7. Stockholders’ Equity

Convertible Preferred Stock

Series A-1 Convertible Preferred Stock

On October 20, 2009, the Company entered into a Series A-1 Preferred Stock Purchase Agreement with certain investors. In connection with the financing, the Company issued 30,726,326 shares of Series A-1 Convertible Preferred Stock for an aggregate amount of $38,979,412, which included the conversion of principal and accrued interest related to an earlier bridge financing of $16,099,770. In connection with the Series A-1 Preferred Stock financing, all then-outstanding shares of Series A and Series B Preferred Stock were converted into common stock, and all then outstanding warrants to purchase Series B Preferred Stock were converted into warrants to purchase common stock. Immediately prior to the Series A-1 Preferred Stock financing, the Company effected a 1-for-10 reverse stock split of the outstanding common stock. All prior-period applicable share amounts have been retroactively adjusted to reflect the reverse stock split.

Upon closing of the Company’s initial public offering, all outstanding shares of convertible preferred stock converted into an aggregate of 9,305,359 shares of common stock. In addition, immediately following the closing of the initial public offering, the Company’s certificate of incorporation was amended to authorize 5,000,000 shares of undesignated preferred stock and 100,000,000 shares of common stock. Both the common stock and undesignated preferred stock have a par value of $0.001 per share.

Common Stock

As of June 30, 2014 and December 31, 2013, there were 100,000,000 and 70,258,276 shares of common stock, respectively, authorized to be issued. Certain of the outstanding shares of common stock are subject to stock restriction agreements (a Restriction Agreement). Pursuant to a Restriction Agreement, a stockholder shall not sell, assign, transfer, or otherwise dispose of any shares except to the Company or as expressly provided in the Restriction Agreement.

In connection with preparing for the initial public offering of the Company’s common stock, the Company’s board of directors and stockholders approved a 1-for-3.302 reverse stock split of the Company’s common stock. The reverse stock split became effective on October 25, 2013. All share and per share amounts in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this reverse stock split, including reclassifying an amount to the reduction in par value of common stock to additional paid-in capital.

Warrants to Acquire Company Stock

On October 13, 2006, the Company issued a warrant to purchase 1,544 shares of common stock at an exercise price of $25.92 per share to a commercial bank. This warrant, which was originally issuable for Series B Preferred Stock prior to the conversion of Series B Preferred Stock to common stock in 2009, was vested upon issuance and expires in October 2016. The fair value of the warrant, which was de minimis, was calculated using the Black-Scholes-Merton option pricing model.

As part of the issuance of convertible unsecured promissory notes, the Company issued warrants to purchase an aggregate of 633,709 shares of common stock. In April 2014, one of the Company’s warrant holders exercised its warrant to purchase 1,026 shares of common stock at an exercise of $0.33 per share, resulting in proceeds to the Company of $339.

The following common stock warrants were outstanding at June 30, 2014:


NUMBER OF SHARES	EXERCISE PRICE PER SHARE		EXPIRATION DATE
298,404	$	0.33	July 18, 2018
301,987		0.33	January 16, 2019
17,042		0.33	December 9, 2015
15,250		0.33	January 30, 2019
1,544		25.92	October 13, 2016

2003 Stock Incentive Plan

The 2003 Stock Incentive Plan (the 2003 Plan) provided for the grant of incentives and nonqualified stock options and restricted stock awards. The exercise price for incentive stock options must be at least equal to the fair value of the common stock on the grant date. Unless otherwise stated in a stock option agreement, 25% of the shares subject to an option grant will vest upon the first anniversary of the vesting start date and thereafter at the rate of one forty-eighth of the option shares per month as of the first day of each month after the first anniversary. Upon termination of employment by reasons other than death, cause, or disability, any vested options shall terminate 60 days after the termination date. Stock options terminate 10 years from the date of grant. The 2003 Plan expired on May 21, 2013. There were options for 9,297 shares granted under the 2003 Plan at a weighted average exercise price of $3.73 during the six months ended June 30, 2013 prior to the expiration of the 2003 Plan.

A summary of the Company’s stock option activity under the 2003 Plan for the six months ended June 30, 2014 is as follows:


	OUTSTANDING OPTIONS			WEIGHTED- AVERAGE EXERCISE PRICE		WEIGHTED- AVERAGE REMAINING CONTRACTUAL TERM (YEARS)		AGGREGATE INTRINSIC VALUE (IN THOUSANDS)
Outstanding as of December 31, 2013		972,860		$	1.18		7.19	$	7,000
Options granted		—
Options exercised		(110,486	)		1.16
Options forfeited		(633	)		1.12

Outstanding as of June 30, 2014		861,741			1.26		5.70		6,180

Vested or expected to vest as of June 30, 2014		859,829			1.26		5.70		6,168

Exercisable as of June 30, 2014		802,034			1.20		5.56		5,799

As of June 30, 2014, there was $95,624 of total unrecognized compensation expense related to unvested options that will be recognized over a weighted-average period of approximately one year. Total intrinsic value of the options exercised during the six months ended June 30, 2013 was not material. The total fair value of shares underlying options which vested in the six months ended June 30, 2014 and 2013 was $30,308 and $180,295, respectively.

2013 Equity Incentive Plan

The Company’s board of directors adopted, and its stockholders approved, its 2013 Equity Incentive Plan (the “2013 Plan”). The 2013 Plan provides for the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code (the “Code”), to the Company’s employees and its parent and subsidiary corporations’ employees, and for the grant of nonstatutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards and other forms of stock compensation to its employees, including officers, consultants and directors. The 2013 Plan also provides for the grant of performance cash awards to the Company’s employees, consultants and directors.

Authorized Shares

The maximum number of shares of common stock that may be issued under the 2013 Plan is 1,000,000 shares, plus any shares subject to stock options or similar awards granted under the 2003 Plan that expire or terminate without having been exercised in full or are forfeited to or repurchased by the Company. The number of shares of common stock reserved for issuance under the 2013 Plan will automatically increase on January 1 of each year, beginning on January 1, 2015 and ending on January 1, 2023, by 3% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by the Company’s board of directors. The maximum number of shares that may be issued pursuant to exercise of incentive stock options under the 2013 Plan is 20,000,000.

Shares issued under the 2013 Plan may be authorized but unissued or reacquired shares of common stock. Shares subject to stock awards granted under the 2013 Plan that expire or terminate without being exercised in full, or that are paid out in cash rather than in shares, will not reduce the number of shares available for issuance under the 2013 Plan. Additionally, shares issued pursuant to stock awards under the 2013 Plan that the Company repurchases or that are forfeited, as well as shares reacquired by the Company as consideration for the exercise or purchase price of a stock award or to satisfy tax withholding obligations related to a stock award, will become available for future grant under the 2013 Plan.

A summary of the Company’s stock option activity under the 2013 Plan for the six months ended June 30, 2014 is as follows:


	OUTSTANDING OPTIONS		WEIGHTED- AVERAGE EXERCISE PRICE		WEIGHTED- AVERAGE REMAINING CONTRACTUAL TERM (YEARS)		AGGREGATE INTRINSIC VALUE (IN THOUSANDS)
Outstanding as of December 31, 2013		—	$	—		—	$	—
Options granted		919,188		8.90
Options exercised		—
Options forfeited		—

Outstanding as of June 30, 2014		919,188		8.90		9.58		372

Vested or expected to vest as of June 30, 2014		893,964		8.90		9.31		362

Exercisable as of June 30, 2014		—		—		—		—

The weighted-average fair value of the options granted during the six months ended June 30, 2014 was $6.72 per share, applying the Black-Scholes-Merton option pricing model utilizing the following weighted-average assumptions:


	Six Months Ended June 30, 2014
Expected term (years)		6.25
Expected volatility		90.50	%
Risk-free interest rate		2.14	%
Expected dividend yield		0	%

As of June 30, 2014, there was $5,322,601 of total unrecognized compensation expense related to unvested options that will be recognized over a weighted-average period of approximately 3.4 years.

Stock-based compensation expense was classified on the statement of operations as follows for the three and six months ended June 30, 2014 and 2013:


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Research and development	$	127,658	$	49,560	$	219,124	$	98,310
General and administrative		290,771		60,103		491,519		119,364

Total stock-based compensation expense	$	418,429	$	109,663	$	710,643	$	217,674