4. Stockholders’ Equity

Common stock

During the three months ended June 30, 2013 and 2012, the Company issued 200,135 and 137,584 shares of common stock upon exercise of 252,129 and 145,000 warrants, respectively.

Restricted stock awards

In May of 2008, the Board of Directors of the Company approved the 2008 Equity Incentive Plan (the “2008 Plan”). The 2008 Plan authorized the issuance of up to 1,521,584 common shares for awards of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock award units, and stock appreciation rights. The 2008 Plan terminates on July 1, 2018. No shares were issued under the 2008 Plan during 2012 or the six months ended June 30, 2013, and the Company does not intend to issue any additional shares from the 2008 Plan in the future.

From 2008 through December 31, 2011, the Company issued a total of 1,258,934 shares of restricted common stock to various employees, advisors, and consultants of the Company. Of those shares, 1,086,662 were issued under the 2008 Plan and the remaining 172,272 shares were issued outside the plan.

In January of 2012, the Board of Directors of the Company approved the 2012 Equity Incentive Plan (the “2012 Plan). The 2012 Plan authorized the issuance of up to 6,553,986 shares of common stock for awards of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares, and other stock or cash awards. The 2012 Plan terminates ten years after its adoption.

No restricted stock was issued during the three months ended June 30, 2012. There were 58,342 shares of restricted stock cancelled due to terminations during the three months ended June 30, 2012.

During the three months ended June 30, 2013, the Company issued an aggregate of 60,000 restricted stock units with immediate vesting to a consultant.

A summary of the Company’s restricted stock award activity for 2012 through June 30, 2013 is as follows:

The fair value of each restricted common stock award is recognized as stock-based expense over the vesting term of the award. The Company recorded restricted stock-based compensation expense in operating expenses for employees and non-employees of approximately $402,000 and $190 during the three months ended June 30, 2013 and 2012, respectively. The Company recorded restricted stock-based compensation expense of approximately $1,723,000 for the period from April 19, 2007 (inception) through June 30, 2013. Expense included approximately $4,000 and $50 for research and development during the three months ended June 30, 2013 and 2012, respectively. General and administrative expense for the three months ended June 30, 2013 and 2012 was approximately $398,000 and $140, respectively.

As of June 30, 2013, total unrecognized restricted stock-based compensation expense was approximately $1,161,000, which will be recognized over a weighted average period of 2.17 years.

Stock options

Under the 2008 Plan, on October 12, 2011, the Company granted an officer incentive stock options to purchase 896,256 shares of common stock at an exercise price of $0.08 per share, a quarter of which vested on the one year anniversary of employment, in May 2012, and the remaining options are vesting ratably over the remaining 36 month term. Other than this grant, the Company does not intend to issue any additional shares under the 2008 Plan.

Under the 2012 Plan, 51,500 and 305,658 incentive stock options were issued during the three months ended June 30, 2013 and 2012, respectively, at various exercise prices, a quarter of which will vest on either the one year anniversary of employment or the one year anniversary of the vesting commencement date, and the remaining options will vest ratably over the remaining 36 month terms. The Company also issued 45,500 non-qualified stock option grants during the three month period ended June 30, 2013, which vest quarterly over three years.

A summary of the Company’s stock option activity for 2012 through June 30, 2013 is as follows:

The weighted-average remaining contractual term of options exercisable and outstanding at June 30, 2013 was approximately 8.71 years and 9.44 years, respectively.

The Company uses the Black-Scholes valuation model to calculate the fair value of stock options. Stock-based compensation expense is recognized over the vesting period using the straight-line method. The fair value of stock options was estimated at the grant date using the following weighted average assumptions:

The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. Due to the Company’s limited historical data, the estimated volatility incorporates the historical and implied volatility of comparable companies whose share prices are publicly available. The risk-free interest rate assumption was based on the U.S. Treasury rates. The weighted average expected life of options was estimated using the average of the contractual term and the weighted average vesting term of the options. Certain options granted to consultants are subject to variable accounting treatment and are required to be revalued until vested.

The total stock option-based compensation recorded as operating expense was approximately $400,000 and $39,000 for the three months ended June 30, 2013 and 2012, respectively. The Company recorded stock-based compensation expense of approximately $1,379,000 for the period from April 19, 2007 (inception) through June 30, 2013. Expense included approximately $67,000 and $35,000 for research and development during the three months ended June 30, 2013 and 2012, respectively. General and administrative expense for the three months ended June 30, 2013 and 2012 were approximately $333,000, and $4,000, respectively.

The total unrecognized compensation cost related to unvested stock option grants as of June 30, 2013 was approximately $4,816,000 and the weighted average period over which these grants are expected to vest is 3.3 years.

Warrants

During the three months ended June 30, 2013 and 2012, 252,129 and 45,000 warrants were exercised through a cashless exercise provision for issuance of 200,135 and 37,584 shares of common stock, respectively. Additionally, during the three months ended June 30, 2012, 100,000 warrants were exercised at $1.00 for total proceeds of $100,000.

In December 2012, the Company consummated a warrant tender offer to the holders of outstanding warrants to purchase approximately 14.5 million shares of the Company’s common stock. In accordance with the tender offer, for those warrant holders that elected to participate, this resulted in a reduction of the exercise price of the warrants from $1.00 per share to $0.80 per share of common stock in cash, shortened the exercise period of the warrants so that they expired concurrently with the tender offer, and removed the price-based anti-dilution provisions contained in the warrants. The Company completed the tender offer on December 21, 2012, resulting in approximately 9.6 million warrants being exercised for gross proceeds of approximately $7,700,000. In connection with the transaction, the Company recognized an expense for the inducement to exercise the warrants of approximately $1,900,000. The Company also incurred approximately $400,000 in placement agent fees, legal costs, and other related fees, which have been recognized as an offset to the proceeds received from the warrant exercises.

35,000 and 145,000 of the warrants exercised during the three months ended June 30, 2013 and 2012, respectively, were derivative liabilities and were valued at the settlement date. For the three months ended June 30, 2013 and 2012, respectively, $129,000 and $874,000 of the warrant liability was removed due to the exercise of warrants. See Note 3.

During April 2013, the Company entered into amendment agreements for 269,657 warrants to purchase common stock which reduced the exercise price of the warrants from $1.00 to $0.85 and removed the down-round price protection provision of the warrant agreement related to the adjustment of exercise price upon issuance of additional shares of common stock. As a result of the removal of the down-round price protection provision, the warrants were reclassified from liability to equity instruments at their fair value of $767,000. The Company determined the incremental expense associated with the modification based on the fair value of the awards prior to and subsequent to the modification. The fair value of the awards subsequent to modification was calculated using the Black-Scholes model. The incremental expense associated with the modification of approximately $12,000 was recognized as interest expense for the three months ended June 30, 2013.

Additionally, during the year ended December 31, 2012 the Company entered into four agreements with consultants for services. In connection with the agreements, the Company issued a total of 650,000 warrants to purchase common stock, at prices ranging from $1.70 to $3.24, with lives ranging from two to five years, to be earned over service periods of up to six months. The fair value of the warrants was estimated to be approximately $889,000, which was recognized as a prepaid asset and was amortized over the term of the consulting agreements. These warrants were classified as equity instruments because they do not contain any anti-dilution provisions. The Black-Scholes model, using volatility rates ranging from 79.8% to 103.8% and risk-free interest rate factors ranging from 0.24% to 0.63%, were used to determine the value. The value has been amortized over the term of the agreements. The Company recognized approximately $72,000 and $889,000 during the three months ended June 30, 2013 and for the period from April 19, 2007 (inception) through June 30, 2013, respectively related to these services.

The following table summarizes warrant activity for 2012 through June 30, 2013:

The warrants outstanding at June 30, 2013 are immediately exercisable at prices between $0.85 and $3.24 per share, and have a weighted average remaining term of approximately 3.33 years.

Common stock reserved for future issuance

Common stock reserved for future issuance consisted of the following at June 30, 2013: