Shareholders’ Equity

Common Stock

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, less approximately $3.5 million in underwriting commissions, discounts and other issuance costs.

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, less approximately $6.8 million in underwriting commissions, discounts and other issuance costs.

Preferred Stock

As of December 31, 2016, 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 (Series C-1²Preferred) and 10,000 are designated as Series F Convertible Preferred Stock (Series F Preferred). During the year ended December 31, 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 December 31, 2016 and 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 December 31, 2016 and 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 December 31, 2016 and 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 (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 one year on the one-year anniversary.

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. At the 2016 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 4,600,000 shares.

As of December 31, 2016, there were 1,960,200 shares available for future grants under the 2013 Equity Plan.

Share-Based Award Activity

The Company’s 2013 Equity Plan stock option and restricted stock award activity for the years ended December 31, 2016, 2015 and 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	)	—
Outstanding at December 31, 2014	618,900		$	9.54
Granted	1,769,785		$	25.89
Exercised	(51,814	)	$	10.81
Forfeited	(18,186	)	$	7.80
Outstanding at December 31, 2015	2,318,685		$	22.01
Granted	483,200		$	17.83
Exercised	(17,548	)	$	8.52
Forfeited	(156,875	)	$	26.35
Outstanding at December 31, 2016	2,627,462		$	21.07	8.39 years	$	4,307,756
Vested and expected to vest at December 31, 2016	2,627,462		$	21.07	8.39 years	$	4,307,756
Exercisable at December 31, 2016	1,105,029		$	20.45	7.85 years	$	2,740,900

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 and is included in the table above. The stock option vests and becomes 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 December 31, 2016, the Company has reserved 4,527,662 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 was $15.33, $22.56, and $9.67 per underlying share for the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, $30,630,000 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 2.8 years. During the year ended December 31, 2016, stock options to purchase 17,548 shares of common stock were exercised with an intrinsic value of $143,000. During the year ended December 31, 2015, stock options to purchase 51,814 shares of common stock were exercised with an intrinsic value of $928,000. 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 vests 25% on each anniversary date over four years. The other grant vested 100% on the one-year anniversary of the grant. In January 2016, the Company granted a warrant to purchase 17,000 shares of common stock to an outside third party at an exercise price equal to the fair market value of the stock on the date of each grant. The grant vests 100% on the one-year anniversary of the grant. The Company recognized compensation expense for these warrant grants of approximately $217,000, $1,086,000 and $63,000 for the years ended December 31, 2016, 2015 and 2014, 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 $362,000 for the year ended December 31, 2015. In July 2015, this consultant became an employee of the Company.

In August and November 2015, the Company granted stock options to purchase 50,000 shares of common stock to two consultants at exercise prices equal to the fair market value of the Company’s common stock on the grant dates. These grants were made from the 2013 Equity Plan. The vesting of these stock options was contingent on the achievement of a performance milestone by the end of 2016, at which time any unvested shares underlying the options will be canceled. The milestone was achieved in the fourth quarter of 2016 at a 75% achievement level, with 25% of the options canceling. The Company recognized compensation expense (benefit) for these stock option grants of approximately $(66,000) and $73,000 for the years ended December 31, 2016 and 2015.

In September 2016, the Company granted a stock option to purchase 35,000 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 will vest with respect to 25% of the underlying shares on the one-year anniversary of the grant, and then with respect to the remaining shares, on a monthly basis over the next three years, subject to continued service during that time. The Company recognized third-party compensation expense for this stock option grant of approximately $46,000 for the year ended December 31, 2016. In January 2017, this consultant became an employee of the Company.

Restricted Stock Award Activity

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 1,327,048 shares to the Company’s Chief Executive Officer (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 December 31, 2016, all performance-based vesting conditions had been satisfied, but the time-based service requirements, which provided for vesting in 2017, 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. In December 2016, vesting and delivery was accelerated for 500,000 shares of the RSA's that had been deferred until March 15, 2017. As of December 31, 2016, there were 542,680 shares remaining of unvested and outstanding RSA's awarded to the CEO, with vesting deferred on this remaining balance until March 15, 2017.

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.

On March 31, 2014, RSAs representing 39,811 shares of common stock were canceled upon forfeiture. The remaining unrecognized share-based compensation expense for the canceled RSAs was expensed during the three months ended March 31, 2014. In addition, RSAs representing 7,318 shares of common stock were canceled in exchange for the payment of employee income taxes during the three months ended September 30, 2014.

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 years ended December 31, 2016, 2015 and 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
Granted	4,000		$	23.12
Vested	(210,108	)	$	12.41
Unvested at December 31, 2015	1,072,899		$	13.00
Vested	(530,219	)	$	12.78
Unvested at December 31, 2016	542,680		$	13.22

As of December 31, 2016, approximately $409,000 of total unrecognized share-based compensation expense for general and administrative activities related to RSAs remains and is expected to be recognized in the first quarter of 2017.

Stock Option Valuation

The fair value of each stock option award is estimated on the grant date using a Black-Scholes option pricing model (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:



	Year ended December 31,
	2016		2015		2014
Volatility	143	%	149	%	186	%
Expected life (years)	5.80 years		5.28 years		6.74 years
Risk-free interest rate	1.4	%	1.5	%	2.1	%
Dividend yield	—		—		—

Share-Based Compensation Expense

Share-based compensation expense recognized in the consolidated statements of operations for the years ended December 31, 2016, 2015 and 2014, is reduced by actual forfeitures of awards in the period that the forfeiture occurs.

Total share-based compensation expense related to all share-based awards for the years ended December 31, 2016, 2015 and 2014 was comprised of the following (in thousands):



	Year Ended December 31,
	2016		2015		2014
Research and development:
Stock options	$	5,599	$	2,428	$	258
Restricted stock	30		1,600		1,009
Warrants	28		56		2
Research and development share-based compensation expense	5,657		4,084		1,269
General and administrative:
Stock options	6,539		3,693		894
Restricted stock	2,161		4,265		6,856
Warrants	189		1,030		61
General and administrative share-based compensation expense	8,889		8,988		7,811
Total share-based compensation expense included in expenses	$	14,546	$	13,072	$	9,080