9. Preferred Stock and Stockholders’ Equity

Preferred Stock

The board of directors is authorized, subject to any limitations prescribed by law, without stockholder approval, to issue up to an aggregate of 10,000,000 shares of preferred stock at $0.001 par value in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon the preferred stock, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences. The rights of the holders of common stock will be subject to the rights of holders of any preferred stock that may be issued in the future.

As of December 31, 2012 and 2011, we had no outstanding shares of preferred stock.

Common Stock

Increase in number of authorized shares of common stock

On June 13, 2012, our stockholders approved an amendment to our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 140.0 million to 280.0 million shares at a par value of $0.001 per share. This amendment was filed with the Delaware Secretary of State on June 14, 2012 and became effective as of that date. Holders of common stock are entitled to one vote per share on all matters to be voted upon by our stockholders.

Significant Stock transactions

The following paragraphs describe significant transactions relating to the sale and issuance of common stock and the exercise and issuance of warrants during the years ended December 31, 2012, 2011 and 2010. Information regarding the issuance of common stock upon the exercise of stock options is discussed below under the caption, Stock Option Plans.

Transactions during 2012

On March 29, 2012, we issued approximately 4.2 million shares of our common stock upon the exercise of warrants that we had issued in a private placement transaction in April 2010 at an exercise price of $2.96 per share and sold new warrants to the same investors to purchase approximately 4.2 million shares of common stock at an exercise price of $4.05 per share. The new warrants are exercisable through March 29, 2015. We generated net proceeds in these transactions of $12.8 million, after the deduction of issuance costs. Venture capital funds, trusts and other entities affiliated with members of our Board of Directors purchased approximately 40 percent of the securities sold in this transaction, with the remainder being purchased by other qualified investors.

On July 6, 2012, we sold 11.0 million shares of our common stock in an underwritten public offering at a price to the public of $4.49 per share, generating net proceeds of $46.1 million after deducting expenses of the offering.

During the year ended December 31, 2012, investors exercised additional warrants for the purchase of our common stock with exercise prices ranging from $1.66 to $2.96 per share. As a result, we issued an aggregate of approximately 216,000 shares of common stock and generated aggregate proceeds of $470,000.

Transactions during 2011

On January 26, 2011, we sold 11.5 million shares of our common stock in an underwritten public offering at a price to the public of $3.90 per share for aggregate net proceeds of $41.8 million after deducting the underwriter’s discount and commissions and other expenses of the offering. Longitude Venture Partners, L.P. purchased 750,000 (approximately 6.5%) of the shares sold in this transaction. Patrick Enright, who is a member of our board of directors, is a managing member of Longitude Capital Partners, LLC, the general partner of Longitude Venture Partners, L.P.

On July 13, 2011, we issued 80,991 shares of common stock to an investor upon the exercise of warrants that had been issued in our April 2010 warrant transaction and our March 2008 financing, for an average exercise price of $2.85 per share, receiving aggregate proceeds of $231,000.

Transactions during 2010

On April 21, 2010, we issued approximately 4.3 million shares of our common stock upon the exercise of warrants that had been issued in a private placement transaction in October 2009 at their exercise price of $1.66 per share and sold new warrants to the same investors to purchase a total of approximately 4.3 million shares of our common stock, which we refer to as the April 2010 Warrant Exchange. The warrants were originally exercisable through April 21, 2013 at an exercise price of $2.96 per share. The total net proceeds generated in this transaction were $7.5 million, after the deduction of issuance costs. Approximately 40% of the securities sold in this transaction were purchased by venture capital funds, trusts and other entities affiliated with members of our Board of Directors, with the remainder being purchased by other qualified investors. As discussed above under the subcaption, Transactions during 2012, the warrants issued in this April 2010 transaction were exercised on March 29, 2012.

On June 30, 2010, we sold 5.0 million shares of our common stock in an underwritten public offering at a price to the public of $3.00 per share for aggregate net proceeds of $13.8 million after deducting the underwriter’s discount and commissions and other expenses of the offering.

During 2010, we also sold an aggregate of 518,639 shares of common stock to Kingsbridge Capital Limited (Kingsbridge) under the Committed Equity Financing Facility (CEFF) at an average price of $3.13 per share, for net proceeds of $1.6 million. There were no underwriting discounts or commissions paid in connection with the CEFF sales and the transaction costs were immaterial.

Committed Equity Financing Facility

Effective August 7, 2012, we terminated our CEFF with Kingsbridge. The termination of the CEFF has no effect on the warrant that was issued to Kingsbridge for 330,000 shares of our common stock, which can be exercised at any time through September 25, 2013 for an exercise price of $3.525 per share. Also, under the registration rights agreement issued in connection with the CEFF, we are required to continue to use commercially reasonable efforts to maintain the effectiveness of the registration statement covering the shares sold under this agreement and to be issued upon the exercise of the warrant for a period of up to two years following the termination of the CEFF, subject to earlier termination on certain events. If we do not fulfill certain of our obligations under the registration rights agreement, we will be required to pay liquidated damages to Kingsbridge. No separate contingent obligation has been recorded as no liquidated damages have become probable of payment. In June 2008, the SEC declared effective our registration statement covering the resale of the 330,000 shares issuable upon the exercise of the warrant.

Registration Rights related to March 2008 Financing

In March 2008, we sold approximately 8.9 million shares of our common stock and warrants to purchase approximately 4.5 million shares of our common stock in a private placement (the March 2008 Financing). The registration rights agreement covering securities issued in the March 2008 Financing provides that if we do not fulfill certain of our obligations under the registration rights agreement, we will be required to pay liquidated damages to the holders of the shares and warrants. We filed the registration statement covering the resale of the shares sold and shares underlying the warrants sold in this transaction with the Securities and Exchange Commission (SEC) on April 11, 2008, and it was declared effective by the SEC on November 10, 2008. During 2008, we recorded $1.3 million in liquidated damages to other non-operating expense because of the delay in the effectiveness of the registration statement, which represented approximately 5% of the purchase price. No separate contingent obligation has been recorded since that time as no additional liquidated damages have become probable of payment.

No dividends have been declared or paid by us.

Shares of common stock reserved for future issuance as of December 31, 2012 are as follows:


	(in thousands)
Common stock:
Exercise of outstanding options		11,626
Exercise of warrants		8,904
Shares available for grant under stock option plans		4,055

		24,585

On January 30, 2013, our Board of Directors authorized an increase of 3,992,570 shares in the number of shares available under the 2012 Plan, which was equivalent to 4% of the shares of our common stock outstanding as of December 31, 2012, pursuant to the terms of the 2012 Plan.

Stock Option Plans

We have three stock option plans—the 2000 Stock Option Plan (the 2000 Plan), the 2004 Equity Incentive Plan (the 2004 Plan) and the 2012 Incentive Award Plan (the 2012 Plan). As of December 31, 2012, all option grants under the 2000 Plan were fully vested and grants covering approximately 214,000 shares remained outstanding with contractual lives expiring through March 2014.

In 2004, our board of directors and stockholders approved the 2004 Plan, which became effective upon the completion of our Initial Public Offering (IPO), after which time, no additional options have been or will be issued under the 2000 Plan. Under the 2004 Plan, options, stock purchase and stock appreciation rights and restricted stock awards can be issued to our employees, officers, directors and consultants. The 2004 Plan provided that the exercise price for incentive stock options will be no less than 100% of the fair value of the Company’s common stock, as of the date of grant. Options granted under the 2004 Plan vest over periods ranging from one to five years. The vesting period of the options is generally equivalent to the requisite service period. In November 2011, our Board of Directors authorized an increase in the shares available for issuance under the 2004 Plan equal to 4 percent of the shares of our common stock outstanding as of December 31, 2011, pursuant to the terms of the 2004 Plan. Accordingly, as of January 1, 2012, the shares available for issuance under the 2004 Plan increased by a total of 3,369,249 shares.

In February 2012, our Board of Directors and stockholders approved the 2012 Plan, which became effective upon its approval at our Annual Meeting of Stockholders on June 13, 2012. As of the effective date of the 2012 Plan, approximately 5.3 million shares that remained available for issuance of new grants under the 2004 Plan were transferred to the 2012 Plan. After that date, no additional options were or will be issued under the 2004 Plan. Vested options under the 2000 Plan and the 2004 Plan that are not exercised within the remaining contractual life and any options under the 2004 Plan that do not vest because of terminations after the effective date of the 2012 Plan will be added to the pool of shares available for future grants under the 2012 Plan.

Under the 2012 Plan, we can issue options, stock purchase and stock appreciation rights and restricted stock awards to our employees, officers, directors and consultants. The 2012 Plan provides that the exercise price for incentive stock options will be no less than 100 percent of the fair value of our common stock, as of the date of grant. Options granted under the 2012 Plan are expected to vest over periods ranging from one to four years. We expect the vesting period of the options that we grant under the 2012 Plan to be generally equivalent to the requisite service period.

Upon exercise of options, new shares are issued.

As of December 31, 2012, 4,054,507 shares remained available for future grants under the 2012 Plan. See discussion above under Common Stock regarding an additional increase to the shares available for grant under the 2012 Plan that was authorized by the Board of Directors in January 2013.

Option activity during 2010, 2011 and 2012

The following table summarizes all stock plan activity:


				Outstanding Options
	Shares Available For Future Grant			Shares Subject to Options Outstanding			Weighted- Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
	(in thousands)			(in thousands)					(in years)		(in thousands)
Balance at December 31, 2009		201			7,347		$	2.28
Increase in shares authorized for grant		2,499			—			—
Shares granted		(838	)		838		$	3.40
Shares exercised		—			(124	)	$	1.22
Shares cancelled and forfeited under 2000 Plan		—			(13	)	$	15.00
Shares cancelled and forfeited under 2004 Plan		87			(87	)	$	2.26

Balance at December 31, 2010		1,949			7,961		$	2.40
Increase in shares authorized for grant		2,896			—			—
Shares granted		(2,825	)		2,825		$	3.97
Shares exercised		—			(246	)	$	1.51
Shares cancelled and forfeited under 2000 Plan		—			(1	)	$	0.10
Shares cancelled and forfeited under 2004 Plan		231			(231	)	$	1.72

Balance at December 31, 2011		2,251			10,308		$	2.86
Increase in shares authorized for grant		3,369			—			—
Shares granted		(1,695	)		1,695		$	3.26
Shares exercised		—			(165	)	$	1.91
Shares expired under 2000 Plan		11			(93	)	$	7.00
Shares cancelled and forfeited under 2004 and 2012 Plans		119			(119	)	$	3.26

Balance at December 31, 2012		4,055			11,626		$	2.90		6.6	$	711

Options exercisable at December 31, 2012					8,198		$	2.66		4.3	$	696

Options fully vested and expected to vest at December 31, 2012					11,626		$	2.90		6.6	$	711

All stock option grants vest solely based upon continuing service, with the exception of the following awards with performance-based vesting criteria: 1) an award to a consultant of 50,000 shares that vested in its entirety on the filing by the FDA of our NDA for Korlym in June 2011, 2) awards to Joseph K. Belanoff, our Chief Executive Officer, and Robert L. Roe, our President, of 500,000 shares and 350,000 shares, respectively, that vested in their entirety upon the receipt of approval of the Korlym NDA in February 2012, and 3) an award to a consultant for 10,000 shares that vested upon issuance in December 2012 due to the completion of the required services.

The total intrinsic value of options exercised during the years ended December 31, 2012, 2011 and 2010 was $303,000, $702,000 and $250,000, respectively, based on the difference between the closing price of our common stock on the date of exercise of the options and the exercise price.

The total grant date fair value of options to employees and directors that vested during the years ended December 31, 2012, 2011 and 2010 was $5.0 million, $2.8 million and $1.9 million, respectively.

The following is a summary of options outstanding and options exercisable at December 31, 2012.


Exercise Prices Of Options	Options Outstanding								Options Exercisable
Exercise Prices Of Options	Number of Shares		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Aggregate Intrinsic Value		Number of Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value
	(in thousands)		(in years)				(in thousands)		(in thousands)				(in thousands)
$0.96 - $ 1.25		2,363		6.2	$	1.13	$	711		2,302	$	1.13	$	696
$1.26 - $ 3.50		4,718		6.4	$	2.12		—		3,308	$	1.93		—
$3.51 - $ 5.00		4,111		7.5	$	4.23		—		2,154	$	4.27		—
$5.01 - $ 14.50		434		1.3	$	8.29		—		434	$	8.29		—

		11,626		6.6	$	2.90	$	711		8,198	$	2.66	$	696

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have received had all option holders exercised their options on December 31, 2012. The aggregate intrinsic value is the difference between our closing stock price on December 31, 2012 and the exercise price, multiplied by the number of in-the-money options.

Stock-Based Compensation related to Employee and Director Options

Assumptions used in determining fair value-based measurements for options to employees and directors

The following table summarizes the weighted-average assumptions and resultant fair value-based measurements for options granted to employees and directors.


	Year Ended December 31,
	2012			2011			2010
Weighted-average assumptions for stock options granted:
Risk-free interest rate		1.06	%		2.65	%		1.83	%
Expected term		6.7 years			8.9 years			5.9 years
Expected volatility of stock price		86.6	%		90.0	%		96.3	%
Dividend rate		0	%		0	%		0	%
Weighted average grant date fair value-based measurement	$	2.41		$	3.29		$	2.68

For options granted from January 1, 2006 through September 2009, the expected term used in determining the fair value was based on the “simplified” method prescribed by the SEC, and considers the weighted-average of the vesting period and contractual life of the options. For options granted since September 2009, the expected term has been based on a formula that considers the expected service period and expected post-vesting termination behavior differentiated by whether the grantee is an employee, an officer or a director.

The expected volatility of our stock used in determining the fair value-based measurement of option grants to employees, officers and directors is based on a weighted-average combination of the volatility of our own stock price and that of a group of peer companies for those grants with expected terms longer than the period of time that we have been a public company. For stock options granted to employees with expected terms of less than the period of time that we have been a public company, the volatility is based on historical data of the price for our common stock for periods of time equivalent to the expected term of these grants.

Since we have a limited employee base and have experienced minimal turnover, we do not apply a forfeiture rate. When an employee terminates, we will record a change in accounting estimate that represents the difference between the expense recorded in the financial statements and the expense that would have been recorded based upon the rights to options that vested during the individual’s service as an employee.

Summary of compensation expense related to options to employees and directors

We recognized compensation expense of $5.1 million, $3.0 million and $1.9 million, related to options to employees and directors during the years ended December 31, 2012, 2011 and 2010, respectively. The data for the year ended December 31, 2012 includes $1.3 million of expense related to performance-based option awards to officers that vested upon the FDA approval of Korlym in February 2012, which is classified as selling, general and administrative expense.

As of December 31, 2012, we had $8.9 million of unrecognized compensation expense for employee and director options outstanding as of that date, which had a remaining weighted-average vesting period of 2.7 years.

Stock Options to Consultants

We expense stock-based compensation related to service-based option grants to non-employees on a straight line basis over the vesting period of the options, which approximates the period over which the related services are rendered, based on the fair value-based measurement of the options using the Black-Scholes option pricing model. The assumptions used in these calculations are similar to those used for the determination of fair value-based measurement for options granted to employees and directors, with the exception that, for non-employee options, the remaining contractual term is utilized as the expected term of the option and the fair value-based measurement related to unvested non-employee options is re-measured quarterly, based on the then current stock price as reflected on the NASDAQ Capital Market. For options with performance-based vesting criteria, we recognize expense based on the minimum number of shares that will vest over time as the criteria are met based on the Black-Scholes valuation of the vested shares.

We recorded charges to expense for stock options granted to consultants of $208,000, $419,000, and $169,000 for the years ended December 31, 2012, 2011 and 2010, respectively.

As of December 31, 2012, all options that had been granted to consultants were fully vested.

Summary of Stock-based Compensation Expense

The following table presents a summary of non-cash stock-based compensation by financial statement classification.


	Year ended December 31,
	2012		2011		2010
	(in thousands)
Research and development expense	$	546	$	547	$	220
Selling, general and administrative expense		4,764		2,888		1,896

Total	$	5,310	$	3,435	$	2,116

Stockholder Notes Receivable

In 2001, we recorded notes receivable from stockholders in the aggregate amount of $438,165 in connection with the exercise of options issued under the 2000 Plan to purchase 585,000 shares of common stock. The notes were secured by the related shares of common stock and were full recourse notes, with interest compounded annually at the rate of 6.5% per year. As of December 31, 2011, all amounts of principal and interest related to these notes had been paid.

Warrants

Outstanding warrants at December 31, 2012 were as follows:


	Number of shares		Exercise Price		Expiration Date
March 2008 Financing		4,371,478	$	2.77		3/25/15
Kingsbridge CEFF		330,000	$	3.525		9/25/13
March 2012 Warrant Exchange		4,202,443	$	4.05		3/29/15

Total warrants outstanding		8,903,921