Shareholders’ Equity

Common Stock

2017 Common Stock Offering

In March 2017, the Company offered and sold an aggregate of 3,731,344 shares of common stock in an underwritten public offering at a price of $33.50 per share for gross proceeds of approximately $125.0 million. The Company received proceeds of approximately $117.5 million, net of approximately $7.5 million in underwriting commissions, discounts and other issuance costs.

2018 Common Stock Offering

In March 2018, the Company offered and sold an aggregate of 3,910,000 shares of common stock in an underwritten public offering at a price of $29.50 per share for gross proceeds of approximately $115.3 million. The Company received proceeds of approximately $109.8 million, net of approximately $5.5 million in underwriting commissions, discounts and other issuance costs.

Preferred Stock

As of December 31, 2018, 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). 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, 2018 and 2017, 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, 2018 and 2017, the issued and outstanding Series C-1² Preferred and Series F Preferred were convertible into 6,735,378 and 782,031 shares of common stock, respectively. In January 2019, all of the Series F Preferred was converted into 782,031 shares of common stock by the preferred holder.

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, 2018 and 2017, the aggregate liquidation preference was approximately $3.9 million and $2.7 million on the Series C-1² Preferred and Series F Preferred, respectively.

Share-based Compensation Expense

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. The 2013 Equity Plan has a 10-year term and permits the issuance of incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (IRC). 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.

At the 2016 and 2017 Annual Meetings 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 and 8,100,000 shares, respectively.

As of December 31, 2018, there were 1,340,450 shares of common stock available for future grants under the 2013 Equity Plan.

Stock Option Activity

The Company’s stock option activity under its option plans was comprised of the following:



	Outstanding Stock Options and 2013 Equity Plan
	Shares Underlying Stock Options		Weighted- average Exercise Price per Share		Weighted- average Remaining Contractual Term	Aggregate Intrinsic Value
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
Granted	3,704,725		$	25.94
Exercised	(174,628	)	$	15.42
Forfeited	(120,257	)	$	22.82
Outstanding at December 31, 2017	6,037,302		$	24.19
Granted	1,978,219		$	23.66
Exercised	(106,370	)	$	17.95
Forfeited	(1,442,937	)	$	28.07
Outstanding at December 31, 2018	6,466,214		$	23.26	7.65 years	$	200,279
Vested and expected to vest at December 31, 2018	6,466,214		$	23.26	7.65 years	$	200,279
Exercisable at December 31, 2018	3,118,365		$	22.61	6.33 years	$	200,279

The weighted-average grant date fair values of the stock options granted was $20.52, $23.80 and $15.33 per underlying share for the years ended December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, $64.5 million of total unrecognized share-based compensation expense related to unvested stock options remains and is expected to be recognized over a weighted-average period of approximately 2.8 years. During the years ended December 31, 2018, 2017 and 2016 stock options to purchase 106,370, 174,628 and 17,548 shares of common stock were exercised with an intrinsic value of $1.4 million, $3.3 million and $0.1 million, respectively. The total fair value of equity awards vested during the years ended December 31, 2018, 2017 and 2016 was $38.0 million, $12.1 million and $14.5 million, respectively.

2018 Employee Stock Purchase Plan

In July 2018, the Company’s board of directors approved the adoption of the 2018 Employee Stock Purchase Plan (ESPP), which was subsequently adopted and approved by the Company’s shareholders at the 2018 Annual Meeting of Shareholders, in order to provide a means for eligible employees to accumulate shares of the Company’s common stock over time through regular payroll deductions. Under the ESPP, eligible employees may purchase shares of the Company’s common stock twice per month at a price equal to 85% of the closing price of shares of the Company’s common stock on the date of each purchase. Eligible employees purchasing shares under the ESPP are subject to an annual cap equal to the lesser of $25,000 or 10% of the employee’s annual cash compensation. Shares purchased under the ESPP cannot be sold for a period of one year following the purchase date (or such shorter period of time if the participating employee’s employment terminates before this one-year anniversary).

A total of 750,000 shares of common stock have been reserved for issuance under the ESPP. As of December 31, 2018, 717,701 shares of common stock remained available for future grants under the ESPP. During the year ended December 31, 2018, the Company recorded $0.2 million of stock-based compensation related to the ESPP.

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 its CEO, 79,622 shares to a director and an aggregate of 336,185 shares to three non-officer employees. The RSA 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, 2017, all performance-based and time-based vesting conditions had been satisfied. In July 2015, the vesting conditions for 1,042,680 shares of unvested and outstanding RSAs awarded to the CEO were amended to provide that vesting and delivery of the shares were 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 RSAs that had been deferred until March 15, 2017. As of December 31, 2017, the remaining 542,680 shares of the RSAs had vested and been delivered.

The Company’s RSA activity was comprised of the following:



	Number of Shares		Weighted- average Grant Date Fair Market Value
Unvested at December 31, 2015	1,072,899		$	13.00
Vested	(530,219	)	$	12.78
Unvested at December 31, 2016	542,680		$	13.22
Vested	(542,680	)	$	13.22
Unvested at December 31, 2017	—		—

There was no activity for the year ended December 31, 2018.

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’ options are 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 estimates 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,
	2018		2017		2016
Volatility	114	%	139	%	143	%
Expected life (years)	6.07		6.12		5.80
Risk-free interest rate	2.8	%	2.1	%	1.4	%
Dividend yield	—		—		—

Share-based Compensation Expense

Total share-based compensation expense related to all share-based awards was comprised of the following (in thousands):



	Year Ended December 31,
	2018		2017		2016
Research and development	$	21,113	$	11,980	$	5,657
Selling, general and administrative	14,038		9,815		8,889
Total share-based compensation expense	$	35,151	$	21,795	$	14,546

Share-based compensation expense recognized for the years ended December 31, 2018, 2017 and 2016 is reduced by actual forfeitures in the period that the forfeiture occurs.

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 grant dates. 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 vested 100% on the one-year anniversary of the grant. In January 2017, the Company granted a warrant to purchase 25,013 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.

In March 2018, the Company issued 43,056 shares of common stock in a cashless exercise of 83,013 warrants to a third-party warrant holder. As of December 31, 2018, the Company had outstanding warrants to purchase 10,000 shares of common stock. For the year ended December 31, 2018, the Company did not recognize stock-based compensation expense for these warrant grants. For the years ended December 31, 2017 and 2016, the Company recognized compensation expense for these warrant grants of approximately $0.6 million and $0.2 million, respectively.

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 would be canceled. The milestone was achieved in the fourth quarter of 2016 at a 75% achievement level, with 25% of the options canceling. For the years ended December 31, 2018 and 2017, the Company did not recognize stock-based compensation expense for these stock option grants. For the year ended December 31, 2016, the Company recognized stock-based compensation benefit for these stock option grants of approximately $0.1 million.

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, with the remainder to vest monthly over the next three years, subject to continued service during that time. In January 2017, this consultant became an employee of the Company.

In February 2017, the Company granted stock options to purchase 42,000 shares of common stock to three 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. Two of the stock options will vest with respect to 25% of the underlying shares on the one-year anniversary of the grant, with the remainder to vest monthly over the next three years, subject to continued service during that time. The other stock option will vest with respect to 25% of the underlying shares on the one-year anniversary of the grant, with the remainder to vest monthly over the next two years, subject to continued service during that time. In addition, an employee converted to a consultant during April 2017. Two of his options were modified and are continuing to vest over the next two years. The Company recognized third-party compensation expense for these stock option grants of approximately $0.3 million and $0.4 million for the years ended December 31, 2018 and 2017, respectively.