alrn-10q_20170930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-38130

 

Aileron Therapeutics, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

13-4196017

( State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

281 Albany Street

Cambridge, MA

 

02139

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (617) 995-0900

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Small reporting company

 

 

 

 

 

 

 

 

  

Emerging growth Company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of November 9, 2017, the registrant had 14,718,787 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 


 

 

Table of Contents

 

 

 

 

 

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

2

Item 1.

 

Financial Statements (Unaudited)

 

2

 

 

Condensed Balance Sheets

 

2

 

 

Condensed Statements of Operations and Comprehensive Loss

 

3

 

 

Condensed Statement of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

 

4

 

 

Condensed Statements of Cash Flows

 

5

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

20

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

27

Item 4.

 

Controls and Procedures

 

27

PART II.

 

OTHER INFORMATION

 

29

Item 1.

 

Legal Proceedings

 

29

Item 1A.

 

Risk Factors

 

29

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

61

Item 6.

 

Exhibits

 

61

 

 

Signatures

 

62

 

1


 

 

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements.

AILERON THERAPEUTICS, INC.

CONDENSED BALANCE SHEETS (UNAUDITED)

(In thousands, except share and per share data)

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,428

 

 

$

20,715

 

Investments

 

 

43,437

 

 

 

 

Prepaid expenses and other current assets

 

 

1,164

 

 

 

333

 

Restricted cash

 

 

88

 

 

 

25

 

Total current assets

 

 

58,117

 

 

 

21,073

 

Property and equipment, net

 

 

111

 

 

 

107

 

Restricted cash

 

 

 

 

 

63

 

Other assets

 

 

808

 

 

 

778

 

Total assets

 

$

59,036

 

 

$

22,021

 

Liabilities, Redeemable Convertible Preferred Stock and Stockholders’

   Equity (Deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,650

 

 

$

1,971

 

Accrued expenses and other current liabilities

 

 

3,373

 

 

 

2,100

 

Total current liabilities

 

 

5,023

 

 

 

4,071

 

Deferred rent

 

 

 

 

 

11

 

Total liabilities

 

 

5,023

 

 

 

4,082

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Redeemable convertible preferred stock (Series A, A-1, B, C-1, C-2, D, D-1, E,

   E-1, E-2, E-3 and F), $0.01 par value; no shares and 151,557,293 shares authorized at

   September 30, 2017 and December 31, 2016, respectively; no shares and 105,631,019

   shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively

 

 

 

 

 

129,745

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000,000 shares and no shares authorized at

   September 30, 2017 and December 31, 2016, respectively; no shares issued

   and outstanding at September 30, 2017 and December 31, 2016

 

 

 

 

 

 

Common stock, $0.001 par value; 150,000,000 shares and 143,500,000 shares authorized

   at September 30, 2017 and December 31, 2016, respectively; 14,718,787 and 432,413

   shares issued and outstanding at September 30, 2017 and December 31, 2016,

   respectively

 

 

15

 

 

 

 

Additional paid-in capital

 

 

184,085

 

 

 

2,536

 

Accumulative other comprehensive loss

 

 

(6

)

 

 

 

Accumulated deficit

 

 

(130,081

)

 

 

(114,342

)

Total stockholders’ equity (deficit)

 

 

54,013

 

 

 

(111,806

)

Total liabilities, redeemable convertible preferred stock and

   stockholders’ equity (deficit)

 

$

59,036

 

 

$

22,021

 

 

The accompanying notes are an integral part of these financial statements.

 

2


 

 

AILERON THERAPEUTICS, INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)

(In thousands, except share and per share data)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue

 

$

 

 

$

 

 

$

 

 

$

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

3,825

 

 

 

2,605

 

 

 

9,928

 

 

 

7,184

 

General and administrative

 

 

2,601

 

 

 

1,627

 

 

 

6,039

 

 

 

6,537

 

Total operating expenses

 

 

6,426

 

 

 

4,232

 

 

 

15,967

 

 

 

13,721

 

Loss from operations

 

 

(6,426

)

 

 

(4,232

)

 

 

(15,967

)

 

 

(13,721

)

Interest and other income

 

 

167

 

 

 

10

 

 

 

228

 

 

 

40

 

Net loss

 

 

(6,259

)

 

 

(4,222

)

 

 

(15,739

)

 

 

(13,681

)

Accretion of redeemable convertible preferred stock to redemption

   value

 

 

 

 

 

(19

)

 

 

(41

)

 

 

(57

)

Net loss attributable to common stockholders

 

$

(6,259

)

 

$

(4,241

)

 

$

(15,780

)

 

$

(13,738

)

Net loss per share attributable to common stockholders—basic and

   diluted

 

$

(0.45

)

 

$

(9.84

)

 

$

(3.16

)

 

$

(32.04

)

Weighted average common shares outstanding—basic and diluted

 

 

13,939,950

 

 

 

430,929

 

 

 

4,990,535

 

 

 

428,770

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on investments, net of tax of $0

 

 

(6

)

 

 

(3

)

 

 

(6

)

 

 

 

Total other comprehensive loss

 

 

(6

)

 

 

(3

)

 

 

(6

)

 

 

 

Comprehensive loss

 

$

(6,265

)

 

$

(4,225

)

 

$

(15,745

)

 

$

(13,681

)

 

The accompanying notes are an integral part of these financial statements.

 

3


 

AILERON THERAPEUTICS, INC.

CONDENSED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND

STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)

(In thousands, except share data)

 

 

 

Redeemable

Convertible

Preferred Stock

 

 

 

 

Common Stock

 

 

Additional

 

 

Accumulated Other

 

 

 

 

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

 

 

Shares

 

 

Par

Value

 

 

Paid-in

Capital

 

 

Comprehensive Loss

 

 

Accumulated

Deficit

 

 

Equity

(Deficit)

 

Balances at December 31, 2016

 

 

105,631,019

 

 

$

129,745

 

 

 

 

 

432,413

 

 

$

 

 

$

2,536

 

 

$

 

 

$

(114,342

)

 

$

(111,806

)

Issuance of Series F redeemable convertible

   preferred stock, net of issuance costs of

   $32

 

 

483,501

 

 

 

626

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accretion of redeemable convertible

   preferred stock to redemption value

 

 

 

 

 

41

 

 

 

 

 

 

 

 

 

 

 

(41

)

 

 

 

 

 

 

 

 

(41

)

Conversion of redeemable convertible

   preferred stock to common stock

 

 

(106,114,520

)

 

 

(130,412

)

 

 

 

 

10,509,774

 

 

 

11

 

 

 

130,401

 

 

 

 

 

 

 

 

 

130,412

 

Issuance of common stock upon completion

   of initial public offering, net of

   commissions, underwriting discounts

   and offering costs

 

 

 

 

 

 

 

 

 

 

3,750,000

 

 

 

4

 

 

 

50,005

 

 

 

 

 

 

 

 

 

50,009

 

Exercise of stock options

 

 

 

 

 

 

 

 

 

 

26,600

 

 

 

 

 

 

100

 

 

 

 

 

 

 

 

 

100

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,084

 

 

 

 

 

 

 

 

 

1,084

 

Unrealized loss on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6

)

 

 

 

 

 

(6

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,739

)

 

 

(15,739

)

Balances at September 30, 2017

 

 

 

 

$

 

 

 

 

 

14,718,787

 

 

$

15

 

 

$

184,085

 

 

$

(6

)

 

$

(130,081

)

 

$

54,013

 

The accompanying notes are an integral part of these financial statements.

 

4


 

AILERON THERAPEUTICS, INC.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(15,739

)

 

$

(13,681

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

85

 

 

 

190

 

Net amortization of premiums and discounts on investments

 

 

(88

)

 

 

(14

)

Stock-based compensation expense

 

 

1,084

 

 

 

519

 

Change in deferred rent

 

 

(11

)

 

 

(29

)

Loss on disposal of property and equipment

 

 

 

 

 

12

 

Write-off of deferred offering costs

 

 

 

 

 

1,500

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(909

)

 

 

(336

)

Other assets

 

 

33

 

 

 

 

Accounts payable

 

 

(233

)

 

 

284

 

Accrued expenses and other current liabilities

 

 

1,085

 

 

 

774

 

Net cash used in operating activities

 

 

(14,693

)

 

 

(10,781

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(74

)

 

 

 

Purchases of investments

 

 

(52,130

)

 

 

(12,634

)

Proceeds from sales or maturities of investments

 

 

8,775

 

 

 

11,150

 

Changes in restricted cash

 

 

 

 

 

(25

)

Net cash used in investing activities

 

 

(43,429

)

 

 

(1,509

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs

 

 

471

 

 

 

13,183

 

Proceeds from exercise of stock options

 

 

100

 

 

 

23

 

Proceeds from initial public offering of common stock, net of commissions and underwriting

   discounts

 

 

52,313

 

 

 

 

Payments of initial public offering costs

 

 

(2,049

)

 

 

(180

)

Net cash provided by financing activities

 

 

50,835

 

 

 

13,026

 

Net increase (decrease) in cash and cash equivalents

 

 

(7,287

)

 

 

736

 

Cash and cash equivalents at beginning of period

 

 

20,715

 

 

 

3,768

 

Cash and cash equivalents at end of period

 

$

13,428

 

 

$

4,504

 

Supplemental disclosure of non-cash financing activities:

 

 

 

 

 

 

 

 

Accretion of redeemable convertible preferred stock to redemption value

 

$

41

 

 

$

57

 

Deferred offering costs included in accounts payable and accrued expenses

 

$

255

 

 

$

 

Conversion of convertible preferred stock into common stock upon listing

   of the Company's common stock on the NASDAQ

 

$

130,412

 

 

$

 

 

The accompanying notes are an integral part of these financial statements.

 

5


 

 

AILERON THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except share and per share data)

1. Nature of the Business and Basis of Presentation

Aileron Therapeutics, Inc. (“Aileron” or the “Company”) is a clinical-stage biopharmaceutical company that is focused on developing and commercializing a novel class of therapeutics called stapled peptides. The Company’s lead product candidate, ALRN-6924, targets the tumor suppressor p53 for the treatment of a wide variety of cancers. ALRN-6924 reactivates p53-mediated tumor suppression by targeting the two primary p53 suppressor proteins, MDMX and MDM2. ALRN-6924 was in multiple clinical trials as of September 30, 2017 and December 31, 2016.

The Company is subject to risks common to companies in the biotechnology industry, including but not limited to, new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations and the need to obtain additional financing. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure, and extensive compliance-reporting capabilities.

The Company’s product candidates are in development. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained, that any products developed will obtain necessary governmental regulatory approval or that any approved products will be commercially viable. Even if the Company’s drug development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its key employees and consultants.

Reverse Stock Split

On June 16, 2017, in connection with its initial public offering (“IPO”), the Company effected a one-for-9.937 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s redeemable convertible preferred stock (see Note 6). Accordingly, all common share and per share amounts for all periods presented in the accompanying financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and the associated adjustment of the preferred stock conversion ratios.

Initial Public Offering

On June 28, 2017, the Company’s registration statement on Form S-1 relating to its initial public offering of its common shares (the “IPO”) was declared effective by the Securities and Exchange Commission (“SEC”). In the IPO, which closed on July 5, 2017, the Company issued and sold 3,750,000 shares of common stock at a public offering price of $15.00 per share for net proceeds of $50.0 million after deducting underwriting discounts and commissions of $3.9 million and estimated offering expenses of $2.3 million. Upon the closing of the IPO, all 106,114,520 shares of redeemable convertible preferred stock then outstanding converted into an aggregate of 10,509,774 common shares.

Liquidity

In accordance with Accounting Standards Update (“ASU”) No. 2014-15, Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the company’s ability to continue as a going concern within one year after the date that the financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Generally, to be considered probable of being effectively implemented, the plans must have been approved before the date that the financial statements are issued.

The Company’s financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business. Through September 30, 2017, the Company has funded its operations with net proceeds of $50.0 million from its IPO, $131.2 million from sales of preferred stock and $34.9 million from a collaboration agreement. As of September 30, 2017, the Company had cash, cash equivalents and investments of $56,865 million. The Company has incurred losses and negative cash flows from operations and had an accumulated deficit of $130,081 as of September 30, 2017. The Company expects to continue to generate losses for the foreseeable future.

6


 

As of November 9, 2017, the date of issuance of these unaudited interim condensed financial statements, the Company expects that its cash, cash equivalents and investments of $56,865 as of September 30, 2017 will be sufficient to fund its operating expenses and capital expenditure requirements through at least the next twelve months. The future viability of the Company is dependent on its ability to raise additional capital to finance its operations. Although the Company has been successful in raising capital in the past, there is no assurance that it will be successful in obtaining such additional financing on terms acceptable to the Company, if at all.

To execute its business plans, the Company will need substantial funding to support its continuing operations and pursue its growth strategy. Until such time as the Company can generate significant revenue from product sales, if ever, it expects to finance its operations through the sale of common stock in public offering and/or private placements, debt financings or other capital sources, including collaborations with other companies or other strategic transactions. The Company may not be able to obtain financing on acceptable terms or at all. The terms of any financing may adversely affect the holdings or the rights of the Company’s stockholders. If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion plans or commercialization efforts, which could adversely affect its business prospects.

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, the accrual of research and development expenses and the valuation of common stock and stock-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from the Company’s estimates.

Unaudited Interim Financial Information

The accompanying unaudited condensed financial statements as of September 30, 2017 and for the nine months ended September 30, 2017 and 2016 have been prepared by the Company, pursuant to the rules and regulations of the SEC for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2016 included in the Company’s prospectus that forms a part of the Company’s Registration Statement on Form S-1 (File No. 333-218474). The prospectus was filed with the SEC pursuant to Rule 424(b)(4) on June 29, 2017.

 

 

The unaudited interim condensed financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2017, the results of its operations for the three and nine months ended September 30, 2017 and 2016 and its cash flows for the nine months ended September 30, 2017 and 2016. The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2017 and 2016 are unaudited. The results for the nine months ended September 30, 2017 are not necessarily indicative of results to be expected for the year ending December 31, 2017, any other interim periods, or any future year or period. The accompanying balance sheet as of December 31, 2016 has been derived from the Company’s audited financial statements for the year ended December 31, 2016 previously filed with the SEC.

Cash Equivalents

The Company considers all short-term, highly liquid investments with original maturities of 90 days or less at acquisition date to be cash equivalents. Cash equivalents, which consist of money market accounts, corporate notes and commercial paper, are stated at fair value.

Restricted Cash

As of September 30, 2017, current restricted cash of $88 consisted of $25 of cash deposited in a separate restricted bank account as a security deposit for the Company’s corporate credit cards and $63 of cash deposited in a separate restricted bank account as a security deposit for the lease of the Company’s facilities. As of December 31, 2016, current restricted cash consisted of $25 of cash deposited in a separate restricted bank account as a security deposit for the Company’s corporate credit cards and non-current restricted cash consisted of $63 of cash deposited in a separate restricted bank account as a security deposit for the lease of the Company’s facilities.

7


 

Investments

The Company classifies its available-for-sale investments as current assets on the balance sheet if they mature within one year from the balance sheet date.

The Company classifies all of its investments as available-for-sale securities. The Company’s investments are measured and reported at fair value using quoted prices in active markets for similar securities or using other inputs that are observable or can be corroborated by observable market data. Unrealized gains and losses on available-for-sale securities are reported as accumulated other comprehensive income (loss), which is a separate component of stockholders’ equity (deficit). The cost of securities sold is determined on a specific identification basis, and realized gains and losses are included in other income (expense) within the statements of operations and comprehensive loss.

The Company evaluates its investments with unrealized losses for other-than-temporary impairment. When assessing investments for other-than-temporary declines in value, the Company considers such factors as, among other things, how significant the decline in value is as a percentage of the original cost, how long the market value of the investment has been less than its original cost, the Company’s ability and intent to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value and market conditions in general. If any adjustment to fair value reflects a decline in the value of the investment that the Company considers to be “other than temporary”, the Company reduces the investment to fair value through a charge to the statements of operations and comprehensive loss. No such adjustments were necessary during the periods presented.

Fair Value Measurements

Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable.

 

 

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

 

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The Company’s cash equivalents and investments are carried at fair value, determined according to the fair value hierarchy described above (see Note 3). The carrying values of the Company’s accounts payable and accrued expenses approximate their fair value due to the short-term nature of these liabilities.

Deferred Offering Costs

The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded in stockholders’ equity (deficit) as a reduction of additional paid-in capital generated as a result of the offering. Should the planned equity financing be abandoned, the deferred offering costs would be expensed immediately as a charge to operating expenses in the statement of operations and comprehensive loss.

The Company’s IPO was completed in July 2017 and deferred offering costs of $2,304 were recorded as a reduction to stockholder's equity.  As of September 30, 2017 and December 31, 2016, the Company did not have any deferred offering costs recorded. As of December 31, 2015, the Company had recorded $1,500 of deferred offering costs in contemplation of a probable 2016 equity financing. The Company determined in June 2016 that the equity financing was no longer probable of being consummated and, at that time, recorded general and administrative expense of $1,500 in the statement of operations and comprehensive loss to write-off the deferred offering costs that had been capitalized.

Net Income (Loss) per Share

The Company follows the two-class method when computing net income (loss) per share as the Company has issued shares that meet the definition of participating securities. The two-class method determines net income (loss) per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed.

8


 

Basic net income (loss) per share attributable to common stockholders is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) attributable to common stockholders is computed by adjusting income (loss) per share attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net income (loss) per share attributable to common stockholders is computed by dividing the diluted net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period, including potential dilutive common shares. For purpose of this calculation, outstanding options to purchase common stock and shares of redeemable convertible preferred stock are considered potential dilutive common shares.

The Company’s redeemable convertible preferred stock contractually entitled the holders of such shares to participate in dividends but contractually did not require the holders of such stock to participate in losses of the Company. Accordingly, in periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes existing revenue recognition guidance under GAAP. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard defines a five-step process to achieve this principle, and will require companies to use more judgment and make more estimates than under the current guidance. The Company expects that these judgments and estimates will include identifying performance obligations in the customer contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 such that the standard is effective for public entities for annual periods beginning after December 15, 2017 and for interim periods within those fiscal years. Early adoption of the standard is permitted for annual periods beginning after December 15, 2016. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”), which further clarifies the implementation guidance on principal versus agent considerations in ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”), clarifying the implementation guidance on identifying performance obligations and licensing. Specifically, the amendments in this update reduce the cost and complexity of identifying promised goods or services and improve the guidance for determining whether promises are separately identifiable. The amendments in this update also provide implementation guidance on determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”), which clarifies the objective of the collectability criterion, presentation of taxes collected from customers, non-cash consideration, contract modifications at transition, completed contracts at transition and how guidance in ASU 2014-09 is retrospectively applied. ASU 2016-08, ASU 2016-10 and ASU 2016-12 have the same effective dates and transition requirements as ASU 2014-09. The adoption of these standards is not expected to have an impact on the Company’s financial position, results of operations or cash flows as the Company does not currently have any revenue-generating arrangements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, it includes a clarification related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The standard is effective for public entities for annual periods beginning after December 15, 2017 and for interim periods within those fiscal years. Entities can early adopt the provision to record changes in the fair value of financial liabilities under the fair value option resulting from instrument-specific credit risk separately in other comprehensive income. Early adoption of this provision can be elected for all financial statements for annual and interim periods that have not yet been issued (for public business entities) or that have not yet been made available for issuance. The adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In February 2016, the FASB issued ASU No. 2016-02, Leases, (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees or lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months, regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASU 2016-02 (Accounting Standards Codification (“ASC”) Topic 842) supersedes the previous leases standard, ASC 840, Leases. The standard is effective for public entities for annual periods beginning after December 15, 2018 and for interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact that the adoption of ASU 2016-02 will have on its financial statements.

9


 

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (“ASU 2016-09”), which amends ASC Topic 718, Compensation—Stock Compensation (“ASC Topic 718”). The new standard identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statements of cash flows. The standard is effective for annual periods beginning after December 15, 2016 and for interim periods within those fiscal years. The Company adopted ASU 2016-09 on the required effective date of January 1, 2017. The Company elected to maintain its existing policy to estimate forfeitures when determining periodic stock-based compensation expense. The adoption of the other provisions of ASU 2016-09 had no impact on the Company’s financial position, results of operations or cash flows.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). This guidance addresses the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. The standard is effective for annual periods beginning after December 15, 2017 and for interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact that the adoption of ASU 2016-15 will have on its financial statements.

 

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash (“ASU 2016-18”). The new standard requires restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. The new standard is effective for annual periods beginning after December 15, 2017 and for interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact that the adoption of ASU 2016-18 will have on its financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (“ASU 2017-09”), Scope of Modification Accounting which amends ASC Topic 718. This new standard clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The standard is effective for all companies for annual periods beginning on or after December 15, 2017 and for interim periods within those fiscal years. The Company is currently evaluating the potential impact that the adoption of ASU 2017-09 will have on its financial statements.

3. Fair Value of Financial Assets

The following tables present information about the Company’s assets that are measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:

 

 

 

Fair Value Measurements as of

September 30, 2017 using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

10,321

 

 

$

 

 

$

 

 

$

10,321

 

Corporate notes

 

 

 

 

 

1,000

 

 

 

 

 

 

1,000

 

Commercial paper

 

 

 

 

 

1,998

 

 

 

 

 

 

1,998

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate notes

 

 

 

 

 

24,910

 

 

 

 

 

 

24,910

 

Commercial paper

 

 

 

 

 

18,527

 

 

 

 

 

 

18,527

 

 

 

$

10,321

 

 

$

46,435

 

 

$

 

 

$

56,756

 

 

 

 

Fair Value Measurements as of

December 31, 2016 using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

20,016

 

 

$

 

 

$

 

 

$

20,016

 

 

 

$

20,016

 

 

$

 

 

$

 

 

$

20,016

 

 

As of September 30, 2017, the Company’s cash equivalents and investments were invested in money market funds, corporate notes and commercial paper and were valued based on Level 1 and Level 2 inputs. As of December 31, 2016, the Company’s cash equivalents were invested in money market funds and were valued based on Level 1 inputs. In determining the fair value of its corporate notes and commercial paper at each date presented above, the Company relied on quoted prices for similar securities in active markets or using other inputs that are observable or can be corroborated by observable market data. The Company’s cash equivalents have original maturities of less than 90 days from the date of purchase. All available-for-sale investments have contractual maturities of less than one year. During the nine months ended September 30, 2017and the year ended December 31, 2016, there were no transfers between Level 1, Level 2 and Level 3.

10


 

4. Investments

As of December 31, 2016, the Company had no available-for-sale investments. As of September 30, 2017, the fair value of available-for-sale investments by type of security was as follows:

 

 

 

September 30, 2017

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gain

 

 

Gross

Unrealized

Loss

 

 

Fair

Value

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate notes

 

$

18,530

 

 

$

1

 

 

$

(4

)

 

$

18,527

 

Commercial paper

 

 

24,913

 

 

 

1

 

 

 

(4

)

 

 

24,910

 

 

 

$

43,443

 

 

$

2

 

 

$

(8

)

 

$

43,437

 

 

5. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Payroll and payroll-related costs

 

$

795

 

 

$

899

 

External research and development services

 

 

1,602

 

 

 

723

 

Professional fees

 

 

472

 

 

 

322

 

Other

 

 

504

 

 

 

156

 

 

 

$

3,373

 

 

$

2,100

 

 

6. Redeemable Convertible Preferred Stock

As of September 30, 2017 and December 31, 2016, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue no shares and 151,557,293 shares of $0.01 par value redeemable convertible preferred stock, respectively.

The Company previously had issued Series A, Series A-1, Series B, Series C-1 and Series C-2 redeemable convertible preferred stock (collectively, the “Junior Preferred Stock”) and Series D, Series D-1, Series E, Series E-1, Series E-2, Series E-3 and Series F redeemable convertible preferred stock (collectively, the “Senior Preferred Stock”), together the “Redeemable Preferred Stock”. The Redeemable Preferred Stock is classified outside of stockholders’ equity (deficit) because the shares contain redemption features that are not solely within the control of the Company.

In January 2016, the Company issued 9,705,882 shares of Series E-1 preferred stock at a price of $1.36 per share, resulting in proceeds of $13,183, net of issuance costs of $17.

In December 2016, the Company issued 13,949,357 shares of Series F redeemable convertible preferred stock (the “Series F preferred stock”) at a price of $1.36 per share, resulting in proceeds of $18,806, net of issuance costs of $165. As part of the Series F preferred stock purchase agreement, the investors agreed to purchase an additional 8,192,477 shares of Series F preferred stock at a price of $1.36 per share upon the Company achieving specified clinical milestones (the “second tranche closing”) for an aggregate purchase price of $11,142. In February 2017, the Company amended the Series F preferred stock purchase agreement to permit the sale of up to 758,458 additional shares of Series F preferred stock. In February 2017, pursuant to the amended Series F preferred stock purchase agreement, the Company issued 483,501 shares of Series F preferred stock at a price of $1.36 per share, resulting in proceeds of $626, net of issuance costs of $32. The purchasers of Series F preferred stock in this February 2017 closing agreed to purchase an additional 274,957 shares of Series F preferred stock at a price of $1.36 per share in the second tranche closing, which increased the aggregate number of shares of Series F preferred stock to be purchased in the second tranche closing to 8,467,434 shares for an aggregate purchase price of $11,516. The Company determined that the future tranche obligations of the Series F preferred stock purchase agreement, as amended, did not meet the definition of a freestanding financial instrument because, while separately exercisable, they were not legally detachable. Further, the Company determined that the embedded future tranche obligations did not require bifurcation for accounting purposes as they are clearly and closely related to the economic characteristics and risks of the initial preferred shares and would not qualify as a derivative on a standalone basis.

In December 2016, pursuant to the Series F preferred stock purchase agreement, holders of 8,927,582 shares of Series E redeemable convertible preferred stock (the “Series E preferred stock”) that participated in the Series F preferred stock financing elected to convert their shares of Series E preferred stock into 8,927,582 shares of Series E-2 preferred stock, and holders of 16,567,108 shares of Series E-1 preferred stock that participated in the Series F preferred stock financing elected to convert their shares of Series E-1 preferred stock into 16,567,108 shares of Series E-3 redeemable convertible preferred stock (the “Series E-3 preferred stock”). Holders of Series E preferred stock and Series E-1 preferred stock that did not participate in the Series F preferred stock financing were not entitled to convert their shares into Series E-2 preferred stock and Series E-3 preferred stock, respectively. In February 2017, pursuant to the amended Series F preferred stock purchase agreement, holders of 4,411,765 shares of Series E-1 preferred stock that participated in the February 2017 closing elected to convert their shares of Series E-1 preferred stock into 4,411,765 shares of Series E-3 preferred stock.

11


 

In February 2017, the Company issued 483,501 shares of Series F preferred stock at a price of $1.36 per share, resulting in proceeds of $626, net of issuance costs of $32.

The Company determined that the conversion of shares of preferred stock that occurred in December 2016 and February 2017 represented modifications of these securities for accounting purposes; however, the modifications did not result in the recognition of a deemed dividend for accounting purposes because the modifications did not result in a transfer of value from common stockholders to preferred stockholders.

Pursuant to the terms of the amended Series F preferred stock purchase agreement, if the second tranche closing did not occur prior to the closing of the Company’s initial public offering of common stock, then, immediately prior to such closing, the purchasers of the Series F preferred stock would be required to purchase a number of shares of the Company’s common stock equal to $11,516 divided by the price per share paid by the public in the initial public offering in a concurrent private offering. This requirement to purchase shares immediately prior to the closing of the Company’s initial public offering could be waived in whole or in part by the Company’s board of directors. As of December 31, 2016, the specified clinical milestones had not been achieved and the second tranche closing had not occurred.

On June 15, 2017, the Company’s board of directors waived in whole, effective immediately prior to the closing of the Company’s IPO, the requirement of the purchasers of Series F preferred stock to purchase shares of the Company’s common stock in a concurrent private offering in connection with the Company’s initial public offering.

Upon the completion of the Company’s IPO on July 5, 2017, all shares of the Redeemable Preferred Stock converted into an aggregate of 10,509,774 shares of common stock. As of September 30, 2017, there were no shares of Redeemable Preferred Stock authorized, issued or outstanding.

Redeemable Preferred Stock consisted of the following as of:

 

 

 

December 31, 2016

 

 

 

Preferred

Shares

Authorized

 

 

Preferred

Shares

Issued and

Outstanding

 

 

Carrying

Value

 

 

Liquidation

Preference

 

 

Common

Stock Issuable

Upon

Conversion

 

Series A preferred stock

 

 

1,250,000

 

 

 

1,250,000

 

 

$

1,250

 

 

$

1,250

 

 

 

12,579

 

Series A-1 preferred stock

 

 

615,384

 

 

 

615,384

 

 

 

800

 

 

 

800

 

 

 

6,192

 

Series B preferred stock

 

 

3,706,056

 

 

 

3,706,056

 

 

 

1,506

 

 

 

1,506

 

 

 

372,955

 

Series C-1 preferred stock

 

 

5,934,050

 

 

 

5,934,050

 

 

 

6,997

 

 

 

7,000

 

 

 

597,167

 

Series C-2 preferred stock

 

 

8,689,144

 

 

 

8,689,144

 

 

 

10,248

 

 

 

10,250

 

 

 

874,423

 

Series D preferred stock

 

 

34,142,865

 

 

 

34,142,865

 

 

 

40,263

 

 

 

40,276

 

 

 

3,435,932

 

Series D-1 preferred stock

 

 

363,636

 

 

 

363,636

 

 

 

2,000

 

 

 

2,000

 

 

 

36,594

 

Series E preferred stock

 

 

12,715,822

 

 

 

3,788,240

 

 

 

4,453

 

 

 

4,469

 

 

 

381,225

 

Series E-1 preferred stock

 

 

24,264,705

 

 

 

7,697,597

 

 

 

10,446

 

 

 

10,469

 

 

 

774,639

 

Series E-2 preferred stock

 

 

9,226,082

 

 

 

8,927,582

 

 

 

10,493

 

 

 

10,531

 

 

 

898,418

 

Series E-3 preferred stock

 

 

21,237,785

 

 

 

16,567,108

 

 

 

22,483

 

 

 

22,531

 

 

 

1,667,214

 

Series F preferred stock

 

 

29,411,764

 

 

 

13,949,357

 

 

 

18,806

 

 

 

18,971

 

 

 

1,403,779

 

 

 

 

151,557,293

 

 

 

105,631,019

 

 

$

129,745

 

 

$

130,053

 

 

 

10,461,117

 

 

The holders of the Redeemable Preferred Stock had the following rights and preferences prior to conversion:

Voting Rights

The holders of the Redeemable Preferred Stock were entitled to vote, together with the holders of common stock, on all matters submitted to stockholders for a vote and had the right to vote the number of shares equal to the number of whole shares of common stock into which such holders of Redeemable Preferred Stock could convert on the record date for determination of stockholders entitled to vote. In addition, holders of the Senior Preferred Stock, voting as a single class, were entitled to elect three directors of the Company. The holders of the Junior Preferred Stock, voting as a single class, were entitled to elect two directors of the Company.

Dividends

The holders of the Redeemable Preferred Stock, in order of preference, were entitled to receive noncumulative dividends when and if declared by the Company’s board of directors. The Company could not declare, pay or set aside any dividends on shares of any other class or series of capital stock of the Company unless the holders of the Redeemable Preferred Stock then outstanding first received, or simultaneously received, a dividend on each outstanding share of Redeemable Preferred Stock in an amount at least equal to the greater of (i) $0.08 per share for Series A redeemable convertible preferred stock (“Series A preferred stock”), $0.104 per share for Series A-1 redeemable convertible preferred stock (“Series A-1 preferred stock”), $0.03251 per share for Series B redeemable convertible preferred stock (“Series B preferred stock”), $0.09437 per share for Series C-1 redeemable convertible preferred stock (“Series C-1 preferred stock”), $0.09437 per share for Series C-2 redeemable convertible preferred stock (“Series C-2 preferred stock”), $0.09437 per share for Series D redeemable convertible preferred stock

12


 

(“Series D preferred stock”), Series E preferred stock and Series E-2 preferred stock, $0.40 per share for Series D-1 redeemable convertible preferred stock (“Series D-1 preferred stock”), and $0.1088 per share for Series E-1 preferred stock, Series E-3 preferred stock and Series F preferred stock and (ii) (A) in the case of a dividend on common stock or any class or series of stock that is convertible into common stock, that dividend per share of Redeemable Preferred Stock as would equal the product of (1) the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into common stock and (2) the number of shares of common stock issuable upon conversion of each share of Redeemable Preferred Stock, or (B) in the case of a dividend on any class or series that is not convertible into common stock, at a rate per share of Redeemable Preferred Stock determined by (1) dividing the amount of the dividend payable on each share of such class or series of capital stock by the Original Issue Price (as defined below) of such class or series of capital stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination of or other similar recapitalization affecting such shares) and (2) multiplying such fraction by an amount equal to the Original Issue Price of each series of Redeemable Preferred Stock. If the Company declared, paid or set aside, on the same date, a dividend on shares of more than one class or series of capital stock of the Company, the dividend payable to the holders of the Redeemable Preferred Stock would be calculated based upon the dividend on the class or series of capital stock that would result in the highest Redeemable Preferred Stock dividend. Stockholders were not entitled to any accruing dividends. No dividends have been declared or paid during the three or nine months ended September 30, 2017 or 2016.

The Original Issue Price per share was $1.00 for Series A, $1.30 for Series A-1, $0.4064 for Series B, $1.179633 for Series C-1, $1.179633 for Series C-2, $1.179633 for Series D, $5.50 for Series D-1, $1.179633 for Series E, $1.36 for Series E-1, $1.179633 for Series E-2, $1.36 for Series E-3 and $1.36 for Series F preferred stock, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Redeemable Preferred Stock.

Liquidation Preference

In the event of any liquidation event, voluntary or involuntary, dissolution or winding up of the Company or Deemed Liquidation Event (as defined below), the holders of the then outstanding Series F preferred stock were entitled to receive, prior and in preference to any distributions to the holders of the common stock and other preferred stock, $1.36 per share, plus any dividends declared but unpaid on the Series F preferred stock.

After the payment of all preferential amounts to the holders of Series F preferred stock, then, to the extent available, the holders of the Series E-2 and Series E-3 preferred stock would have been paid $1.179633 per share and $1.36 per share, respectively, plus any dividends declared but unpaid on the Series E-2 and Series E-3 preferred stock, prior and in preference to any distributions to the holders of common stock, Series E, Series E-1, Series D and Series D-1 preferred stock and Junior Preferred Stock.

After the payment of all preferential amounts to the holders of Series E-2 and Series E-3 preferred stock, then, to the extent available, the holders of the Series E preferred stock and the Series E-1 preferred stock would have been entitled to receive, prior and in preference to any distributions to the holders of the common stock and other preferred stock, $1.179633 per share and $1.36 per share, respectively, plus any dividends declared but unpaid on the Series E and Series E-1 preferred stock, prior and in preference to any distributions to the holders of common stock, Series D and Series D-1 preferred stock and Junior Preferred Stock.

After the payment of all preferential amounts to the holders of Series E and Series E-1 preferred stock, then, to the extent available, the holders of the Series D and Series D-1 preferred stock would have been paid $1.179633 per share and $5.50 per share, respectively, plus any dividends declared but unpaid on the Series D and Series D-1 preferred stock, prior and in preference to any distributions to the holders of common stock and Junior Preferred Stock.

After the payment of all preferential amounts to the holders of the Senior Preferred Stock, then, to the extent available, the holders of Series C-1 and Series C-2 preferred stock would have been paid $1.179633 per share plus any dividends declared but unpaid on the Series C-1 and Series C-2 preferred stock, prior and in preference to any distributions to the holders of common stock and Series B, Series A and Series A-1 preferred stock.

After the payment of all preferential amounts to the holders of the Senior Preferred Stock, Series C-1 and Series C-2 preferred stock, then, to the extent available, the holders of Series B preferred stock would have been paid $0.4064 per share plus any dividends declared but unpaid on the Series B preferred stock, prior and in preference to any distributions to the holders of common stock and Series A and Series A-1 preferred stock.

After the payment of all preferential amounts to the holders of the Senior Preferred Stock, Series C-1, Series C-2 and Series B preferred stock, then, to the extent available, the holders of Series A and Series A-1 preferred stock would have been paid $1.00 and $1.30 per share, respectively, plus any dividends declared but unpaid on the Series A and A-1 preferred stock, prior and in preference to any distributions to the holders of common stock.

After payments have been made in full to the holders of the Redeemable Preferred Stock, then, to the extent available, the remaining amounts would have been distributed among the holders of the shares of preferred stock and common stock, pro rata based on the number of shares held by each holder, treating for this purpose all such securities as if they had been converted to common stock immediately prior to such dissolution, liquidation or winding up of the Company.

13


 

Unless 55% of the holders of the Senior Preferred Stock, voting together as a single class, elected otherwise, a Deemed Liquidation Event would have included a merger or consolidation (other than one in which stockholders of the Company own a majority by voting power of the outstanding shares of the surviving or acquiring corporation) or a sale, lease, transfer, exclusive license or other disposition of substantially all of the assets of the Company.

Conversion

Each share of Redeemable Preferred Stock was convertible, at the option of the holder, at any time, and without the payment of additional consideration, or would have automatically converted into shares of common stock at the applicable conversion ratio then in effect (i) upon the closing of a firm commitment underwritten public offering at a price per share to the public, which when multiplied by the total number of shares of common stock then outstanding or then issuable upon conversion of outstanding Redeemable Preferred Stock immediately prior to the consummation of the offering, exceeded $150,000 and with at least $50,000 of gross proceeds to the Company or (ii) upon the vote or written consent of the holders of at least 55% of the outstanding shares of the Senior Preferred Stock, voting together as a single class. All shares that were required to be surrendered per the provisions above would have been deemed to have been retired and canceled and would not be reissued as shares of preferred stock.

The conversion ratio of each series of Redeemable Preferred Stock was determined by dividing the Original Issue Price of each series of preferred stock by the Conversion Price of each series, except for Series D-1 preferred stock. The conversion ratio for Series D-1 was determined by dividing $11.722013 by the Series D Conversion Price. The Conversion Price was $99.37 for Series A, $129.181 for Series A-1, $4.038397 for Series B, $11.722013 for Series C-1, Series C-2, Series D, Series E and Series E-2, and $13.51432 for Series E-1, Series E-3 and Series F. The Conversion Price was subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization and other adjustments as set forth in the Company’s certificate of incorporation, as amended and restated.

Redemption Rights

At the written election of at least 55% of the holders of the Senior Preferred Stock, voting together as a single class, the shares of Redeemable Preferred Stock outstanding were redeemable, at any time on or after December 22, 2020, in three equal annual installments commencing 60 days after receipt of the required vote, in an amount equal to the Original Issue Price per share of each series of Redeemable Preferred Stock plus all declared but unpaid dividends thereon.

 

7. Preferred Stock

On July 5, 2017, in connection with the closing of the Company’s IPO, the Company effected its amended and restated certificate of incorporation, which authorizes the Company to issue 5,000,000 shares of preferred stock, $0.001 par value per share.

 

8. Common Stock

As of December 31, 2016, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue 143,500,000 shares of $0.001 par value common stock. On July 5, 2017, the Company increased the authorized number of shares of common stock to 150,000,000 shares.

Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the Company’s board of directors, if any, subject to the preferential dividend rights of the preferred stock. As of September 30, 2017 and December 31, 2016, no dividends had been declared.

As of September 30, 2017, the Company had reserved 3,113,310 shares for the exercise of outstanding stock options and grant of future awards under the Company’s stock incentive plans (see Note 9). As of December 31, 2016, the Company had reserved 12,206,216 shares for the conversion of outstanding shares of Redeemable Preferred Stock (see Note 6), the exercise of outstanding stock options and the number of shares remaining available for future grant under the Company’s stock incentive plans (see Note 9). Upon completion of the Company’s IPO on July 5, 2017, all shares of Redeemable Preferred Stock converted to common stock.

9. Stock-Based Awards

2017 Stock Incentive Plan

The Company’s 2017 Stock Incentive Plan (the “2017 Plan”) was approved by the Company’s stockholders on June 16, 2017 and became effective on June 28, 2017. Under the 2017 Plan, the Company may grant incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, awards of restricted stock units and other stock-based awards. The Company’s employees, officers, directors, consultants and advisors are eligible to receive awards under the 2017 Plan; however, incentive stock options may only be granted to employees. The 2017 Plan is administered by the board of directors or, at the discretion of the board of directors, by a committee of the board. The number of shares of common stock covered by options and the date those options become exercisable, type of options to be granted, exercise prices, vesting and other restrictions are determined at the discretion of the board of directors, or its committee if so delegated.

14


 

Stock options granted under the 2017 Plan with service-based vesting conditions generally vest over four years and may not have a duration in excess of ten years, although options have been granted with vesting terms of less than four years.

The total number of shares of common stock that may be issued under the 2017 Plan was (1) 1,244,816; plus (2) the number of shares equal to the sum of the number of shares of common stock then available for issuance under the 2016 plan, which was 424,601 shares, and the number of shares of common stock subject to outstanding awards under the 2006 plan and the 2016 plan that expire, terminate or are otherwise surrendered, canceled, forfeited or repurchased by us at their original issuance price pursuant to a contractual repurchase right. The number of shares of common stock that may be issued under the 2017 Plan will automatically increase on each January 1, beginning with the fiscal year ending December 31, 2018 and continuing for each fiscal year until, and including, the fiscal year ending December 31, 2027, equal to the least of (i) 1,244,816 shares, (ii) 4% of the outstanding shares of common stock on such date and (iii) an amount determined by the Company’s board of directors.

During the three months ended September 30, 2017, pursuant to the terms of the 2017 Plan, the Company granted options to employees and directors to purchase 619,027 shares of common stock at a weighted average exercise price of $12.80 per share.

Shares that are expired, terminated, surrendered or canceled without having been fully exercised will be available for future awards. In addition, shares of common stock that are tendered to the Company by a participant to exercise an award are added to the number of shares of common stock available for the grant of awards.

The exercise price for stock options granted may not be less than the fair market value of the common stock as of the date of grant.

2017 Employee Stock Purchase Plan

On June 16, 2017, the Company’s stockholders approved the 2017 Employee Stock Purchase Plan (the “2017 ESPP”), which became effective on June 28, 2017. A total of 150,000 shares of common stock were initially reserved for issuance under this plan. The number of shares of common stock that may be issued under the 2017 ESPP will automatically increase on each January 1, beginning with the fiscal year ending December 31, 2018 and continuing for each fiscal year until, and including, the fiscal year ending December 31, 2027, equal to the least of (i) 622,408 shares, (ii) 1% of the outstanding shares of common stock on such date and (iii) an amount determined by the Company’s board of directors.

2016 Stock Incentive Plan

The Company’s 2016 Stock Incentive Plan (the “2016 Plan”) provided for the Company to grant incentive stock options or nonqualified stock options, restricted stock, restricted stock units and other equity awards to employees, directors and consultants of the Company. The 2016 Plan was administered by the board of directors or, at the discretion of the board of directors, by a committee of the board. The exercise prices, vesting and other restrictions were determined at the discretion of the board of directors, or its committee if so delegated.

Stock options granted under the 2016 Plan with service-based vesting conditions vest over four years and expire after ten years.

As of the effective date of the 2017 Plan, no stock options or other awards were made under the 2016 Plan. No shares remained available for future issuance as of September 30, 2017.

Shares that are expired, terminated, surrendered or canceled without having been fully exercised will be available for future awards under the 2017 Plan. In addition, shares of common stock that are tendered to the Company by a participant to exercise an award are added to the number of shares of common stock available for the grant of awards under the 2017 Plan.

2006 Stock Incentive Plan

The Company’s 2006 Stock Incentive Plan, as amended, (the “2006 Plan”) provided for the Company to grant incentive stock options or nonqualified stock options, restricted stock, restricted stock units and other equity awards to employees, directors and consultants of the Company. The 2006 Plan was administered by the board of directors or, at the discretion of the board of directors, by a committee of the board. The exercise prices, vesting and other restrictions were determined at the discretion of the board of directors, or its committee if so delegated.

Stock options granted under the 2006 Plan with service-based vesting conditions generally vest over four years and expire after ten years, although options have been granted with vesting terms of less than four years.

The 2006 Plan expired in 2016. No shares remained available for future issuance as of December 31, 2016.

Shares that are expired, terminated, surrendered or canceled without having been fully exercised will be available for future awards under the 2017 Plan. In addition, shares of common stock that are tendered to the Company by a participant to exercise an award are added to the number of shares of common stock available for the grant of awards under the 2017 Plan.

15


 

Stock Option Valuation

The assumptions that the Company used to determine the grant-date fair value of the stock options granted to employees and directors during the nine months ended September 30, 2017 and 2016 were as follows, presented on a weighted average basis:

 

 

 

Nine Months Ended

September 30, 2017

 

 

Nine Months Ended

September 30, 2016

 

Risk-free interest rate

 

 

2.15

%

 

 

1.37

%

Expected term (in years)

 

 

6.1

 

 

 

6.1

 

Expected volatility

 

 

80.6

%

 

 

80.5

%

Expected dividend yield

 

 

0

%

 

 

0

%

 

Stock Options

The following table summarizes the Company’s stock option activity since January 1, 2017:

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

(in years)

 

 

 

 

 

Outstanding at December 31, 2016

 

 

920,731

 

 

$

4.36

 

 

 

6.4

 

 

$

1,297

 

Granted

 

 

1,207,728

 

 

 

10.50

 

 

 

 

 

 

 

 

 

Exercised

 

 

(26,600

)

 

 

3.76

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(46,595

)

 

 

5.14

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2017

 

 

2,055,264

 

 

$

7.96

 

 

 

8.2

 

 

$

11,385

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at September 30, 2017

 

 

711,428

 

 

$

4.33

 

 

 

5.9

 

 

$

6,437

 

Options vested and expected to vest at September 30, 2017

 

 

1,998,844

 

 

$

7.87

 

 

 

8.1

 

 

$

11,239

 

Options exercisable at December 31, 2016

 

 

585,959

 

 

$

3.78

 

 

 

5.2

 

 

$

1,136

 

Options vested and expected to vest at December 31, 2016

 

 

904,010

 

 

$

4.37

 

 

 

6.3

 

 

$

1,289

 

 

The weighted average grant-date fair value of stock options granted during the nine months ended September 30, 2017 and 2016 was $7.51 and $3.24, respectively.

The aggregate fair value of stock options that vested during the nine months ended September 30, 2017 and 2016 was $810 and $718, respectively.

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock. The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2017 and 2016 was $256 and $6, respectively.

Stock-Based Compensation

The Company recorded stock-based compensation expense related to stock options in the following expense categories of its statements of operations and comprehensive loss:

 

 

 

Three Months Ended September 30,