Shareholders’ Equity

Common Stock

2015 Common Stock Offering

In September 2015, the Company offered and sold an aggregate of 2,932,500 shares of common stock in an underwritten offering at a public offering price of $38.00 per share, with gross proceeds of approximately $111.4 million. The Company received net proceeds of approximately $104.6 million, net of approximately $6.8 million in underwriting commissions, discounts and other issuance costs.

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 net proceeds of approximately $53.1 million, net of approximately $3.5 million in underwriting commissions, discounts and other issuance costs.

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.

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 September 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 nine months ended September 30, 2015, the Company issued 19,134 and 17,360 shares of common stock upon the conversion of Series C-1²Preferred and Series F Preferred, respectively. 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 September 30, 2015, there were 3,906 shares of Series C-1² Preferred and 2,737 shares of Series F Preferred issued and outstanding. As such, as of September 30, 2015, the issued and outstanding Series C-1² Preferred and Series F Preferred were convertible into 6,735,378 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 September 30, 2015, the aggregate liquidation preference was approximately $3,906,000 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. At the 2015 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 3,100,000 shares.

As of September 30, 2015, there were 1,613,525 shares available for future grants under the 2013 Equity Plan.

Share-Based Award Activity

The Company’s stock option and 2013 Equity Plan restricted stock award activity for the nine months ended September 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	942,285		$23.83
Exercised	(42,535	)	$9.74
Forfeited	(24,465	)	$10.19
Outstanding at September 30, 2015	1,494,185		$18.54	9.21 years	$	15,765,631
Vested and expected to vest at September 30, 2015	1,494,185		$18.54	9.21 years	$	15,765,631
Exercisable at September 30, 2015	211,408		$10.60	8.67 years	$	3,643,505

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 September 30, 2015, the Company has reserved 3,047,710 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 60,000 shares underlying the stock option discussed above that was issued in April 2015.

The weighted-average grant date fair values of the stock options granted during the three and nine months ended September 30, 2015 was $21.49 and $21.13 per underlying share, respectively. The weighted-average grant date fair values of stock options granted during the three and nine months ended September 30, 2014 was $8.38 and $9.49 per underlying share, respectively. As of September 30, 2015, approximately $19,856,000 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 3.0 years. During the three and nine months ended September 30, 2015, stock options to purchase 35,035 and 42,535 shares of common stock, respectively, were exercised with an intrinsic value of $641,000 and $752,000, respectively. No stock option exercises occurred during the year ended December 31, 2014.

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 $197,000 and $613,000 for the three and nine months ended September 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 third party compensation expense for this stock option grant of approximately zero and $362,000 for the three and nine months ended September 30, 2015, respectively. In July 2015, this consultant became an employee of the Company.

In August 2015, the Company granted a stock option to purchase 40,000 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 vesting of this stock option is contingent on the achievement of a performance milestone by the end of 2016, at which time any unvested shares underlying the option will be canceled. The Company recognized compensation expense for this stock option grant of approximately $38,000 for the three and nine months ended September 30, 2015.

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:



	Nine Months Ended September 30,
	2015		2014
Volatility	147	%	188	%
Expected life (years)	4.91 years		6.73 years
Risk-free interest rate	1.4	%	2.2	%
Dividend yield	—	%	—	%

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 September 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.

In August 2015, the Company issued a fully vested RSA representing the right to acquire 4,000 shares of common stock with a grant date fair value of approximately $92,000.

The Company’s RSA activity for the nine months ended September 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	(188,414	)	$	12.30
Unvested at September 30, 2015	1,090,593		$	12.95

As of September 30, 2015, approximately $178,000 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 0.3 years. As of September 30, 2015, approximately $3,117,000 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 1.4 years.

Share-Based Compensation Expense

Share-based compensation expense recognized in the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2015 and 2014 is based on awards ultimately expected to vest.

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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Research and development:
Stock options	$	636	$	98	$	1,609	$	142
Restricted stock	240		147		1,452		652
Warrants	15		—		40		—
Research and development share-based compensation expense	891		245		3,101		794
General and administrative:
Stock options	1,443		286		2,950		575
Restricted stock	545		1,212		3,719		5,226
Warrants	182		—		573		—
General and administrative share-based compensation expense	2,170		1,498		7,242		5,801
Total share-based compensation expense included in expenses	$	3,061	$	1,743	$	10,343	$	6,595