7. Capital structure

Convertible preferred stock prior to 2013 recapitalization

As of December 31, 2012, the Company had authorized for issuance up to 29,500,000 shares of preferred stock, $0.001 par value. The authorized shares as of December 31, 2012 were designated as follows: 2,000,000 shares of Series One convertible preferred stock (Series One), 13,750,000 shares of Series Two convertible preferred stock (Series Two), and 13,750,000 shares of Series Three convertible preferred stock (Series Three).

2013 Recapitalization

During January and February of 2013, the Company entered into a "bridge" financing arrangement with certain existing investors providing for the issuance by the Company of an aggregate of $6 million of convertible promissory notes and warrants to purchase 2,527,675 shares of Series One and Series Two convertible preferred stock. The warrants have a per share exercise price of $0.01, and as such, they are referred to as "penny warrants". This bridge financing was closed in anticipation of the March 2013 Series Four financing event, which the Company refers to as the "2013 recapitalization".

The Company allocated the proceeds of the convertible promissory notes between debt and warrant liability. Since the value of the warrants exceeded the proceeds from the convertible notes issued to existing investors, the value of the warrant in excess of the proceeds is considered a deemed dividend and reflected as an equity transaction in the financial statements. The Company recorded $6.0 million to interest expense related to the debt discount associated with the convertible debt during the quarter ended March 31, 2013.

On March 7, 2013, the Company closed a private placement of a new series of convertible preferred stock that resulted in another recapitalization event (the 2013 recapitalization). In this private placement, the Company issued and sold an aggregate of 4,497,035 shares of its Series Four senior preferred stock (Series Four) for an aggregate purchase price of approximately $54 million. Including the $6.0 million raised with the bridge financing, total gross proceeds raised during the quarter ended March 31, 2013 was approximately $60.0 million. In addition, the Company issued an aggregate of 502,919 shares of Series Four upon the share settlement of the convertible promissory notes described above that were issued in January and February 2013.

In connection with this private placement, the Company effected a one- for-120 reverse stock split of its common stock and an exchange of outstanding shares of Series One, Series Two and Series Three convertible preferred stock into an aggregate of 6,700,487 shares of a new series of Series Five junior preferred stock (Series Five). In addition, the Company issued an aggregate of 2,527,675 shares of Series One and Series Two convertible preferred stock upon the exercise of the warrants issued in connection with the bridge loan that were immediately exchanged for 2,095,515 shares of Series Five during the 2013 recapitalization.

The Company accounted for the 2013 recapitalization as an extinguishment of its Series One, Series Two and Series Three convertible preferred stock and recorded the Series Five shares at their fair value as of the recapitalization date. In accordance with authoritative accounting guidance, the Company recorded a gain attributable to the common stockholders on the extinguishment of the Series One, Series Two and Series Three convertible preferred stock. The gain of approximately $3.4 million represents the excess of the Series One, Series Two and Series Three convertible preferred stock over the fair value of the shares Series Five issued in connection with the recapitalization.

Valuation—The value of the Company was estimated using the PWERM. The PWERM considered the most significant near-term driver of value for the Company as the Company's ability to complete a Phase 3 clinical trial of ataluren for the treatment of Duchenne muscular dystrophy caused by nonsense mutations (nmDMD). The remaining scenarios in the PWERM related to funding the completion of the Phase 3 clinical trial for nmDMD. The path to raising this money made up the remaining nodes in the PWERM.

After identifying the various potential liquidity scenarios and their likely timing, a pre-money enterprise value was assigned to each scenario based on a combination of management's guidance and recent trends in the capital markets. The resulting enterprise value for each liquidity event was divided by the total shares that would be outstanding under each scenario to arrive at a price per share for the common and preferred classes of stock. Each scenario was then assigned an outcome probability based on management's estimates. The resulting probability weighted share values were then discounted to present value at a rate that reflects general industry risks (but not Company specific risks).

The rights and preferences of the shares of Series Four and Series Five are as follows:

Dividends—The holders of Series Four and Series Five, in preference to the holders of common stock, were entitled to noncumulative dividends when and if declared by the Board of Directors.

Liquidation—Upon the liquidation, dissolution, reorganization or winding-up of the Company, the holders of Series Four would have been entitled to receive, before any distribution or payment was made to any other class of security, an amount equal to the original issuance price, plus all declared, but unpaid, dividends. To the extent there had been excess assets to distribute, the holders of Series Five would have been entitled to receive, before any distribution or payment was made to the holders of the common stock, an amount equal to the stated liquidation preference, plus all declared, but unpaid, dividends. To the extent there had been remaining assets to distribute, the holders of common stock would have been entitled to receive such remaining assets.

Voting—Each holder of Series Four and Series Five was entitled to cast the number of votes into which such holder's shares would have converted. Except as required by law, holders of common stock had limited voting rights. Additionally, except as required by law, and except in certain enumerated circumstances, holders of Series Four and Series Five would have voted together with the holders of common stock as a single class.

Conversion—Each share of Series Four and Series Five is convertible at any time at the option of the holder into one share of common stock. These conversion ratios were subject to adjustment for certain dilutive events, including certain types of stock splits or stock dividends or future recapitalizations.

In May 2013, the Company issued and sold an additional 375,000 shares of Series Four, at a price per share of $12.00, for an aggregate purchase price of $4.5 million.

Common Stock

In May 2013, the Company's Board of Directors and stockholders approved an amendment to the Company's certificate of incorporation increasing the number of authorized shares of common stock to 125,000,000.

Initial Public Offering

In June 2013, the Company closed the initial public offering of its common stock pursuant to a registration statement on Form S-1, as amended. The Company issued and sold an aggregate of 9,627,800 shares of common stock under the registration statement at a public offering price of $15.00 per share, including 1,255,800 shares pursuant to the exercise by the underwriters of an over- allotment option. The Company received net proceeds from the initial public offering of approximately $131.6 million, after deducting underwriting discounts and commissions and other offering expenses payable by the Company.

Upon closing the initial public offering, all outstanding shares of the Series Four and Series Five were converted into 14,170,956 shares of common stock.

Follow-On Offerings

In February 2014, the Company closed a follow-on public offering of its common stock pursuant to a registration statement on Form S-1, as amended. The Company issued and sold an aggregate of 5,163,265 shares of common stock under the registration statement at a public offering price of $24.50 per share, including 673,469 shares pursuant to the exercise by the underwriters of an over-allotment option. The Company received net proceeds from the follow -on public offering of approximately $118.4 million, after deducting underwriting discounts and commissions and other offering expenses payable by the Company.

On October 16, 2014, the Company closed an underwritten public offering of its common stock pursuant to a registration statement on Form S-3. The Company issued and sold an aggregate of 3,450,000 shares of common stock under the registration statement at a public offering price of $36.25 per share, including 450,000 shares issued upon exercise by the underwriters of their option to purchase additional shares. The Company received net proceeds of approximately $117.6 million after deducting underwriting discounts and commissions and other offering expenses payable by the Company.

Warrants

All of the Company's outstanding warrants are classified as liabilities as of December 31, 2015 and 2014 because they contain non-standard antidilution provisions.

The following is a summary of the Company's outstanding warrants as of December 31, 2015 and 2014:

	Warrant shares		Exercise price		Expiration
Common stock		6,250	$	128.00		2017
Common stock		7,030	$	128.00		2019
Common stock		130	$	2,520.00		2019

In connection with the 2013 recapitalization, all of the Series Two outstanding warrants became warrants to purchase Series Five. In connection with the Company's initial public offering all of the Series Five outstanding warrants became warrants to purchase common stock.