eligible options for a lesser number of replacement options with a lower exercise price. Upon the expiration of the option exchange program on August 23, 2016, the Company accepted for cancellation exchanged options to purchase an aggregate of 4,569,959 shares of common stock and issued from the Amended 2010 Plan replacement options covering 3,340,273 shares of common stock. The exchanged eligible options included options to purchase 1,135,313 shares of the Company’s common stock, which were originally inducement grants. The replacement options have an exercise price of $0.72 per share and vest monthly over three years. This one-time option exchange was treated as a modification for accounting purposes and resulted in incremental expense of approximately $926,000 which was calculated using the Black-Scholes option pricing model. The incremental expense and the unamortized expense remaining on the exchanged options are being amortized over the three-year vesting period of the replacement options.

Employee Stock Purchase Plan

In June 2010, the Company’s stockholders approved the 2010 Employee Stock Purchase Plan (ESPP). A total of 2,000,000 shares of common stock were initially reserved for issuance under the ESPP in 2010. On September 1, 2010, the Company commenced the first offering period under the ESPP. In May 2015, the Company’s stockholders approved an amendment increasing the number of shares reserved for issuance by 2,000,000 shares. The ESPP, which is intended to qualify under Section 423 of the Internal Revenue Code, is administered by the board of directors or the compensation committee of the board of directors. The ESPP provides that eligible employees may purchase up to $25,000 worth of the Company’s common stock annually over the course of two six-month offering periods. The purchase price to be paid by participants is 85% of the price per share of the Company’s common stock either at the beginning or the end of each six-month offering period, whichever is less.

On February 29, 2016, approximately 373,000 shares of common stock were issued for an aggregate purchase price of $197,000 under the ESPP. On August 31, 2016, approximately 319,000 shares of common stock were issued for an aggregate purchase price of $168,000. As of September 30, 2016, there were approximately 1.5 million shares authorized and unissued under the ESPP.