Shareholders’ Equity

Common Stock

2014 Reverse Stock Split

On January 14, 2014, the Company enacted the 2014 Reverse Stock Split. The 2014 Reverse Stock Split was approved by the Company's shareholders on June 5, 2013, and resulted in every 50 shares of the Company’s issued and outstanding common stock to be automatically combined into one share of the Company’s common stock. No fractional shares were issued in connection with the 2014 Reverse Stock Split. Shareholders who were entitled to fractional shares instead became entitled to receive a cash payment in lieu of receiving fractional shares equal to the fractional share interest. The 2014 Reverse Stock Split affected all of the holders of the Company’s common stock uniformly. Shares of the Company’s common stock underlying outstanding stock options were proportionately reduced, and the exercise prices of outstanding stock options were proportionately increased in accordance with the terms of the agreements governing such securities. Shares of the Company’s common stock underlying outstanding convertible preferred stock were proportionately reduced, and the conversion rates were proportionately decreased in accordance with the terms of the agreements governing such securities.

Amendments to Articles of Incorporation

On August 27, 2014, at the Company's annual meeting of shareholders, the Company's shareholders approved an amendment to the Company's articles of incorporation to reduce the number of authorized common shares available for issuance to 100,000,000 shares from 12,000,000,000 shares.

2014 Common Stock Offering

In July 2014, the Company entered into an underwriting agreement, in which the Company agreed to issue and sell an aggregate of 4,800,000 shares of its common stock. Under the terms of the underwriting agreement, the Company granted the underwriters an option for 30 days to purchase up to an additional 720,000 shares of the Company's common stock. On July 23, 2014, the underwriters partially exercised their option to purchase an additional 595,000 shares of the Company's common stock. The shares were sold at a public offering price of $10.50 per share, with gross proceeds of approximately $56.6 million. This transaction closed on July 28, 2014, and the Company received total net proceeds of approximately $53.1 million, net of approximately $3.5 million in underwriting commissions, discounts and other issuance costs.

Preferred Stock

As of March 31, 2015, the Company is authorized to issue 8,000,000 shares of preferred stock, with a par value of $0.0001 per share, in one or more series, of which 11,000 are designated Series C-1² Convertible Preferred Stock (the "Series C-1²Preferred") and 10,000 are designated Series F Convertible Preferred Stock (the "Series F Preferred"). During the three months ended March 31, 2015, the Company issued 17,360 shares of common stock upon the conversion of Series F Preferred. During the year ended December 31, 2014, the Company issued 5,341,670 shares of common stock upon the conversion of Series C-1² Preferred and 129,105 shares of common stock upon the conversion of Series F Preferred. The Series C-1² Preferred is convertible into common stock at a rate of 1,724 shares of common stock for each share of Series C-1² Preferred, and the Series F Preferred is convertible into common stock at a rate of 286 shares of common stock for each share of Series F Preferred. As of March 31, 2015, there were 3,917 shares of Series C-1² Preferred and 2,737 shares of Series F Preferred issued and outstanding. As such, as of March 31, 2015, the issued and outstanding Series C-1² Preferred and Series F Preferred were convertible into 6,752,908 and 782,032 shares of common stock, respectively.

The holders of preferred stock do not have voting rights, other than for general protective rights required by the California General Corporation Law. The Series C-1² Preferred and the Series F Preferred do not have dividends.

The Series C-1² Preferred and the Series F Preferred have a liquidation preference in an amount equal to $1,000 per share. As of March 31, 2015, the aggregate liquidation preference was $3,917,000 and $2,737,000 on the Series C-1² Preferred and Series F Preferred, respectively.

Share-Based Compensation

Stock Options

2013 Equity Incentive Plan

In September 2013, the Company adopted an equity compensation plan entitled the 2013 Equity Incentive Plan (the “2013 Equity Plan”). The 2013 Equity Plan is an omnibus equity compensation plan that permits the issuance of various types of equity-based compensation awards, including stock options, restricted stock awards, stock appreciation rights and restricted stock units, as well as cash awards, to employees, directors and eligible consultants of the Company. The 2013 Equity Plan has a ten-year term and permits the issuance of incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended. The administrator under the plan has broad discretion to establish the terms of awards, including the size, term, exercise price and vesting conditions. Generally, grants to employees vest over four years, with 25% vesting on the one-year anniversary, and the remainder vesting either quarterly or monthly thereafter; grants to non-employee directors vest over three years, with 33% vesting on the one-year anniversary, and the remainder vesting either quarterly or monthly thereafter.

The 2013 Equity Plan previously allowed for automatic annual increases to the number of shares of common stock authorized for issuance under the plan on the first day of each year, with such increases based on 10% of the outstanding shares of the Company’s common stock as of the last day of the previous year end. On January 1, 2014, the total shares available for grant under the 2013 Equity Plan increased to 440,441. At the 2014 annual meeting of shareholders, the Company's shareholders approved and adopted an amendment to the 2013 Equity Plan to increase the number of shares of common stock authorized for issuance up to a total of 1,100,000 shares and eliminated the automatic annual increase on the first day of each year.

As of March 31, 2015, there were 208,204 shares available for future grants under the 2013 Equity Plan.

Total share-based compensation expense related to all share-based awards for the three months ended March 31, 2015 and 2014 was comprised of the following (in thousands):



	Three Months Ended March 31,
	2015		2014
Research and development:
Stock options	$	558	$	8
Restricted stock	478		359
Warrants	11		—
Research and development share-based compensation expense	1,047		367
General and administrative:
Stock options	589		23
Restricted stock	1,579		2,308
Warrants	187		—
General and administrative share-based compensation expense	2,355		2,331
Total share-based compensation expense included in expenses	$	3,402	$	2,698

The Company’s 2013 Equity Plan stock option and restricted stock award activity for the three months ended March 31, 2015 and the year ended December 31, 2014 was comprised of the following:



	Outstanding Stock Options and Restricted Stock Awards
	Shares Underlying Stock Options and Restricted Stock Awards		Weighted-Average Exercise Price per Share	Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2013	54,000		$6.00
Granted	567,876		$9.88
Restricted stock awards	(2,976	)	$0.00
Outstanding at December 31, 2014	618,900		$9.54
Granted	577,600		$19.50
Exercised	(7,500	)	$7.63
Forfeited	(7,500	)	$7.63
Outstanding at March 31, 2015	1,181,500		$14.43	9.50 years	$	5,318,774
Vested and expected to vest at March 31, 2015	1,181,500		$14.43	9.50 years	$	5,318,774
Exercisable at March 31, 2015	44,127		$10.19	9.11 years	$	358,024

During February 2015, the Company made a stock option grant to the Company's Chief Executive Officer to purchase 300,000 shares of common stock at an exercise price equal to the fair market value of the Company's stock on the date of grant. The grant was made under the 2013 Equity Plan. However, due to the fact that the share reserve in the plan had been exhausted at that time, the grant was made subject to shareholder approval, which must be obtained within one year from the date of grant. The stock option will vest and become exercisable with respect to 25% of the underlying shares on the first anniversary of the date of grant, and then with respect to the remaining shares, on a quarterly basis over the next three years, subject to continued service during that time. The Company intends to seek shareholder approval of an increase in the share reserve under the 2013 Equity Plan at the Company's 2015 annual meeting of shareholders.

Share-based compensation expense recognized in the statements of operations and comprehensive loss for the three months ended March 31, 2015 and the year ended December 31, 2014 is based on awards ultimately expected to vest. There were no forfeitures during 2014.

As of March 31, 2015, the Company has reserved 1,089,524 shares of common stock for future issuance upon exercise of all outstanding stock options granted or to be granted under the 2013 Equity Plan, which excludes the 300,000 shares underlying the stock option issued in February 2015.

The weighted-average grant date fair values of stock options granted during the three months ended March 31, 2015 and 2014 was $18.89 and $7.51 per share, respectively. As of March 31, 2015, approximately $14,396,000 of total unrecognized compensation costs related to non-vested stock options is expected to be recognized over a weighted-average period of approximately 3.4 years. During the three months ended March 31, 2015, stock options to purchase 7,500 shares of common stock were exercised with an intrinsic value of $111,000. No stock option exercises occurred during the year ended December 31, 2014.

The fair value of each stock option award is estimated on the date of grant using a Black-Scholes option pricing model (the “Black-Scholes model”), which uses the assumptions noted in the following table. Expected volatility is based on historical volatility of the Company’s Common Stock. In determining the expected life of employee stock options, the Company uses the “simplified” method. The expected life assumptions for non-employees were based upon the contractual term of the stock options. The risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the stock options in effect at the time of the grants. The dividend yield assumption is based on the expectation of no future dividend payments by the Company.

The Company estimated the fair value of each stock option grant on the date of grant using the Black-Scholes model with the following weighted-average assumptions:



	March 31,
	2015		2014
Volatility	174	%	132	%
Expected life (years)	6.82 years		6.11 years
Risk-free interest rate	1.8	%	1.9	%
Dividend yield	—	%	—	%

Third Party Share-based Compensation Expense

The Company initially estimates the fair value of stock options, warrants or stock awards issued to non-employees, other than non-employee directors, on the date of grant using the Black-Scholes model; and thereafter, the Company re-measures the fair value as of each balance sheet date as the stock options and warrants vest.

In December 2014, the Company granted warrants to purchase 51,000 shares of common stock to two outside third parties at an exercise price equal to the fair market value of the stock at the date of each grant. One grant will vest 25% on each anniversary date over four years. The second grant vests 100% on the one-year anniversary of the grant. The Company recognized compensation expense for these warrant grants of approximately $198,000 for the three months ended March 31, 2015.

During the three months ended March 31, 2015, the Company granted a stock option to purchase 60,000 shares of common stock to a consultant at an exercise price equal to the fair market value of the Company's common stock at the date of grant. This grant was made from the 2013 Equity Plan. The stock option vested 25% upon grant, and the remainder will vest quarterly over three years. The Company recognized compensation expense for this stock option grant of approximately $298,000 for the three months ended March 31, 2015.

Restricted Stock Awards

Restricted stock awards are grants that entitle the holder to acquire shares of common stock for no cash consideration or at a fixed price, which is typically nominal. The Company accounts for the restricted stock awards as issued and outstanding common stock, even though the shares covered by a restricted stock award cannot be sold, pledged, or otherwise disposed of until the award vests, and any unvested shares may be reacquired by the Company for the original purchase price following the awardee's termination of service.

On September 24, 2013, the Company issued restricted stock awards ("RSAs") of approximately 1,327,048 shares to an officer, 79,622 shares to a director and an aggregate of 336,185 shares to three employees. The grants to the officer, director and one of the employees were for the replacement of canceled stock options and restricted stock units granted on April 10, 2012, which was done in order to complete the capital restructuring that took place in September 2013. The RSAs were granted outside of the 2013 Equity Plan, but are governed in all respects by the 2013 Equity Plan. The RSAs were granted with a combination of performance-based and time-based vesting components. During the year ended December 31, 2014, all of the performance-based vesting components were either achieved or modified to time-based vesting, and the RSAs will be fully vested within approximately 13 months.

On January 25, 2014, the Company granted RSAs representing 2,976 shares of common stock with a grant date fair market value of $25,000 to a consultant for services. The RSAs vested immediately and were issued under the 2013 Equity Plan.

The Company’s restricted stock award activity for the three months ended March 31, 2015 and the year ended December 31, 2014 was comprised of the following:



	Number of Shares		Weighted-Average Grant Date Fair Value
Unvested at December 31, 2013	1,746,853		$	11.80
Granted	2,976		$	8.40
Vested	(423,693	)	$	9.18
Forfeited	(47,129	)	$	4.41
Unvested at December 31, 2014	1,279,007		$	12.86
Vested	(153,026	)	$	12.87
Unvested at March 31, 2015	1,125,981		$	12.86

The remaining unrecognized share-based compensation expense for research and development activities attributable to RSAs to be recognized over the next 10 months is approximately $1,060,000. The remaining unrecognized share-based compensation expense for general and administrative activities attributable to RSAs to be recognized over the next 10 months is approximately $5,257,000.