Stockholders' Equity | 6. Stockholders’ Equity Common Stock Private Placement of Common Stock, Convertible Preferred Shares and Common Stock Warrants On August 27, 2017, we entered into a Securities Purchase Agreement (Securities Purchase Agreement) for a private placement (Private Placement) with a select group of institutional investors, including Viking Global Opportunities Illiquid Investments Sub-Master, LP (VGO Fund) and other accredited investors, certain of whom are affiliated with our directors and officers (collectively, the Purchasers). Pursuant to the Securities Purchase Agreement, (i) VGO Fund purchased 1,777,784 shares of our common stock, par value $0.001 per share (the Common Shares), at a price of $2.65 per share, 2,285,952 shares of our Class X Convertible Preferred Stock (the Preferred Shares or Preferred Stock, and together with the Common Shares, the Shares), par value $0.001 per share, at a price of $13.25 per share, and warrants to purchase up to that number of additional shares of Common Stock equal to thirty seven and one half percent (37.5%) of the number of Shares purchased by VGO Fund on an if-converted to common stock basis (rounded up to the nearest whole share), and (ii) the remaining Purchasers purchased an aggregate of 4,094,336 shares of our Common Shares, at a price of $2.65 per share, and warrants to purchase up to that number of additional shares of Common Stock equal to thirty-seven and one half percent (37.5%) of the number of Common Shares purchased by such Purchaser (rounded up to the nearest whole share). The Private Placement closed on August 31, 2017 for gross proceeds of $45.8 million, and after giving effect to costs related to the Private Placement, net proceeds of $42.5 million. Each share of Preferred Stock is convertible into five shares of our common stock. VGO Fund will be prohibited from converting the Preferred Stock into shares of our common stock if, as a result of such conversion, VGO Fund, together with its affiliates, would own more than 9.50% of the shares of our common stock then issued and outstanding, which percentage may change at VGO Fund’s election upon 61 days’ notice to us to (i) any other number less than or equal to 19.99% or (ii) subject to approval of our stockholders to the extent required in accordance with the NASDAQ Global Market rules, any number in excess of 19.99%. Holders of outstanding Preferred Stock are entitled to receive a dividend (on an if-converted to common stock basis), if we at any time pay a stock dividend equal to and in the same form as a dividend paid to holders of Common Shares. In the event of our liquidation, dissolution or winding up, holders of Preferred Stock will participate in any distribution of proceeds, pro rata based on the number of shares held by each such holder on an if-converted basis. The Preferred Shares have no voting rights. We evaluated the Preferred Stock for liability or equity classification under ASC 480, Distinguishing Liabilities from Equity , We also evaluated the Preferred Stock in accordance with the provisions of ASC 815, Derivatives and Hedging The issuance of convertible preferred stock could generate a beneficial conversion feature (BCF), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor (or in-the-money) at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock on the commitment date. The fair value of our common stock was $2.37 on August 31, 2017, the commitment date, using the Black-Scholes valuation model. After the proceeds allocation, the Preferred Stock have an effective conversion price of $2.37 per common share, which was equal to the fair value of our common stock on the commitment date. Therefore, no BCF is present. The warrants are exercisable at an exercise price of $4.64 per share, subject to adjustments as provided under the terms of the warrants. The warrants are immediately exercisable and expire on December 31, 2019. We also entered into a registration rights agreement (Registration Rights Agreement) with certain of the Purchasers, excluding those Purchasers affiliated with our directors and officers, requiring us to register for the resale of the relevant securities. We registered all of the relevant securities issued in the Private Placement for resale on a Form S-3 filed with the SEC, as required under the Registration Rights Agreement, and the registration statement was declared effective on September 27, 2017. We evaluated the warrants for liability or equity classification under ASC 815, Derivative and Hedging Registration Statement on Form S-3 In June 2016, we filed a Registration Statement on Form S-3 (File No. 333-211998) containing two prospectuses: (i) a base prospectus which covers the offering, issuance and sale of up to $150 million in the aggregate of an indeterminate number of shares of common stock and preferred stock, an indeterminate principal amount of debt securities and such indeterminate number of warrants and units; and (ii) a sales agreement prospectus covering the offering, issuance and sale of up to a maximum aggregate offering price of up to $20 million of our common stock that may be sold from time to time under a sales agreement with Cowen and Company, LLC (Cowen). In accordance with the terms of such sales agreement entered with Cowen, we may offer and sell shares of our common stock having an aggregate offering price of up to $35 million from time to time through Cowen. We are required to file another prospectus supplement in the event we intend to offer more than $20 million in shares of our common stock in accordance with the sales agreement. The sales agreement prospectus amount of $20 million is included in the base prospectus amount of $150 million. 2014 Stock Plan We adopted a stock option plan in 2007 (the 2007 Plan), which was subsequently amended, restated and renamed in July 2014 (the 2014 Plan) to provide for the incentive stock options, nonstatutory stock options, stock and rights to purchase restricted stock to eligible recipients. Recipients of incentive stock options are eligible to purchase shares of our common stock at an exercise price equal to no less than the estimated fair market value of such stock on the date of grant. The maximum term of options under the 2014 Plan is ten years. Options granted generally vest over four years. Shares underlying any awards under the 2014 Plan that are forfeited, canceled, reacquired by us prior to vesting, satisfied without the issuance of stock or otherwise terminated (other than by exercise) will be added to shares available for issuance under the 2015 Plan. 2015 Stock Plan In April 2015, our board of directors adopted, and our stockholders approved, the 2015 Stock Plan (the 2015 Plan). The 2015 Plan became effective on May 6, 2015 and we ceased granting any new awards under our 2014 Plan. Awards granted under the 2014 Plan prior to our IPO that are forfeited, canceled, reacquired by us prior to vesting satisfied without the issuance of stock or otherwise terminated (other than by exercise) will be added to shares available for issuance under the 2015 Plan. A total of 1,574,566 shares of our common stock were initially reserved for issuance under the 2015 Plan. In addition, the number of shares reserved and available for issuance under the 2015 Plan will automatically increase each January 1, beginning on January 1, 2016 and thereafter until January 1, 2019, by the lesser of (i) 1,840,000 shares, (ii) 4% of the outstanding number of shares of our common stock on the immediately preceding December 31 or (iii) an amount determined by our board of directors. Pursuant to this provision, 1,191,566, 949,793 and 946,803 additional shares were reserved for issuance under the 2015 Plan on January 1, 2018, 2017 and 2016, respectively. Shares underlying any awards under the 2015 Plan that are forfeited, canceled, reacquired by us prior to vesting, satisfied without the issuance of stock or otherwise terminated (other than by exercise) will be added to shares available for issuance under the 2015 Plan. The maximum term of options granted under 2015 Plan is ten years. For an initial grant to an employee, 25% of the options generally vest on the first anniversary of the original vesting date, with the balance vesting monthly over the remaining three years. For subsequent grants to an employee, the options generally vest monthly over a four-year term. Inducement Grant In September 2016, we granted a non-qualified option to purchase 145,000 shares of our common stock at an exercise price of $3.29 per share as an inducement award in connection with the hiring of our Senior Vice President, Research. This option will vest over a period of four (4) years, with 25% vesting on the one year anniversary of the grant date and the remaining 75% vesting on a monthly basis over three years thereafter, subject to continuous employment. This option was an inducement grant issued outside of the 2015 Plan in accordance with NASDAQ Listing Rule 5635(c)(4). We filed a registration statement on Form S-8 on March 22, 2017 to register the shares of common stock underlying this option. In addition, from time to time, we may make inducement grants of stock options to new employees. There were no inducement awards granted in 2017. Employee Stock Purchase Plan In April 2015, our board of directors adopted, and our stockholders approved, our 2015 Employee Stock Purchase Plan (the 2015 ESPP). The 2015 ESPP became effective on May 6, 2015. A total of 227,623 shares of our common stock were initially reserved for issuance under the 2015 ESPP. In addition, the number of shares reserved and available for purchase under the 2015 ESPP will automatically increase each January 1, beginning on January 1, 2016 and thereafter until January 1, 2019, by 1% of the outstanding number of shares of our common stock on the immediately preceding December 31 or such lesser number of shares as determined by the administrator of the 2015 ESPP. Pursuant to this provision, 297,891, 237,448 and 236,700 additional shares were reserved for issuance under the 2015 ESPP on January 1, 2018, 2017 and 2016, respectively. Stock-based Compensation Stock Options Stock option activity is summarized as follows: Number of Outstanding Options Weighted Average Exercise Price Weighted Remaining Contractual Term Aggregate Intrinsic Value (in 000s) Outstanding as of December 31, 2016 4,014,988 $ 6.73 Granted 1,508,119 $ 3.51 Exercised (75,289 ) $ 2.47 Canceled/forfeited/expired (830,759 ) $ 7.99 Outstanding as of December 31, 2017 4,617,059 $ 5.52 7.37 $ 1,370 Options vested and expected to vest as of December 31, 2017 4,617,059 $ 5.52 7.37 $ 1,370 Options exercisable as of December 31, 2017 2,220,670 $ 6.01 6.23 $ 1,070 The assumptions used in the Black-Scholes option pricing model to determine the fair value of the employee stock option grants were as follows: Years Ended December 31, 2017 2016 2015 Expected term (in years) 5.50 – 6.08 5.50 – 6.08 5.50 – 6.08 Risk-free interest rate 1.9% – 2.1 % 1.2% – 2.1 % 1.5% – 1.9 % Expected volatility 99.1% – 124.4 % 80.7% – 84.5 % 79.2% – 100.9 % Expected dividend yield 0.0 % 0.0 % 0.0 % The assumptions used in the Black-Scholes option pricing model to determine the fair value of the ESPP offering were as follows: Years Ended December 31, 2017 2016 2015 Expected term (in years) 0.50 0.50 0.50 Risk-free interest rate 0.6% – 1.0 % 0.4% – 0.6 % 0.3 % Expected volatility 74.5% – 115.2 % 75.5% – 80.8 % 67.3 % Expected dividend yield 0.0 % 0.0 % 0.0 % Expected term . The expected term represents the period of time that options are expected to be outstanding. Because we do not have sufficient history of exercise behavior, we determine the expected life assumption using the simplified method, which is an average of the contractual term of the option and its vesting period. Risk-free interest rate. We base the risk-free interest rate assumption on the U.S. Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. Expected volatility. The expected volatility assumption is based on volatilities of a peer group of similar companies whose share prices are publicly available. The peer group was developed based on companies in the biotechnology industry. Expected dividend yield. We base the expected dividend yield assumption on the fact that we have never paid cash dividends and have no present intention to pay cash dividends. Performance Options with Market Conditions In October 2015, we granted to our executives, employees and certain consultants performance options with a market condition to purchase up to an aggregate 169,402 shares of common stock at an exercise price of $10.24. Upon achievement of specified market condition by October 2017, such performance options shall begin to vest over four years in equal monthly installments, otherwise the options will be subject to forfeiture. The fair value of the performance options with market conditions is estimated on the date of the grant using a Monte Carlo simulation, based on the market price of the underlying common stock, expected performance measurement period, expected peer group stock price volatility and expected risk-free interest rate. The weighted average grant date fair value was $4.23. The performance options with market conditions grants are expensed using the accelerated attribution method over the requisite service period of 4.8 years regardless of whether the market condition is achieved or earned and vested. As of October 2017, the market condition for these performance options were not met and therefore were forfeited. In January 2016, we granted to our executives, employees and certain consultants performance options with a market condition to purchase up to an aggregate 396,960 shares of common stock at an exercise price of $9.13. Upon achievement of specified market conditions by January 2018, such performance options shall begin to vest over four years in equal monthly installments, otherwise the options will be subject to forfeiture. The fair value of the performance options with a market condition is estimated on the date of the grant using a Monte Carlo simulation, based on the market price of the underlying common stock, expected performance measurement period, expected peer group stock price volatility and expected risk-free interest rate. The weighted average grant date fair value was $1.93. The performance options with market conditions grants are expensed using the accelerated attribution method over the requisite service period of 5.1 years regardless of whether the market condition is achieved or earned and vested. Refer to Note 10, Subsequent Events for further discussion of these options. There were no performance options with a market condition granted during 2017. The assumptions used at grant date to determine the fair value of the performance options with a market condition were as follows: December 31, 2016 2015 Expected term (in years) 5.06 4.81 Risk-free interest rate 2.2 % 2.1 % Expected volatility 83.3 % 80.6 % Expected dividend yield 0.0 % 0.0 % Restricted Stock Units During the year ended December 31, 2017, we granted restricted stock units to employees. Restricted stock unit activity is summarized as follows: Number of Outstanding Restricted Stock Units Weighted Average Grant Date Fair Value Balance as of December 31, 2016 76,713 $ 4.95 Granted 22,000 $ 3.30 Released (36,099 ) $ 4.96 Forfeited (13,314 ) $ 4.67 Balance as of December 31, 2017 49,300 $ 4.28 The allocation of stock-based compensation for all options, including performance options with market condition and restricted stock units is as follows (in thousands): Years Ended December 31, 2017 2016 2015 Research and development $ 1,399 $ 1,876 $ 2,524 General and administrative 5,385 3,153 2,332 $ 6,784 $ 5,029 $ 4,856 The weighted–average grant date fair value per share of stock options granted by us, excluding performance options with market conditions, during the years ended December 31, 2017, 2016 and 2015 was $2.85, $3.34 and $11.29, respectively. The total fair value of restricted stock units vested during the years ended December 31, 2017, 2016 and 2015 was $0.1 million, $13,000 and none, respectively. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2017, 2016 and 2015 was $0.3 million, $34,000 and $1.9 million, respectively. As of December 31, 2017, total unrecognized share-based compensation expense related to unvested stock options and restricted stock units was approximately $6.0 million. This unrecognized cost is expected to be recognized ratably over a weighted-average period of approximately 2.6 years. In October 2015, our Compensation Committee of the Board of Directors approved an amendment to accelerate the vesting schedule of certain outstanding stock options representing 931,749 shares granted to active employees and certain consultants under the 2014 Plan to change the vesting schedule of such options from six-years to four-years retroactive to the original vesting commencement dates. We recorded $0.8 million of stock compensation expense in connection with the modification during the year ended December 31, 2015. During the fourth quarter of 2017, in connection with the change of status of our then-Chief Executive Officer to an advisor consulting role, we modified certain terms of outstanding options granted to the executive. We recorded $1.9 million of share-based compensation expense related to the modifications. We determined that vesting of the shares underlying the options will occur whether or not our then-Chief Executive Officer provides substantive service. In addition, in connection with the departure of our then-Chief Business Officer, we modified certain terms of outstanding options previously granted to the executive. As a result, we recorded $0.3 million in share-based compensation expense related to the modification. Warrants Warrants outstanding as of December 31, 2017 is as follows: Number Exercise Price Expiration Outstanding Per Share Date 6,488,205 $ 4.64 December 2019 2,006 $ 7.48 March 2021 14,913 $ 20.12 July 2023 95,542 $ 3.14 November 2023 41,666 $ 3.60 June 2024 40,376 $ 3.72 December 2024 6,682,708 Common Stock Reserved for Future Issuance Common stock reserved for future issuance is as follows: December 31, 2017 2016 Class X Preferred Stock (if-converted to common stock) 11,429,760 — Common stock warrants 6,682,708 121,512 Common stock options and awards outstanding 4,666,359 4,091,701 Shares available under the 2015 Plan 765,427 510,760 Shares available under the 2015 ESPP 583,819 407,542 24,128,073 5,131,515 |