7 .	Stockholders’ Equity

Amendments to Articles of Incorporation

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Reverse Stock Split

Effective January 13, 2014, we amended our Certificate of Incorporation to change our name to Heron Therapeutics, Inc. and effected a 1-for-20 reverse split of our outstanding common stock. The name change and Reverse Stock Split were approved by our stockholders on September 19, 2013. As a result of the Reverse Stock Split, we amended our Certificate of Incorporation to reduce the total authorized shares of our common stock from 1,500,000,000 to 75,000,000 shares.

2013 Common Stock Offering

In November 2013, we sold approximately 7.7 million shares of our common stock at a public offering price of $8.00 per share. We received total net proceeds of approximately $57.8 million (net of approximately $3.9 million in issuance costs).

2014 Common Stock Offering

In June 2014, we sold approximately 4.8 million shares of our common stock at a public offering price of $11.75 per share. In addition, as a component of the offering, we sold 600,000 pre-funded warrants to purchase shares of our common stock at a public offering price of $11.74 per share. The pre-funded warrants have an exercise price of $0.01 per share and expire on June 30, 2021. We received total net proceeds of approximately $58.9 million (net of approximately $4.0 million in issuance costs) from the sale of the common stock and the pre-funded warrants.

2015 Common Stock Offering

In June 2015, we sold approximately 5.5 million shares of our common stock at a public offering price of approximately $24.75 per share. We received total net proceeds of approximately $128.2 million (net of approximately $8.4 million in issuance costs) from the sale of the common stock.

Warrants

Private Placement Warrants

In June 2011, we sold shares of common stock and warrants to purchase common stock in a private placement. A total of 4.0 million warrants to purchase common stock at an exercise price of $3.60 per share were issued as part of this private placement. The warrants were immediately exercisable and expire on July 1, 2016. The warrants may be exercised for cash only, or, if a registration statement is not then effective and available for the resale of the shares of common stock issuable upon exercise of the warrants, by surrender of such warrant, or a portion of such warrant, by way of cashless exercise. There is no right to exercise the warrants to the extent that, after giving effect to such exercise the holder would beneficially own in excess of 9.99% of our outstanding shares of common stock or such other limit as may be designated by any particular purchaser. Each holder of the warrants can amend or waive the foregoing limitation by written notice to us, with such waiver taking effect only upon the expiration of a 61-day notice period.

During the year ended December 31, 2015, warrant holders exercised 343,813 warrants under the cashless exercise provision in the warrant agreement, which resulted in the net issuance of 285,713 shares of common stock and no net cash proceeds to us. During the year ended December 31, 2014, warrant holders exercised 460,706 warrants under the cashless exercise provision in the warrant agreement, which resulted in the net issuance of 303,614 shares of common stock and no net cash proceeds to us. During the year ended December 31, 2013, we received $0.6 million for cash exercises of these warrants.

Outstanding Warrants

The following table summarizes all warrants outstanding as of December 31, 2015:

	Number of Shares Outstanding		Exercise Price		Expiration Date
Issued to private placement investors in July 2011		2,965,477	$	3.60	07/01/2016
Issued in a public offering in June 2014		600,000	$	0.01	06/30/2021
Total warrants outstanding		3,565,477

The weighted-average exercise price of warrants outstanding as of December 31, 2014 was $3.00.

Common Stock Reserved for Future Issuance

Shares of our common stock reserved for future issuance as of December 31, 2015 were as follows:

	Number of Shares
Stock options outstanding		8,434,988
Stock options available for grant		3,880,849
Employee stock purchase plan		99,532
Warrants outstanding		3,565,477
Common stock underlying Convertible Notes outstanding		7,086,560
Total shares reserved for future issuance		23,067,406

Employee Stock Purchase Plan

In 1997 our stockholders approved our Employee Stock Purchase Plan (the “ESPP”). In December 2007, May 2009, June 2011, May 2014 and May 2015, our stockholders authorized increases in the number of shares reserved for issuance under the ESPP by 5,000, 10,000, 25,000, 25,000 and 100,000 shares, respectively, for a total of 175,000 shares reserved at December 31, 2015. Under the terms of the ESPP, employees can elect to have up to a maximum of 10% of their base earnings withheld to purchase our common stock. The purchase price of the stock is 85% of the lower of the closing prices for our common stock on: (i) the first trading day in the enrollment period, as defined in the ESPP, in which the purchase is made, or (ii) the purchase date. The length of the enrollment period is six months. Enrollment dates are the first business day of May and November. Approximately 36% of eligible employees participated in the ESPP in 2015. Under the ESPP, we issued 30,361, 12,028 and 5,630 shares in 2015, 2014 and 2013, respectively. The weighted-average exercise price per share of the purchase rights exercised during 2015, 2014 and 2013 was $8.46, $7.59 and $6.12, respectively. As of December 31, 2015, 75,468 shares of common stock have been issued under the ESPP and 99,532 shares of common stock are available for future issuance.

Stock Option Plans

We currently have one stock option plan from which we can grant options and restricted stock awards to employees, officers, directors and consultants. In December 2007, the stockholders approved our 2007 Equity Incentive Plan (the “2007 Plan”) at which time a maximum of 150,000 shares of common stock were available for grant. In May 2010, June 2011, May 2014 and May 2015, our stockholders approved amendments to our 2007 Plan to increase the maximum number of shares of common stock available for grant by 100,000, 4,500,000, 1,750,000 and 4,300,000 shares of common stock, respectively, resulting in an aggregate of 10,800,000 shares of common stock authorized for issuance as of December 31, 2015. At December 31, 2015, there were 3,880,849 shares available for future grant under the 2007 Plan. Any shares that are issuable upon exercise of options granted that expire, are cancelled, or that we receive pursuant to a net exercise of options, are available for future grant and issuance.

We also granted stock options and restricted stock awards under the 2002 Stock Incentive Plan (the “2002 Plan”) in prior years. The remaining shares available to be granted under the 2002 Plan expired in February 2012.

In 2014, 2013 and 2012, we granted options to certain employees outside of our stockholder approved stock option plans. All options to purchase our common stock were granted with an exercise price that equals fair market value of the underlying common stock on the grant dates and expire no later than ten years from the date of grant. The options are exercisable in accordance with vesting schedules that generally provide for them to be fully vested and exercisable four years after the date of grant, provided, however, that we have also issued stock options awards that are subject to performance vesting requirements. All stock option grants issued outside of our stockholder approved plans have been registered on Form S-8 with the SEC.

A summary of our stock option activity and related data follows:

	Outstanding Options
				Weighted-
				Average
	Number of			Exercise
	Shares			Price
Balance at December 31, 2012		4,323,874		$	8.46
Granted		4,256,971			8.08
Exercised		(537,029	)		5.20
Cancelled		(1,688,135	)		9.45
Balance at December 31, 2013		6,355,681			8.22
Granted		3,181,001			9.40
Exercised		(756,593	)		6.34
Cancelled		(862,085	)		9.88
Balance at December 31, 2014		7,918,004			8.69
Granted		2,134,505			28.95
Exercised		(1,042,343	)		9.15
Cancelled		(575,178	)		10.42
Balance at December 31, 2015		8,434,988		$	13.64

For the year ended December 31, 2015, option holders exercised 1,042,343 stock options resulting in cash proceeds to us of approximately $9.5 million.

For the year ended December 31, 2015, options cancelled (included in the above table) consisted of 503,343 options forfeited with a weighted-average exercise price of approximately $9.16 and 71,835 options expired with a weighted-average exercise price of approximately $19.24.

As of December 31, 2015, options exercisable have a weighted-average remaining contractual term of 6.7 years. The total intrinsic value of stock option exercises, which is the difference between the exercise price and closing price of our common stock on the date of exercise, during the years ended December 31, 2015 and 2014, was approximately $13,882,000 and $3,377,000, respectively. As of December 31, 2015 and 2014, the total intrinsic value of options outstanding and exercisable was approximately $46,603,000 and $14,654,000, respectively, which is the difference between the exercise price and closing price of our common stock.

	Years Ended December 31,
	2015				2014				2013
			Weighted-				Weighted-				Weighted-
			Average				Average				Average
			Exercise				Exercise				Exercise
	Options		Price		Options		Price		Options		Price
Exercisable at end of year		2,587,392	$	8.72		2,237,901	$	9.01		1,770,597	$	8.67
Options vested or expected to vest		8,059,481	$	13.38		7,841,074	$	8.69		6,292,296	$	8.22

Exercise prices and weighted-average remaining contractual lives for the options outstanding as of December 31, 2015 were:

												Weighted-
						Weighted-						Average
						Average		Weighted-				Exercise
						Remaining		Average				Price of
Options		Range of				Contractual		Exercise		Options		Options
Outstanding		Exercise Prices				Life (in years)		Price		Exercisable		Exercisable
	702,903		$3.80	–	$7.00		6.31	$	5.92		466,373	$	5.38
	2,302,688			$7.20			7.33		7.20		711,687		7.20
	2,047,712		$7.61	–	$9.05		8.30		8.91		711,561		8.84
	1,702,732		$9.20	–	$28.30		7.23		14.89		692,974		12.17
	1,678,953		$28.73	–	$128.00		9.71		30.23		4,797		42.60
	8,434,988		$3.80	–	$128.00		7.94		13.64		2,587,392		8.72

On December 31, 2015, we had reserved 8,434,988 shares of common stock for future issuance upon exercise of outstanding options granted under the 2002 Plan and the 2007 Plan, as well as the non-plan grants.

Valuation and Expense Information

The following table summarizes stock-based compensation expense related to stock-based payment awards granted pursuant to all of our equity compensation arrangements for the years ended December 31, 2015, 2014 and 2013 (in thousands):

	December 31,
	2015		2014		2013
Research and development	$	4,701	$	3,329	$	2,562
General and administrative		9,659		4,738		8,328
Stock-based compensation expense included in operating expenses	$	14,360	$	8,067	$	10,890

As of December 31, 2015, there was $63,865,000 of total unrecognized compensation cost related to non-vested, stock-based payment awards granted under all of our equity compensation plans and all non-plan option grants. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize this compensation cost over a weighted-average period of 2.3 years.

For the years ended December 31, 2015, 2014 and 2013, we estimated the fair value of each option grant and ESPP purchase right on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

Options:

	December 31,
	2015			2014			2013
Risk-free interest rate		1.7	%		1.9	%		1.1	%
Dividend yield		—	%		—	%		—	%
Volatility		92.7	%		99.0	%		104.2	%
Expected life (years)		6			6			6

ESPP:

	December 31,
	2015			2014			2013
Risk-free interest rate		0.1	%		0.1	%		0.1	%
Dividend yield		—	%		—	%		—	%
Volatility		86.7	%		53.8	%		76.0	%
Expected life (months)		6			6			6

The weighted-average fair value of options granted was $21.92, $7.40 and $6.53 for the years ended December 31, 2015, 2014 and 2013, respectively.

The weighted-average fair value of shares purchased through the ESPP was $8.23, $3.06 and $3.01 for the years ended December 31, 2015, 2014 and 2013, respectively.

The risk-free interest rate assumption is based on observed interest rates on United States Treasury debt securities with maturities close to the expected term of our employee and director stock options and ESPP purchases.

The dividend yield assumption is based on our history and expectation of dividend payouts. We have never paid dividends on its common stock and we do not anticipate paying dividends in the foreseeable future.

We used our historical stock price to estimate volatility.

The expected life of employee and director stock options represents the average of the contractual term of the options and the weighted-average vesting period, as permitted under the simplified method. We have elected to use the simplified method, as we do not have enough historical exercise experience to provide a reasonable basis upon which to estimate the expected term. The expected life for the ESPP purchase rights is six months, which represents the length of each purchase period.