8. Preferred Stock and Stockholders’ Equity

Preferred Stock

Our 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, 2016 and 2015, we had no outstanding shares of preferred stock.

Common Stock

Significant stock transactions

We issued approximately 6.2 million shares of our common stock in March 2015, upon the exercise of warrants that had been issued in two private placement transactions, one in 2008 and the other in 2012, to qualified investors, including members of our board of directors and their affiliates. The transactions generated aggregate net proceeds of approximately $17.1 million, after the deduction of issuance costs. Approximately 3.1 million shares of the securities, which generated aggregate gross proceeds of $5.9 million, were issued in these transactions to venture capital funds, trusts and other entities affiliated with members of our Board of Directors.

We also issued 164,666 shares of common stock related to the exercise of a warrant in May 2014 that had been issued in the 2008 private placement. This warrant was exercised on a cashless net-exercise basis, wherein an unaffiliated investor surrendered a warrant for 529,567 shares in exchange for the issuance of 164,666 shares of common stock.

We have never declared or paid any dividends.

Shares of common stock reserved for future issuance as of December 31, 2016 are as follows:

Common stock:	(in thousands)
Exercise of outstanding options		17,663
Shares available for grant under stock option plans		7,920
		25,583

On February 10, 2017, our Board of Directors authorized an additional increase of 4.5 million shares in the number of shares available under the 2012 Equity Incentive Plan (the 2012 Plan), which was equivalent to 4% of the shares of our common stock outstanding at December 31, 2016.

Stock Option Plans

We have two active stock option plans at December 31, 2016 – the 2004 Equity Incentive Plan (the 2004 Plan) and the 2012 Plan.

In 2004, our board of directors and stockholders approved the 2004 Plan, which became effective upon the completion of our initial public offering (IPO). 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 2012, our board of directors and stockholders approved the 2012 Plan. As of the effective date of the 2012 Plan, 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 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.

On February 26, 2016, our Board of Directors authorized an increase of 4.4 million 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, 2015, pursuant to the terms of the 2012 Plan.

Option activity during 2014, 2015 and 2016

The following table summarizes all stock plan activity:

				Outstanding Options
	Shares Available For Future Grant			Options 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, 2013		4,926			14,712		$	2.63
Increase in shares authorized for grant		3,993			—			—
Shares granted		(2,140	)		2,140		$	2.62
Shares exercised		—			(1,381	)	$	1.34
Shares cancelled and forfeited		767			(767	)	$	5.03
Balance at December 31, 2014		7,546			14,704		$	2.62
Increase in shares authorized for grant		4,056			—
Shares granted		(4,902	)		4,902		$	3.88
Shares exercised		—			(2,041	)	$	2.55
Shares cancelled and forfeited		1,370			(1,370	)	$	3.07
Balance at December 31, 2015		8,070			16,195		$	2.98
Increase in shares authorized for grant		4,386			—
Shares granted		(5,906	)		5,906		$	4.92
Shares exercised		—			(3,068	)	$	2.50
Shares cancelled and forfeited		1,370			(1,370	)	$	3.98
Balance at December 31, 2016		7,920			17,663		$	3.63		6.83		$	64,122

Options exercisable at December 31, 2016					10,471		$	3.00		5.37		$	44,598

Options fully vested and expected to vest at December 31, 2016					16,720		$	3.56		6.70		$	61,909

The total intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014 was $14.8 million, $5.5 million and $3.0 million, 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, 2016, 2015 and 2014 was $7.0 million, $5.4 million and $4.6 million, respectively.

The following is a summary of options outstanding and options exercisable at December 31, 2016.

			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	-	$	2.00		2,174		3.7	$	1.40		$	12,751		2,058	$	1.37	$	12,116
$	2.01	-	$	3.00		3,486		5.4	$	2.33			17,184		3,261	$	2.31		16,141
$	3.01	-	$	4.00		6,201		8.1	$	3.55			22,991		2,575	$	3.48		9,745
$	4.01	-	$	6.92		5,802		7.5	$	5.33			11,196		2,577	$	4.70		6,596
						17,663		6.8	$	3.63		$	64,122		10,471	$	3.00	$	44,598

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, 2016. The aggregate intrinsic value is the difference between our closing stock price on December 31, 2016 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,
	2016		2015		2014
Weighted-average assumptions for stock options granted:
Risk-free interest rate		1.31%		1.77%		1.80%
Expected term	5.8 years		7.2 years		6.0 years
Expected volatility of stock price		69.0%		77.0%		79.0%
Dividend rate		0%		0%		0%
Weighted-average grant date fair value-based measurement	$2.98		$2.72		$1.77

The expected term of options reflected in the table above 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.

We calculated employee stock-based compensation expense based on awards ultimately expected to vest and reduced it for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Summary of compensation expense related to options to employees and directors

We recognized compensation expense of $7.1 million, $6.0 million and $4.7 million related to options to employees and directors during the years ended December 31, 2016, 2015 and 2014, respectively.

As of December 31, 2016, we had $17.0 million of unrecognized compensation expense for employee and director options outstanding as of that date, which had a remaining weighted-average vesting period of 2.97 years.

Stock Options to Non-Employees

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.

We recorded charges to expense for non-employee stock options of $57,000, $87,000 and $470,000 for the years ended December 31, 2016, 2015 and 2014, respectively.

As of December 31, 2016, there is one award outstanding to a non-employee with an aggregate total of 4,000 shares unvested as of that date.

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,
	2016		2015		2014
	(in thousands)
Research and development	$	1,312	$	839	$	723
Selling, general and administrative		5,746		5,174		4,478
Total stock-based compensation	$	7,058	$	6,013	$	5,201