7.	Convertible Preferred Stock and Stockholders’ Equity

Convertible Preferred Stock

In November 2016, the Company completed a private placement of stock in which investors, certain of which are affiliated with the directors and officers of the Company, purchased convertible preferred stock and common stock of the Company (the November 2016 Placement). The Company issued 2,819,549 shares of non-voting Class A Convertible Preferred Stock (the Class A Preferred) at $13.30 per share, each of which is convertible into five shares of common stock upon certain conditions defined in the Certificate of Designation of Preferences, Rights and Limitations of the Class A Preferred filed with the Delaware Secretary of State on November 22, 2016 (the CoD). The Class A Preferred were purchased exclusively by entities affiliated with Redmile Group, LLC (collectively, Redmile). The terms of the CoD prohibited Redmile from converting the Class A Preferred into shares of the Company’s common stock if, as a result of conversion, Redmile, together with its affiliates, would own more than 9.99% of the Company’s common stock then issued and outstanding (the Redmile Percentage Limitation), which percentage could change at Redmile’s election upon 61 days’ notice to the Company to (i) any other number less than or equal to 19.99% or (ii) subject to approval of the Company’s stockholders to the extent required in accordance with the NASDAQ Global Market rules, any number in excess of 19.99%. On May 2, 2017, the Company’s stockholders approved the issuance of up to an aggregate of 14,097,745 shares of common stock upon the conversion of the outstanding shares of Class A Preferred. As a result, Redmile has the right to increase the Redmile Percentage Limitation to any percentage in excess of 19.99% at its election. The Company also issued 7,236,837 shares of common stock at $2.66 per share as part of the November 2016 Placement. Gross proceeds from the November 2016 Placement were $56.7 million, and after giving effect to costs related to placement, net proceeds were $54.9 million.

The Class A Preferred are non-voting shares and have a stated par value of $0.001 per share and are convertible into five shares of the Company’s common stock at a conversion price of $2.66 per share, which was the fair value of the Company’s common stock on the date of issuance. Holders of the Class A Preferred have the same dividend rights as holders of the Company’s common stock. Additionally, the liquidation preferences of the Class A Preferred are pari passu among holders of the Company’s common stock and holders of the Class A Preferred, pro rata based on the number of shares held by each such holder (treated for this purpose as if the Class A Preferred had been converted to common stock).

The Company evaluated the Class A Preferred for liability or equity classification under ASC 480, Distinguishing Liabilities from Equity, and determined that equity treatment was appropriate because the Class A Preferred did not meet the definition of the liability instruments defined thereunder for convertible instruments. Specifically, the Class A Preferred are not mandatorily redeemable and do not embody an obligation to buy back the shares outside of the Company’s control in a manner that could require the transfer of assets. Additionally, the Company determined that the Class A Preferred would be recorded as permanent equity, not temporary equity, based on the guidance of ASC 480 given that they are not redeemable for cash or other assets (i) on a fixed or determinable date, (ii) at the option of the holder, and (iii) upon the occurrence of an event that is not solely within control of the Company.

The Company also evaluated the Class A Preferred in accordance with the provisions of ASC 815, Derivatives and Hedging, including the consideration of embedded derivatives requiring bifurcation from the equity host. Based on this assessment, the Company determined that the conversion option is clearly and closely related to the equity host, and thus, bifurcation is not required.

The issuance of convertible preferred stock could generate a beneficial conversion feature (BCF), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor (or in-the-money) at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock on the commitment date. The Class A Preferred have an effective conversion price of $2.66 per common share, which was equal to the market price of the Company’s stock on the commitment date. Therefore, no BCF was present.

The Company also entered into a registration rights agreement (the Registration Rights Agreement) with certain of the purchasers in the November 2016 Placement, excluding those purchasers affiliated with the Company’s directors and officers, requiring the Company to register for the resale of the relevant shares. The Company registered all of the relevant shares issued in the November 2016 Placement for resale on a Form S-3 filed with the SEC, as required under the Registration Rights Agreement, and the registration statement was declared effective in January 2017.

Stock Options and Restricted Stock Units

Stock option activity under all equity and stock option plans is summarized as follows:

	Number of Options			Weighted- Average Price
Balance at December 31, 2017		5,458,043		$	3.52
Granted		2,964,260			7.55
Canceled		(620,489	)		4.58
Exercised		(504,475	)		3.80
Balance at September 30, 2018		7,297,339		$	5.05

Restricted stock unit activity under all equity and stock option plans is summarized as follows:

	Number of Restricted Stock Units			Weighted- Average Grant Date Fair Value per Share
Balance at December 31, 2017		212,625		$	4.89
Granted		—			—
Canceled		(24,000	)	$	4.89
Vested		—			—
Balance at September 30, 2018		188,625		$	4.89

In October 2017, 225,125 shares of common stock underlying restricted stock units vested and were issued to certain employees.

The allocation of stock-based compensation for all stock awards is as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Research and development	$	939	$	450	$	2,598	$	1,599
General and administrative		703		421		1,911		1,112
	$	1,642	$	871	$	4,509	$	2,711

As of September 30, 2018, the outstanding options included 36,800 performance-based options for which the achievement of the performance-based vesting provisions was determined not to be probable. The aggregate grant date fair value of these unvested options at September 30, 2018 was $0.1 million.

As of September 30, 2018, the unrecognized compensation cost related to outstanding options (excluding those with performance-based conditions determined not to be probable) was $15.4 million and is expected to be recognized as expense over a weighted average period of approximately 3.1 years.

As of September 30, 2018, the unrecognized compensation cost related to restricted stock units was $0.5 million which is expected to be recognized as expense over approximately 1.0 years.

The weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of the employee stock option grants were as follows:

	Nine Months Ended September 30,
	2018			2017
Risk-free interest rate		2.5	%		2.0	%
Expected volatility		79.3	%		90.4	%
Expected term (in years)		6.0			5.9
Expected dividend yield		0.0	%		0.0	%

The weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of the non-employee stock option grants were as follows:

	Nine Months Ended September 30,
	2018			2017
Risk-free interest rate		2.8	%		2.0	%
Expected volatility		80.1	%		90.8	%
Remaining contractual term (in years)		8.0			8.6
Expected dividend yield		0.0	%		0.0	%

Reconciliation of Stockholders’ Equity Accounts

The following table summarizes the Company’s changes in Stockholders’ Equity accounts for the nine months ended September 30, 2018 (in thousands):

	Convertible Preferred Stock		Common Stock		Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders' Equity
Balance at December 31, 2017	$	3	$	53	$	295,934		$	(3	)	$	(218,798	)	$	77,189
Exercise of stock options, net of issuance costs		—		—		606			—			—			606
Issuance costs from public offering of common stock		—		—		(37	)		—			—			(37	)
Stock-based compensation		—		—		1,382			—			—			1,382
Unrealized loss on short-term investments		—		—		—			(10	)		—			(10	)
Net loss		—		—		—			—			(14,135	)		(14,135	)
Balance at March 31, 2018	$	3	$	53	$	297,885		$	(13	)	$	(232,933	)	$	64,995
Exercise of stock options, net of issuance costs		—		—		175			—			—			175
Issuance costs for public offering of common stock		—		—		(19	)		—			—			(19	)
Stock-based compensation		—		—		1,485			—			—			1,485
Issuance of common stock for license agreement		—		—		4,845			—			—			4,845
Unrealized loss on short-term investments		—		—		—			(2	)		—			(2	)
Net loss		—		—		—			—			(19,654	)		(19,654	)
Balance at June 30, 2018	$	3	$	53	$	304,371		$	(15	)	$	(252,587	)	$	51,825
Exercise of stock options, net of issuance costs		—		1		1,132			—			—			1,133
Public offering of common stock, net of offering costs		—		11		134,844			—			—			134,855
Stock-based compensation		—		—		1,642			—			—			1,642
Issuance of common stock for license agreement		—		—		1,255			—			—			1,255
Unrealized gain on short-term investments		—		—		—			1			—			1
Net loss		—		—		—			—			(16,782	)		(16,782	)
Balance at September 30, 2018	$	3	$	65	$	443,244		$	(14	)	$	(269,369	)	$	173,929

The following table summarizes the Company’s changes in Stockholders’ Equity accounts for the nine months ended September 30, 2017 (in thousands):

	Convertible Preferred Stock		Common Stock		Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders' Equity
Balance at December 31, 2016	$	3	$	41	$	248,957		$	(1	)	$	(175,846	)	$	73,154
Exercise of stock options, net of issuance costs		—		—		35			—			—			35
Stock-based compensation		—		—		867			—			—			867
Private placement issuance of common stock, net of offering costs		—		—		(13	)		—			—			(13	)
Private placement issuance of Class A convertible preferred stock, net of offering costs		—		—		(26	)		—			—			(26	)
Unrealized loss on short-term investments		—		—		—			(33	)		—			(33	)
Net loss		—		—		—			—			(10,126	)		(10,126	)
Balance at March 31, 2017	$	3	$	41	$	249,820		$	(34	)	$	(185,972	)	$	63,858
Exercise of stock options, net of issuance costs		—		—		32			—			—			32
Stock-based compensation		—		—		973			—			—			973
Unrealized loss on short-term investments		—		—		—			(5	)		—			(5	)
Net loss		—		—		—			—			(9,645	)		(9,645	)
Balance at June 30, 2017	$	3	$	41	$	250,825		$	(39	)	$	(195,617	)	$	55,213
Exercise of stock options, net of issuance costs		—		—		119			—			—			119
Issuance costs for public offering of common stock		—		—		(13	)		—			—			(13	)
Stock-based compensation		—		—		871			—			—			871
Issuance of warrants for common stock		—		—		217			—			—			217
Unrealized gain on short-term investments		—		—		—			26			—			26
Net loss		—		—		—			—			(10,684	)		(10,684	)
Balance at September 30, 2017	$	3	$	41	$	252,019		$	(13	)	$	(206,301	)	$	45,749