Shareholders’ Equity

Common Stock

2014 Reverse Stock Split

In January 2014, the Company enacted the 2014 Reverse Stock Split. The 2014 Reverse Stock Split was approved by the Company's shareholders in June 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.

2014 Common Stock Offering

In July 2014, the Company offered and sold an aggregate of 5,395,000 shares of common stock in an underwritten offering at a public offering price of $10.50 per share, with gross proceeds of approximately $56.6 million. 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.

Amendment to Articles of Incorporation

In August 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.

Preferred Stock

As of June 30, 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 as Series C-1² Convertible Preferred Stock (the "Series C-1²Preferred") and 10,000 are designated as Series F Convertible Preferred Stock (the "Series F Preferred"). During the six months ended June 30, 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 approximately 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 approximately 286 shares of common stock for each share of Series F Preferred. As of June 30, 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 June 30, 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 June 30, 2015, the aggregate liquidation preference was approximately $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 generally 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 2013 Equity 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. 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 June 30, 2015, there were 171,089 shares available for future grants under the 2013 Equity Plan.

Share-Based Compensation Expense

Share-based compensation expense recognized in the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2015 and 2014 is based on awards ultimately expected to vest. There were no forfeitures during 2014.

Total share-based compensation expense related to all share-based awards for the three and six months ended June 30, 2015 and 2014 was comprised of the following (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Research and development:
Stock options	$	413	$	36	$	972	$	44
Restricted stock	735		146		1,213		505
Warrants	14		—		25		—
Research and development share-based compensation expense	1,162		182		2,210		549
General and administrative:
Stock options	918		266		1,507		289
Restricted stock	1,596		1,706		3,174		4,014
Warrants	204		—		391		—
General and administrative share-based compensation expense	2,718		1,972		5,072		4,303
Total share-based compensation expense included in expenses	$	3,880	$	2,154	$	7,282	$	4,852

Share-Based Award Activity

The Company’s stock option and 2013 Equity Plan restricted stock award activity for the six months ended June 30, 2015 and the year ended December 31, 2014 was comprised of the following:



	Outstanding Stock Options and 2013 Equity Plan 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 vested	(2,976	)	$0.00
Outstanding at December 31, 2014	618,900		$9.54
Granted	674,535		$19.40
Exercised	(7,500	)	$7.63
Forfeited	(7,500	)	$7.63
Outstanding at June 30, 2015	1,278,435		$14.76	9.29 years	$	12,460,770
Vested and expected to vest at June 30, 2015	1,278,435		$14.76	9.29 years	$	12,460,770
Exercisable at June 30, 2015	156,607		$10.68	8.82 years	$	2,165,911

In February 2015, the Company made a stock option grant to the Company's Chief Executive Officer ("CEO") to purchase 300,000 shares of common stock at an exercise price equal to the fair market value of the Company's common stock on the grant date. The grant was made under the 2013 Equity Plan. However, due to the fact that the share reserve in the 2013 Equity Plan had been exhausted at that time, the grant was made subject to shareholder approval, which must be obtained within one year from the grant date. The stock option will vest and become exercisable with respect to 25% of the underlying shares on the first anniversary of the grant date, 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, which will be held August 19, 2015.

In April 2015, the Company made a stock option grant to the Company's recently appointed Chief Financial Officer to purchase 60,000 shares of common stock at an exercise price equal to the fair market value of the Company's common stock on the grant date. This grant was awarded as an Inducement Grant outside of the 2013 Equity Plan. The stock option will vest and become exercisable with respect to 25% of the underlying shares on the first anniversary of the grant date, and then with respect to the remaining shares, on a quarterly basis over the next three years, subject to continued service during that time.

As of June 30, 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 and 60,000 shares underlying the stock options discussed above that were issued in February and April of 2015, respectively.

The weighted-average grant date fair values of the stock options granted during the three and six months ended June 30, 2015 was $18.79 and $18.87 per underlying share, respectively. The weighted-average grant date fair values of stock options granted during the three and six months ended June 30, 2014 was $10.73 and $9.95 per underlying share, respectively. As of June 30, 2015, approximately $14,822,000 of total unrecognized share-based compensation expense related to non-vested stock options remains and is expected to be recognized over a weighted-average period of approximately 3.3 years. During the three and six months ended June 30, 2015, stock options to purchase zero and 7,500 shares of common stock, respectively, were exercised with an intrinsic value of $111,000. No stock option exercises occurred during the year ended December 31, 2014.

Stock Option Valuation

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



	Six Months Ended June 30,
	2015		2014
Volatility	173	%	187	%
Expected life (years)	6.70 years		6.78 years
Risk-free interest rate	1.7	%	2.2	%
Dividend yield	—	%	—	%

Third Party Share-Based Compensation Expense

The Company initially estimates the fair value of stock options and warrants issued to non-employees, other than non-employee directors, on the grant date using the Black-Scholes model. Thereafter, the Company re-measures the fair value using the Black-Scholes model 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 on the date of each grant. One grant will vest 25% on each anniversary date over four years. The other grant vests 100% on the one-year anniversary of the grant. The Company recognized compensation expense for these warrant grants of approximately $218,000 and $416,000 for the three and six months ended June 30, 2015, respectively.

In February 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 on the grant date. This grant was made from the 2013 Equity Plan. The stock option vested with respect to 25% of the underlying shares on the grant date with the remainder to vest quarterly over three years. The Company recognized compensation expense for this stock option grant of approximately $64,000 and $362,000 for the three and six months ended June 30, 2015, respectively. In July 2015, this consultant became an employee of the Company.

Restricted Stock Awards

Restricted stock awards ("RSAs") 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 RSAs as issued and outstanding common stock, even though: (a) shares covered by an RSA cannot be sold, pledged, or otherwise disposed of until the award vests; and (b) any unvested shares may be reacquired by the Company for the original purchase price following the awardee's termination of service. The valuation of RSAs is based on the fair market value of the underlying shares on the grant date.

In September 2013, the Company issued RSAs consisting of approximately 1,327,048 shares to the CEO, 79,622 shares to a director and an aggregate of 336,185 shares to three non-officer employees. The grants to the CEO, director and one of the employees were for the replacement of canceled stock options and restricted stock units granted in April 2012, which was done in order to complete the capital restructuring that took place in September 2013. These RSAs were granted outside of the 2013 Equity Plan, but are governed in all respects by the 2013 Equity Plan. These RSAs were granted with a combination of performance-based and time-based vesting components. As of June 30, 2015, all performance-based vesting conditions had been satisfied, but the time-based service requirements, which provided for vesting in 2016, subject to continuous service through the vesting and delivery date, had not yet been satisfied. In July 2015, the vesting conditions for 1,042,680 shares of unvested and outstanding RSA’s awarded to the CEO were amended to provide that vesting and delivery of the shares shall be deferred until March 15, 2017, subject to the CEO's continued service with the Company through such date.

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 from the 2013 Equity Plan.

The Company’s RSA activity for the six months ended June 30, 2015 and the year ended December 31, 2014 was comprised of the following:



	Number of Shares		Weighted-Average Grant Date Fair Market 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	(170,726	)	$	12.57
Unvested at June 30, 2015	1,108,281		$	12.90

As of June 30, 2015, approximately $325,000 of total unrecognized share-based compensation expense for research and development activities related to RSAs remains and is expected to be recognized over a weighted-average period of approximately 0.6 years. As of June 30, 2015, approximately $3,661,000 of total unrecognized share-based compensation expense for general and administrative activities related to RSAs remains and is expected to be recognized over a weighted-average period of approximately 1.8 years.