Annual report pursuant to Section 13 and 15(d)

Equity-Based Compensation

v2.4.0.6
Equity-Based Compensation
12 Months Ended
Dec. 31, 2012
Equity-Based Compensation [Abstract]  
Equity-Based Compensation

Note 9 Equity-Based Compensation

We maintain three equity-based incentive compensation plans, the 2007 Equity Incentive Plan, the 2000 Stock Option Plan, and the 1996 Stock Option Plan that provide for grants of stock options and restricted stock to our directors, officers, key employees and certain outside consultants. Equity awards granted under our 2007 Equity Incentive Plan are exercisable for a period up to seven years from the date of grant. Equity awards granted under our 2000 Stock Option Plan and the 1996 Stock Option Plan are exercisable for a period of up to 10 years from date of grant. Vesting periods range from immediate to 5 years.

We classify the cash flows resulting from the tax benefit that arises when the tax deductions exceed the compensation cost recognized for those equity awards (excess tax benefits) as financing cash flows. There were no excess tax benefits for the years ended December 31, 2012, 2011, and 2010.

Equity-based compensation arrangements to non-employees are accounted for at their fair value on the measurement date. The measurement of equity-based compensation is subject to periodic adjustment over the vesting period of the equity instruments.

Valuation and Expense Information

We recorded equity based compensation expense from continuing operations of $5.1 million, $7.0 million and $6.5 million for the years ended December 31, 2012, 2011, and 2010, respectively, all of which were reflected as operating expenses. Of the $5.1 million of equity based compensation expense recorded in the year ended December 31, 2012, $3.1 million was recorded as selling, general and administrative expenses and $2.0 million was recorded as research and development expenses. Of the $7.0 million of equity based compensation expense recorded in the year ended December 31, 2011, $3.0 million was recorded as selling, general and administrative expense and $4.0 million was recorded as research and development expenses. Of the $6.5 million of equity based compensation expense recorded in the year ended December 31, 2010, $4.8 million was recorded as selling, general and administrative expense and $1.7 million was recorded as research and development expenses. In addition, during the years ended December 31, 2011 and 2010, we recorded equity based compensation expense from discontinued operations of $0.2 million and $0.4 million, respectively. Refer to Note 4.

We estimate forfeitures of stock options and recognize compensation cost only for those awards expected to vest. Forfeiture rates are determined for all employees and non-employee directors based on historical experience and our estimate of future vesting. Estimated forfeiture rates are adjusted from time to time based on actual forfeiture experience.

As of December 31, 2012, there was $9.6 million of unrecognized compensation cost related to the stock options granted under our stock plans. Such cost is expected to be recognized over a weighted-average period of approximately 2.2 years.

Stock Options

We estimate the fair value of each stock option on the date of grant using a Black-Scholes option-pricing formula, applying the following assumptions, and amortize the fair value to expense over the option’s vesting period using the straight-line attribution approach for employees and non-employee directors, and for awards issued to non-employees we recognize compensation expense on a graded basis, with most of the compensation expense being recorded during the initial periods of vesting:

 

             
    Year Ended
December 31,
2012
  Year Ended
December 31,
2011
  Year Ended
December 31,
2010

Expected term (in years)

  3.0 - 7.0   1.0 - 7.0   0.6 - 7.0

Risk-free interest rate

  0.34% - 1.61%   0.09% - 2.61%   1.3% - 2.7%

Expected volatility

  41% - 68%   69%   69% - 74%

Expected dividend yield

  0%   0%   0%

 

Expected Term: The expected term of the stock options granted to employees and non-employee directors was calculated using the shortcut method. We believe this method is appropriate as our equity shares have been publicly-traded for a limited period of time and as such we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The expected term of stock options issued to non-employee consultants is the remaining contractual life of the options issued.

Risk-Free Interest Rate: The risk-free interest rate is based on the rates paid on securities issued by the U.S. Treasury with a term approximating the expected life of the option.

Expected Volatility: The expected volatility for options with an expected life of 5 years or less was based on our historical volatility of our stock. The expected volatility for options with an expected life of 6 years and over was based on a peer group of publicly-traded stocks’ historical trading, which we believe will be representative of the volatility over the expected term of the options. We believe the peer group’s historical volatility is appropriate as our equity shares have been publicly-traded for a limited period of time.

Expected Dividend Yield: We do not intend to pay dividends on Common Stock for the foreseeable future. Accordingly, we used a dividend yield of zero in the assumptions.

We maintain incentive stock plans that provide for the grants of stock options to our directors, officers, employees and non-employee consultants. As of December 31, 2012, there were 6,630,600 shares of Common Stock reserved for issuance under our 2007 Incentive Plan. We intend to issue new shares upon the exercise of options. Stock options granted under these plans have been granted at an option price equal to the closing market value of the stock on the date of the grant. Options granted under these plans to employees typically become exercisable over four years in equal annual installments after the date of grant, and options granted to non-employee directors become exercisable in full one-year after the grant date, subject to, in each case, continuous service with us during the applicable vesting period. We assumed options to grant Common Stock as part of the mergers with Acuity Pharmaceuticals, Inc. and Froptix, Inc., which reflected various vesting schedules, including monthly vesting to employees and non-employee consultants.

A summary of option activity under our stock plans as of December 31, 2012, and the changes during the year is presented below:

 

                                 

Options

  Number of
options
    Weighted
average
exercise
price
    Weighted
average
remaining
contractual
term (years)
    Aggregate
intrinsic value
(in thousands)
 

Outstanding at December 31, 2011

    16,814,521     $ 2.64       4.3     $ 38,092  

Granted

    2,279,500     $ 4.59                  

Exercised

    (1,019,967   $ 2.19                  

Forfeited

    (327,750   $ 3.36                  

Expired

    (4,500   $ 2.41                  
   

 

 

                         

Outstanding at December 31, 2012

    17,741,804     $ 2.90       3.8     $ 34,227  
   

 

 

   

 

 

   

 

 

   

 

 

 

Vested and expected to vest at December 31, 2012

    15,106,165     $ 2.85       3.8     $ 29,973  
   

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable at December 31, 2012

    11,513,890     $ 2.48       2.9     $ 27,080  
   

 

 

   

 

 

   

 

 

   

 

 

 

The total intrinsic value of stock options exercised for the years ended December 31, 2012, 2011, and 2010 was $2.4 million, $0.8 million and $0.3 million, respectively.

 

The weighted average grant date fair value of stock options granted for the years ended December 31, 2012, 2011, and 2010 was $2.44, $2.49, and $1.39, respectively. The total fair value of stock options vested during the years ended December 31, 2012, 2011 and 2010 was $3.4 million, $6.4 million and $3.4 million, respectively. The following table provides the grant date fair value for each of the following groups of stock option activity during 2012:

 

                 

Options

  Number of
options
    Weighted
average
grant
date fair
value
 

Nonvested at December 31, 2011

    6,484,875     $ 1.84  

Granted

    2,279,500     $ 2.44  

Forfeited

    327,750     $ 1.89  

Nonvested at December 31, 2012

    6,227,914     $ 1.45  

Restricted Stock

In 2009, we issued 30,000 shares of restricted Common Stock to one of our independent board members. The restricted stock was granted under our 2007 Equity Incentive Plan with a term of seven years and vesting occurring five years after the grant date with certain events which would accelerate the vesting of the award. The restricted stock was valued using the grant date fair value which was equivalent to the closing price of our Common Stock on the grant date. We record the cost of restricted stock over the vesting period.