ubx-10q_20180630.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 June 30, 2018

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: 001-38470

 

Unity Biotechnology, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

26-4726035

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

3280 Bayshore Blvd. Suite 100

Brisbane, CA

94005

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (650) 416-1192

 

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 smaller reporting company)

  

Smaller 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 August 3, 2018, the registrant had 42,314,738 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 


 

UNITY BIOTECHNOLOGY, INC.

QUARTERLY REPORT ON FORM 10-Q

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1

Condensed Financial Statements

2

 

Condensed Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017

2

 

Condensed Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)

3

 

Condensed Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (unaudited)

4

 

Notes to Condensed Financial Statements (unaudited)

5

Item 2

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

22

Item 3

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4

Controls and Procedures

29

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1

Legal Proceedings

29

Item 1A

Risk Factors

29

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

73

Item 3

Default Upon Senior Securities

73

Item 4

Mine Safety Disclosures

73

Item 5

Other Information

73

Item 6

Exhibits

74

Signatures

76

 

 

1


 

PART I. FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

 

Unity Biotechnology, Inc.

Condensed Balance Sheets

(In thousands, except share and per share amounts)

 

 

 

June 30,

2018

 

 

December 31,

2017

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,165

 

 

$

7,298

 

Contribution receivable

 

 

 

 

 

1,382

 

Short-term marketable securities

 

 

151,806

 

 

 

79,212

 

Prepaid expenses and other current assets

 

 

1,650

 

 

 

988

 

Total current assets

 

 

187,621

 

 

 

88,880

 

Property and equipment, net

 

 

6,595

 

 

 

6,958

 

Long-term marketable securities

 

 

12,073

 

 

 

5,118

 

Restricted cash

 

 

550

 

 

 

550

 

Other long-term assets

 

 

1,617

 

 

 

518

 

Total assets

 

$

208,456

 

 

$

102,024

 

Liabilities, convertible preferred stock, and stockholders’ equity (deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,883

 

 

$

2,378

 

Accrued compensation

 

 

1,941

 

 

 

2,181

 

Accrued and other current liabilities

 

 

4,856

 

 

 

3,338

 

Contingent consideration liability

 

 

725

 

 

 

 

Total current liabilities

 

 

9,405

 

 

 

7,897

 

Deferred rent, net of current portion

 

 

2,867

 

 

 

3,166

 

Contingent consideration liability, net of current portion

 

 

1,033

 

 

 

 

Other non-current liabilities

 

 

82

 

 

 

118

 

Total liabilities

 

 

13,387

 

 

 

11,181

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Convertible preferred stock, $0.0001 par value; 10,000,000 and

   91,739,149 shares authorized as of June 30, 2018 and December 31,

   2017, respectively; 28,159,724 shares issued and outstanding as of

   December 31, 2017; aggregate liquidation preference of $190,825

   as of December 31, 2017

 

 

 

 

 

173,956

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value; 300,000,000 and 122,000,000 shares

   authorized as of June 30, 2018 and December 31, 2017, respectively;

   42,314,738 and 4,830,389 shares issued and outstanding as of June 30,

   2018 and December 31, 2017, respectively

 

 

4

 

 

 

1

 

Additional paid-in capital

 

 

318,758

 

 

 

4,072

 

Related party promissory notes for purchase of common stock

 

 

(201

)

 

 

(202

)

Employee promissory notes for purchase of common stock

 

 

(400

)

 

 

 

Accumulated other comprehensive loss

 

 

(77

)

 

 

(104

)

Accumulated deficit

 

 

(123,015

)

 

 

(86,880

)

Total stockholders’ equity (deficit)

 

 

195,069

 

 

 

(83,113

)

Total liabilities, convertible preferred stock, and stockholders’ equity (deficit)

 

$

208,456

 

 

$

102,024

 

 

See accompanying notes to the condensed financial statements.

2


 

Unity Biotechnology, Inc.

Condensed Statements of Operations and Comprehensive Loss

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

15,198

 

 

$

9,213

 

 

$

28,223

 

 

$

16,183

 

General and administrative

 

 

3,842

 

 

 

2,485

 

 

 

7,299

 

 

 

4,555

 

Fair value of contingent consideration

 

 

1,758

 

 

 

 

 

 

1,758

 

 

 

 

Total operating expenses

 

 

20,798

 

 

 

11,698

 

 

 

37,280

 

 

 

20,738

 

Loss from operations

 

 

(20,798

)

 

 

(11,698

)

 

 

(37,280

)

 

 

(20,738

)

Interest income

 

 

826

 

 

 

278

 

 

 

1,178

 

 

 

386

 

Other expense, net

 

 

(30

)

 

 

(8

)

 

 

(33

)

 

 

(10

)

Net loss

 

 

(20,002

)

 

 

(11,428

)

 

 

(36,135

)

 

 

(20,362

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on marketable securities, net of tax

 

 

61

 

 

 

(18

)

 

 

27

 

 

 

(20

)

Comprehensive loss

 

$

(19,941

)

 

$

(11,446

)

 

$

(36,108

)

 

$

(20,382

)

Net loss per share, basic and diluted

 

$

(0.76

)

 

$

(3.62

)

 

$

(2.41

)

 

$

(6.53

)

Weighted average number of shares used in computing

   net loss per share, basic and diluted

 

 

26,298,666

 

 

 

3,154,515

 

 

 

15,003,493

 

 

 

3,117,220

 

 

See accompanying notes to the condensed financial statements.

3


 

Unity Biotechnology, Inc.

Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(36,135

)

 

$

(20,362

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,023

 

 

 

388

 

Amortization of premium and discounts on marketable securities

 

 

(203

)

 

 

105

 

Stock-based compensation

 

 

4,208

 

 

 

938

 

Accretion of tenant improvement allowance

 

 

(305

)

 

 

(302

)

Change in fair value of contingent consideration for license agreements

 

 

1,758

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Contribution receivable

 

 

1,382

 

 

 

 

Prepaid expenses and other current assets

 

 

(662

)

 

 

(513

)

Other long-term assets

 

 

(1,099

)

 

 

25

 

Accounts payable

 

 

(633

)

 

 

1,798

 

Accrued compensation

 

 

(240

)

 

 

249

 

Accrued liabilities and other current liabilities

 

 

970

 

 

 

(226

)

Deferred rent, net of current portion

 

 

4

 

 

 

263

 

Net cash used in operating activities

 

 

(29,932

)

 

 

(17,637

)

Investing activities

 

 

 

 

 

 

 

 

Purchase of marketable securities

 

 

(137,803

)

 

 

(110,285

)

Maturities of marketable securities

 

 

58,484

 

 

 

4,750

 

Purchase of property and equipment

 

 

(526

)

 

 

(984

)

Net cash used in investing activities

 

 

(79,845

)

 

 

(106,519

)

Financing activities

 

 

 

 

 

 

 

 

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

 

 

59,899

 

 

 

42,880

 

Proceeds from issuance of common stock upon exercise of stock options,

   net of repurchases

 

 

33

 

 

 

(6

)

Proceeds from issuance of common stock in initial public offering, net of commissions

 

 

79,050

 

 

 

 

Payment of initial public offering costs

 

 

(3,199

)

 

 

 

Proceeds from repayment of recourse notes

 

 

895

 

 

 

 

Payments made on capital lease obligations

 

 

(34

)

 

 

 

Net cash provided by financing activities

 

 

136,644

 

 

 

42,874

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

26,867

 

 

 

(81,282

)

Cash, cash equivalents and restricted cash at beginning of year

 

 

7,848

 

 

 

89,736

 

Cash, cash equivalents and restricted cash at end of year

 

$

34,715

 

 

$

8,454

 

Supplemental Disclosures of Non-Cash Investing and Financing Information

 

 

 

 

 

 

 

 

Property and equipment included in accounts payable

 

$

138

 

 

$

528

 

Property and equipment acquired under capital leases

 

$

 

 

$

96

 

Receipt of promissory note from related party for purchase of common stock

 

$

390

 

 

$

 

Receipt of promissory note from employees for purchase of common stock

 

$

400

 

 

$

 

 

See accompanying notes to the condensed financial statements.

4


 

Unity Biotechnology, Inc.

Notes to Condensed Financial Statements

(Unaudited)

 

1. Organization

Description of Business

Unity Biotechnology, Inc. (the “Company” or “we” or “our” or “us”) is a biotechnology company engaged in the research and development of therapeutics to extend human healthspan. The Company devotes substantially all of its time and efforts to performing research and development, raising capital and recruiting personnel. The Company is located in Brisbane, California, was incorporated in the State of Delaware in March 2009 under the name Forge, Inc. and operates in one segment. The Company changed its name to Unity Biotechnology, Inc. in January 2015.  

Initial Public Offering

On May 7, 2018, the Company closed its initial public offering (“IPO”), of 5,000,000 shares of common stock, at an offering price to the public of $17.00 per share. The Company received net proceeds of approximately $75.9 million, after deducting underwriting discounts, commissions and offering related transaction costs of approximately $9.1 million. In connection with the IPO, all of the Company’s outstanding shares of convertible preferred stock were automatically converted into 32,073,149 shares of common stock. In addition, all of our convertible preferred stock warrants were converted into warrants to purchase shares of common stock.

In connection with the completion of its IPO, on May 7, 2018, the Company’s certificate of incorporation was amended and restated to provide for 300,000,000 authorized shares of common stock with a par value of $0.0001 per share and 10,000,000 authorized shares of preferred stock with a par value of $0.0001 per share.

 

2. Summary of Significant Accounting Policies

Basis of Presentation

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) the rules and regulations of United States Securities and Exchange Commission (“SEC”) for interim reporting.

The condensed financial statements are unaudited and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation for interim reporting. The results of operations for any interim period are not necessarily indicative of results of operations for any future period.  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, the unaudited condensed financial statements should be read in conjunction with the financial statements as of and for the year ended December 31, 2017, which are included in the Company’s prospectus related to the Company’s initial public offering, filed May 4, 2018 (the “Prospectus”), pursuant to Rule 424 (b) under the Securities Act of 1933, as amended with the SEC.

 

Reverse Stock Split

On April 19, 2018, the Company’s board of directors approved an amendment to the Company’s amended and restated certificate of incorporation to effect a 1-for-2.95 reverse split (“Reverse Split”) of shares of the Company’s common and convertible preferred stock, which was effected on April 20, 2018. The par value and authorized shares of common stock and convertible preferred stock were not adjusted as a result of the Reverse Split. All of the share and per share information included in the accompanying financial statements have been adjusted to reflect the Reverse Split. Accordingly, all share and per share information presented in the condensed financial statements herein, and notes thereto, have been retroactively adjusted to reflect the Reverse Split.  

5


 

Need for Additional Capital

The Company has incurred operating losses and has an accumulated deficit as a result of ongoing efforts to develop drug product candidates, including conducting preclinical and clinical trials and providing general and administrative support for these operations. The Company had an accumulated deficit of $123.0 million and $86.9 million as of June 30, 2018 and December 31, 2017, respectively. The Company had net losses of $36.1 million and $20.4 million for the six months ended June 30, 2018 and 2017, respectively, and net cash used in operating activities of $29.9 million and $17.6 million for the six months ended June 30, 2018 and 2017, respectively.  To date, none of the Company’s drug candidates have been approved for sale and therefore the Company has not generated any revenue from contracts with customers. The Company has evaluated and concluded there are no conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year following the date that these financial statements are issued. Management expects operating losses to continue for the foreseeable future. As a result, the Company will need to raise additional capital. If sufficient funds on acceptable terms are not available when needed, the Company could be required to significantly reduce its operating expenses and delay, reduce the scope of, or eliminate one or more of its development programs. Failure to manage discretionary spending or raise additional financing, as needed, may adversely impact the Company’s ability to achieve its intended business objectives.

Use of Estimates

The condensed financial statements have been prepared in accordance with GAAP, which requires management to make estimates and assumptions that affect the amounts and disclosures reported in the condensed financial statements and accompanying notes. The Company bases its estimates on historical experience and market-specific or other relevant assumptions that it believes are reasonable under the circumstances. The amounts of assets and liabilities reported in the Company’s balance sheets and the amount of expenses and income reported for each of the periods presented are affected by estimates and assumptions, which are used for, but are not limited to, determining the fair value of assets and liabilities, common stock valuation, contingent consideration and stock-based compensation. Actual results could differ from such estimates or assumptions.

Contingent Consideration Liability

The Company has entered and may continue to enter into license agreements to access and utilize certain technology. In each case, the Company evaluates if the license agreement results in the acquisition of an asset or a business. To date none of the Company’s license agreements have been considered an acquisition of a business. For asset acquisitions, the upfront payments to acquire such licenses, as well as any future milestone payments made before product approval, are immediately recognized as research and development expense when due, provided there is no alternative future use of the rights in other research and development projects. These license agreements also include contingent consideration in the form of additional issuances of the Company’s common stock based on the achievement of certain milestones. For asset acquisitions, the Company assesses whether such contingent consideration meets the definition of a derivative, until such time that the contingency is met or expires. As of June 30, 2018, the Company has recorded a liability related to contingent consideration as the net settlement criteria of the definition of a derivative had been met. The derivative related to this contingent consideration is measured at fair value as of each balance sheet date with the related change in fair value being reflected in operating expenses.

Deferred Offering Costs

Deferred offering costs, consisting of direct incremental legal, accounting, filing and other fees incurred related to the preparation of the IPO, have been capitalized and were offset against proceeds upon completion of the offering in May 2018. As of June 30, 2018, there were no deferred offering costs capitalized and included in current assets on the balance sheet. There were no capitalized deferred offering costs at December 31, 2017.

6


 

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with original maturities of 90 days or less from the date of purchase to be cash equivalents. Cash equivalents primarily include money market funds that invest in U.S. Treasury obligations which are stated at fair value.

The Company has issued a letter of credit under a lease agreement which has been collateralized. This cash is classified as noncurrent restricted cash on the balance sheet based on the term of the underlying lease.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash within the balance sheets that sum to the total of the same amounts shown in the condensed statements of cash flows (in thousands).  

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Cash and cash equivalents

 

$

34,165

 

 

$

7,298

 

Restricted cash

 

 

550

 

 

 

550

 

Total cash, cash equivalents, and restricted cash

 

$

34,715

 

 

$

7,848

 

 

Variable Interest Entities

The Company reviews agreements it enters into with third-party entities, pursuant to which the Company may have a variable interest in the entity, in order to determine if the entity is a variable interest entity (“VIE”). If the entity is a VIE, the Company assesses whether or not it is the primary beneficiary of that entity. In determining whether the Company is the primary beneficiary of an entity, the Company applies a qualitative approach that determines whether it has both (i) the power to direct the economically significant activities of the entity and (ii) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. If the Company determines it is the primary beneficiary of a VIE, it consolidates that VIE into the Company’s financial statements. The Company’s determination about whether it should consolidate such VIEs is made continuously as changes to existing relationships or future transactions may result in a consolidation or deconsolidation event.

Concentrations of Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash and marketable securities. Substantially all of the Company’s cash and cash equivalents and restricted cash is deposited in accounts with financial institutions that management believes are of high credit quality. Such deposits have and will continue to exceed federally insured limits. The Company maintains its cash with accredited financial institutions and accordingly, such funds are subject to minimal credit risk. The Company has not experienced any losses on its cash deposits. The contribution receivable outstanding as of December 31, 2017 was unsecured and was concentrated with one third-party organization, and accordingly the Company was exposed to credit risk. The Company received the full amount of the contribution receivable in January 2018.

The Company’s investment policy limits investments to certain types of securities issued by the U.S. government, its agencies and institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash, cash equivalents, restricted cash and marketable securities and issuers of marketable securities to the extent recorded on the balance sheets. As of June 30, 2018, the Company had no off-balance sheet concentrations of credit risk.

The Company depends on third-party suppliers for key raw materials used in its manufacturing processes and is subject to certain risks related to the loss of these third-party suppliers or their inability to supply the Company with adequate raw materials.

 

7


 

Recently Issued Accounting Pronouncements

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for the Company for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the effect that this guidance will have on its financial statements.

In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases (Topic 842), which supersedes the guidance in former ASC 840, Leases. 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. 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. For the Company, this standard is effective for annual reporting periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020. Early adoption is permitted. The ASU is expected to impact the Company’s financial statements as the Company has certain operating lease arrangements for which the Company is the lessee. Management expects that the adoption of this standard will result in the recognition of an asset for the right to use the leased facility on the Company’s balance sheet, as well as the recognition of a liability for the lease payments remaining on the lease. While the Company is currently evaluating the impact of the adoption of this standard on its financial statements, the Company anticipates the recognition of additional assets and corresponding liabilities on its balance sheet related to leases.

In May 2017, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718)- Scope of Modification Accounting (ASU 2017- 09). The amendments included in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update will be applied prospectively to an award modified on or after the adoption date. The amendments in ASU 2017-09 became effective for the Company on January 1, 2018 and the adoption of this standard did not have a material impact on the Company’s condensed financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance makes amendments to the classification and measurement of financial instruments and revises the accounting related to: (1) the classification and measurement of investments in equity securities (except for investments accounted for under the equity method of accounting); and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. In addition, the update also amends certain disclosure requirements associated with the fair value of financial instruments. The guidance is effective for the Company for annual periods beginning in 2019 and interim periods beginning in 2020. Early adoptions of certain amendments within the update are permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its financial statements and related disclosures, including the Company’s cost method investment.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230: Classification of Certain Cash Receipts and Cash Payments). This guidance addresses specific cash flow issues with the objective of reducing the diversity in practice for the treatment of these issues. The areas identified include: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and application of the predominance principle with respect to separately identifiable cash flows. The guidance will generally be applied retrospectively and is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted.  The Company is currently evaluating the effect that this guidance will have on its financial statements and related disclosures.

8


 

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this ASU expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. This new guidance is effective for the Company in fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently assessing the impact of this new guidance.

On December 22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act contains, among other things, significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21% for tax years beginning after December 31, 2017, limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, implementing a territorial tax system, and requiring a mandatory one-time tax on U.S. owned undistributed foreign earnings and profits known as the transition tax.  In December 2017, SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) to address the accounting implications of recently enacted U.S. federal tax reform. SAB 118 allows companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date to address ongoing guidance and tax interpretations that are expected over the next 12 months.  The Company has adopted SAB 118 and currently considers its accounting for the impact of U.S. federal tax reform to be incomplete but continues to make a reasonable estimate of the effects on our existing deferred tax assets. The Company expects to complete the remainder of the analysis within the measurement period in accordance with SAB 118.  Adjustments, if any, are not expected to impact the statement of operations and comprehensive loss due to the full valuation allowance on the Company’s deferred tax assets.

 

3. Fair Value Measurements

The Company determines the fair value of financial and non-financial assets and liabilities based on the assumptions that market participants would use in pricing the asset or liability in an orderly transaction between market participants at the measurement date. The identification of market participant assumptions provides a basis for determining what inputs are to be used for pricing each asset or liability. A fair value hierarchy has been established which gives precedence to fair value measurements calculated using observable inputs over those using unobservable inputs. This hierarchy prioritized the inputs into three broad levels as follows:

 

Level 1: Quoted prices in active markets for identical instruments

 

Level 2: Other significant observable inputs (including quoted prices in active markets for similar instruments)

 

Level 3: Significant unobservable inputs (including assumptions in determining the fair value of certain investments)

The carrying amounts of financial instruments such as cash and cash equivalents, restricted cash, contributions receivable, prepaid expenses and other current assets, accounts payable, accrued compensation, accrued and other current liabilities approximate the related fair values due to the short maturities of these instruments.

The fair value of the Company’s cost method investment is measured when it is deemed to be other-than- temporarily impaired.

9


 

The Company’s financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used in such measurements were as follows (in thousands):

 

 

 

June 30, 2018

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

20,142

 

 

$

20,142

 

 

$

 

 

$

 

U.S. treasuries

 

 

1,000

 

 

 

 

 

 

1,000

 

 

 

 

U.S. government debt securities

 

 

10,887

 

 

 

 

 

 

10,887

 

 

 

 

Total cash equivalents

 

 

32,029

 

 

 

20,142

 

 

 

11,887

 

 

 

 

Short-term marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

 

40,077

 

 

 

 

 

 

40,077

 

 

 

 

U.S. and foreign commercial paper

 

 

28,481

 

 

 

 

 

 

28,481

 

 

 

 

U.S. and foreign corporate debt securities

 

 

17,118

 

 

 

 

 

 

17,118

 

 

 

 

Asset-backed securities

 

 

9,865

 

 

 

 

 

 

9,865

 

 

 

 

U.S. government debt securities

 

 

56,265

 

 

 

 

 

 

56,265

 

 

 

 

Total short-term marketable securities

 

 

151,806

 

 

 

 

 

 

151,806

 

 

 

 

Long-term marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

 

2,460

 

 

 

 

 

 

2,460

 

 

 

 

 

U.S. corporate debt securities

 

 

1,969

 

 

 

 

 

 

1,969

 

 

 

 

U.S. government debt securities

 

 

7,644

 

 

 

 

 

 

7,644

 

 

 

 

Total long-term marketable securities

 

 

12,073

 

 

 

 

 

 

12,073

 

 

 

 

Total marketable securities

 

 

163,879

 

 

 

 

 

 

163,879

 

 

 

 

Total assets

 

$

195,908

 

 

$

20,142

 

 

$

175,766

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

 

1,758

 

 

 

 

 

 

 

 

 

1,758

 

Total contingent consideration

 

$

1,758

 

 

$

 

 

$

 

 

$

1,758

 

 

 

 

December 31, 2017

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds

 

$

5,709

 

 

$

5,709

 

 

$

 

 

$

 

Short-term marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. and foreign commercial paper

 

 

6,359

 

 

 

 

 

 

6,359

 

 

 

 

U.S. and foreign corporate debt securities

 

 

16,149

 

 

 

 

 

 

16,149

 

 

 

 

Asset-backed securities

 

 

14,588

 

 

 

 

 

 

14,588

 

 

 

 

U.S. government debt securities

 

 

40,362

 

 

 

 

 

 

40,362

 

 

 

 

U.S. treasuries

 

 

1,754

 

 

 

 

 

 

1,754

 

 

 

 

Total short-term marketable securities

 

 

79,212

 

 

 

 

 

 

79,212

 

 

 

 

Long-term marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

 

2,742

 

 

 

 

 

 

2,742

 

 

 

 

U.S. government debt securities

 

 

2,376

 

 

 

 

 

 

2,376

 

 

 

 

Total long-term marketable securities

 

 

5,118

 

 

 

 

 

 

5,118

 

 

 

 

Total marketable securities

 

 

84,330

 

 

 

 

 

 

84,330

 

 

 

 

Total

 

$

90,039

 

 

$

5,709

 

 

$

84,330

 

 

$

 

 

10


 

The Company estimates the fair value of its money market funds, U.S. and foreign commercial paper, U.S. and foreign corporate debt securities, asset-backed securities, U.S. treasuries and U.S. government debt securities by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs.

The fair value of the contingent consideration liability includes inputs not observable in the market and thus represents a Level 3 measurement. The Company has recorded a contingent consideration liability related to two agreements executed in February 2016 with a privately held clinical-stage biopharmaceutical company: (a) a license agreement granting the Company the right to research, develop, and seek and obtain marketing approval for an initial licensed compound, and (b) a compound library and option agreement granting the Company the right to identify and take licenses to additional compounds, in each case for the treatment of indications outside of oncology (collectively, the “Commercial Agreements”). The Commercial Agreements include contingent consideration of up to 666,670 additional shares of common stock to be issued based on achievement of certain specified clinical development and sales milestone events.  The Company valued the contingent consideration liability using a probability-weighted valuation approach model which reflects the probability and timing of future issuances of shares. The probability of achieving the defined milestones for each licensed product was estimated by the Company’s management. Total contingent consideration may change significantly as development under the Commercial Agreements progresses and additional data is obtained, impacting the Company’s assumptions regarding probabilities of successful achievement of related development and commercial milestones used to estimate the fair value of the liability and the timing in which they are expected to be achieved. For example, significant increases in the estimated probability of achieving a milestone would result in a significantly higher fair value measurement while significant decreases in the estimated probability of achieving a milestone would result in a significantly lower fair value measurement. The potential contingent consideration value resulting in shares to be issued range from zero if none of the milestones are achieved to a maximum of $11.1 million (using the Company’s stock price as of June 30, 2018). As of June 30, 2018, and December 31, 2017, none of the development and commercial milestones had been achieved and no royalties were due from the sales of licensed products.

The following table provides a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2018 (in thousands):

 

 

 

Amount

 

Balance at December 31, 2017

 

$

 

Additions

 

 

 

Settlements

 

 

 

Change in fair value

 

 

1,758

 

Balance at June 30, 2018

 

$

1,758

 

 

There were no transfers between the hierarchies during the six months ended June 30, 2018 and the year ended December 31, 2017.

11


 

4. Marketable Securities

Marketable securities, which are classified as available-for-sale, consisted of the following as of June 30, 2018 (in thousands):

 

 

 

June 30, 2018

 

 

 

Amortized

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

Short-term marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. and foreign commercial paper

 

$

28,487

 

 

$

3

 

 

$

(9

)

 

$

28,481

 

U.S. and foreign corporate debt securities

 

 

17,142

 

 

 

 

 

 

(24

)

 

 

17,118

 

Asset-backed securities

 

 

9,885

 

 

 

 

 

 

(20

)

 

 

9,865

 

U.S. government debt securities

 

 

56,290

 

 

 

3

 

 

 

(28

)

 

 

56,265

 

U.S. treasuries

 

 

40,078

 

 

 

1

 

 

 

(2

)

 

 

40,077

 

Total short-term marketable securities

 

 

151,882

 

 

 

7

 

 

 

(83

)

 

 

151,806

 

Long-term marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. corporate debt securities

 

 

1,970

 

 

 

 

 

 

(1

)

 

 

1,969

 

U.S. government debt securities

 

 

7,644

 

 

 

1

 

 

 

(1

)

 

 

7,644

 

U.S. treasuries

 

 

2,460

 

 

 

 

 

 

 

 

 

2,460

 

Total long-term marketable securities

 

 

12,074

 

 

 

1

 

 

 

(2

)

 

 

12,073

 

Total marketable securities

 

$

163,956

 

 

$

8

 

 

$

(85

)

 

$

163,879

 

 

Marketable securities, which are classified as available-for-sale, consisted of the following as of December 31, 2017:

 

 

 

December 31, 2017

 

 

 

Amortized

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

Short-term marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. and foreign commercial paper

 

$

6,369

 

 

$

 

 

$

(10

)

 

$

6,359

 

U.S. and foreign corporate debt securities

 

 

16,162

 

 

 

 

 

 

(13

)

 

 

16,149

 

Asset-backed securities

 

 

14,604

 

 

 

 

 

 

(16

)

 

 

14,588

 

U.S. government debt securities

 

 

40,418

 

 

 

 

 

 

(56

)

 

 

40,362

 

U.S. treasuries

 

 

1,754

 

 

 

 

 

 

 

 

 

1,754

 

Total short-term marketable securities

 

 

79,307

 

 

 

 

 

 

(95

)

 

 

79,212

 

Long-term marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

 

2,752

 

 

 

 

 

 

(10

)

 

 

2,742

 

U.S. government debt securities

 

 

2,375

 

 

 

1

 

 

 

 

 

 

2,376

 

Total long-term marketable securities

 

 

5,127

 

 

 

1

 

 

 

(10

)

 

 

5,118

 

Total marketable securities

 

$

84,434

 

 

$

1

 

 

$

(105

)

 

$

84,330

 

 

At June 30, 2018, the remaining contractual maturities of available-for-sale securities were less than two years. There have been no significant realized gains or losses on available-for-sale securities for the periods presented. Available-for-sale debt securities that were in a continuous loss position but were not deemed to be other than temporarily impaired were immaterial at both June 30, 2018 and December 31, 2017.

 

12


 

5. License Agreements

License and Compound Library and Option Agreement

The Commercial Agreements referenced above include cash payments of up to $70.3 million as well as the equity payments of up to 666,670 additional shares of common stock, in each case to be issued based on the Company’s achievement of certain specified clinical development and sales milestone events. The license agreement also includes tiered royalties in the low-single digits based on sales of licensed products.

The Company recognized a $1.8 million contingent consideration liability associated with the potential issuance of common stock related to the Commercial Agreements with the privately held clinical-stage biopharmaceutical company for the three months ended June 30, 2018.          

In connection with the Commercial Agreements the Company purchased an equity interest in an affiliate of the biopharmaceutical company for an aggregate purchase price of $0.5 million. The equity interest represents an insignificant level of ownership in the entity and approximates the fair value of the shares received and has been recorded as a cost method investment in the Company’s financial statements. In May 2018 these shares were exchanged for new shares of a newly formed affiliate of the biopharmaceutical company as part of a reorganization of those entities. The Company also invested an additional $0.5 million in the biopharmaceutical company in May 2018.  

The Company agreed to provide funding to the biopharmaceutical company for research and development work performed at a cost of up to $2.0 million through February 2020. The research and development expense under the research services agreement was $0.3 million for the six months ended June 30, 2018 and 2017.

Under the consolidation guidance, the Company determined that the biopharmaceutical company is a VIE. The Company does not have the power to direct the activities that most significantly affect the economic performance of this entity and as such the Company is not the primary beneficiary and consolidation is not required. As of June 30, 2018, and December 31, 2017, the Company has not provided financial, or other, support to the biopharmaceutical company that was not contractually required.

Other License Agreements with Research Institutions

The Company has entered into license agreements with various research institutions which have provided the Company with rights to patents, and in certain cases, research “know-how” and proprietary research tools to research, develop and commercialize drug candidates. In addition to upfront consideration paid to these various research institutions in either cash or shares of the Company’s common stock, the Company may be obligated to pay milestone payments in cash or the issuance of the Company’s common stock specific to each agreement upon achievement of certain specified clinical development and/or sales events. The contingent consideration liability considered to be a derivative associated with the potential issuance of common stock related to these license agreements was not significant at June 30, 2018. To date, none of these events has occurred and no contingent consideration, milestone or royalty payments have been recognized.

13


 

6. Commitments and Contingencies

Operating Lease

The Company has one non-cancelable operating lease consisting of administrative and research and development office space for its Brisbane, California headquarters that expires in October 2022. Future minimum lease payments under our non-cancellable operating lease at June 30, 2018 were as follows (in thousands):

 

 

 

 

 

 

 

 

Amount

 

2018 (remaining 6 months)

 

$

984

 

2019

 

 

2,012

 

2020

 

 

2,072

 

2021

 

 

2,135

 

2022

 

 

1,621

 

Total future minimum lease payments

 

$

8,824

 

 

Rent expense for the six months ended June 30, 2018 and 2017 was $0.9 million and $0.8 million, respectively.

 

Indemnifications

The Company indemnifies each of its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity, as permitted under Delaware law and in accordance with the Company’s amended and restated certificate of incorporation and bylaws. The term of the indemnification period lasts as long as an officer or director may be subject to any proceeding arising out of acts or omissions of such officer or director in such capacity.

The maximum amount of potential future indemnification is unlimited; however, the Company currently holds director and officer liability insurance. The Company believes that the fair value of these indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations for any period presented.

 

7. Related-Party Transactions

Recourse Notes

In December 2015, April 2016, and July 2016, the Company issued three full-recourse promissory notes to two executive officers for an aggregate principal amount of $0.2 million with an interest rate of 2.5% per annum. All of the principal was used to early exercise options for 667,253 shares of the Company’s common stock, in aggregate.  All of these related party full-recourse notes were repaid on April 4, 2018 in accordance with the terms of such notes.

In October 2017, the Company issued two promissory notes to an executive officer for $1.6 million and $0.5 million, each with an interest rate of 1.85% per annum. The aggregate principal amount of $2.1 million was used to purchase 625,084 shares of restricted stock. The promissory notes were considered to be non-recourse in substance and accordingly, the shares sold subject to such promissory notes are considered an option for accounting purposes. In April 2018, the Company’s board of directors approved the forgiveness of all outstanding principal and accrued interest of the $1.6 million non-recourse promissory note. The non-recourse promissory note outstanding of $0.5 million was repaid on April 4, 2018 in accordance with the terms of the note. The forgiveness of the promissory note was accounted for as a modification of a share-based payment. The Company recorded an incremental $0.8 million charge related to the modification for the three and six months ended June 30, 2018.

14


 

In January 2018, the Company issued full-recourse promissory notes to an executive and an executive officer of the Company for an aggregate principal amount of $0.4 million with an interest rate of 2.5% per annum. All of the principal was used to early exercise options for 114,406 shares of the Company’s common stock. The full recourse note of $0.2 million for the executive officer was repaid on April 4, 2018 in accordance with the terms of the note.                    

Financing Activities

During the six months ended June 30, 2018, the Company issued convertible preferred stock for total proceeds of $3.0 million to shareholders who are considered to be related parties.

 

8. Convertible Preferred Stock and Common Stock

Convertible Preferred Stock

In March 2018, the Company amended and restated its certificate of incorporation to, among other things, (i) increase its authorized shares of common stock from 122,000,000 to 140,000,000 shares, (ii) increase its authorized shares of preferred stock from 91,739,149 to 103,283,818 shares, of which 11,544,669 shares were designated as Series C convertible preferred stock, and (iii) set forth the rights, preferences and privileges of the Series C convertible preferred stock. In March 2018, the Company sold 3,590,573 shares of Series C convertible preferred stock at $15.3317 per share for net proceeds of $54.9 million and in April 2018, the Company sold an additional 322,852 shares of Series C convertible preferred stock $15.3317 per share for net proceeds of $5.0 million.

Each share of Series C convertible preferred stock was convertible into one share of the Company’s common stock. Each share of preferred stock was automatically converted into one share of common stock upon the consummation of a qualified public offering. A qualified public offering was defined as an initial public offering that resulted in listing on a U.S. national securities exchange and at least $30.0 million of gross proceeds at a per share price of not less than the Series C original issue price of $15.3317.

The Company evaluated the other rights, preferences and privileges of each series of convertible preferred stock and concluded that there were no freestanding derivative instruments or any embedded derivatives requiring bifurcation.

Upon the closing of the IPO, all of the Company’s outstanding shares of convertible preferred stock were converted into 32,073,149 shares of common stock. In addition, all 763,501 of the Company’s convertible preferred stock warrants were converted into warrants to purchase shares of common stock. As of June 30, 2018, the Company had no remaining shares of convertible or preferred stock issued or outstanding.

As of December 31, 2017, convertible preferred stock consisted of the following (in thousands, except share amounts):

 

 

 

Shares

Authorized

 

 

Shares Issued

and

Outstanding

 

 

Liquidation

Preference

 

 

Carrying

Value

 

Series A-1

 

 

9,085,738

 

 

 

2,887,086

 

 

$

2,495

 

 

$

2,457

 

Series A-2

 

 

32,653,411

 

 

 

10,498,269

 

 

 

9,198

 

 

 

9,214

 

Series B

 

 

50,000,000

 

 

 

14,774,369

 

 

 

179,132

 

 

 

162,285

 

Total convertible preferred stock

 

 

91,739,149

 

 

 

28,159,724

 

 

$

190,825

 

 

$

173,956

 

 

Prior to the conversion of the convertible preferred stock upon closing of the IPO, the rights, preferences and privileges of the convertible preferred stock were as follows:

15


 

Conversion Rights

Each share of convertible preferred stock was convertible at the right and option of the stockholder, at any time after the date of issuance, into such number of fully paid and non-assessable shares of common stock on a one for one ratio (1:1 conversion ratio). The Series A-1 conversion price was $0.864 per share, the Series A-2 conversion price was $0.876 per share, the Series B conversion price was $12.125 per share and the Series C conversion price was $15.3317 per share, in each case, subject to certain antidilution adjustments as provided in the Company’s amended and restated certificate of incorporation.

Each share of convertible preferred stock was automatically convertible into a fully paid, non-assessable share of common stock at the then-effective conversion rate for such share (i) upon the closing of a firm commitment, underwritten initial public offering of the Company’s common stock with aggregate gross proceeds of not less than $30.0 million and a price per share to the public of not less than $15.3317 per share; or (ii) upon the receipt by the Company of a written request for such conversion from at least 60% of the holders of the convertible preferred stock then outstanding (voting together as a single class and on an as-converted basis), or if later, the effective date for conversion specified in such requests.

Liquidation Rights

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or a deemed liquidation event, as further defined in the Company’s amended and restated certificate of incorporation, prior to and in preference to any distribution of any of the assets of the Company to the holders of Series B convertible preferred stock and the Series A-1 and Series A-2 convertible preferred stock and common stock, the holders of Series C convertible preferred stock would have been paid, on a pari passu basis, an amount per share equal to the Series C liquidation preference of $15.3317 per share, plus an amount equal to any dividends declared but unpaid thereon (the “Series C Liquidation Preference”). If upon any such liquidation, dissolution or winding up of the Company or a deemed liquidation event, the assets of the Company available for distribution to its stockholders had been insufficient to pay the holders of Series C convertible preferred stock the full amount to which they were entitled, the holders of the Series C convertible preferred stock would have shared ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise have been payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

After the payment or setting aside for payment to the holders of the Series C convertible preferred stock of the full amount of the Series C Liquidation Preference, prior to any distribution of any of the assets of the Company to the holders of the Series A-1 and Series A-2 convertible preferred stock and common stock, the holders of Series B convertible preferred stock would have been paid, on a pari passu basis, an amount per share equal to the Series B liquidation preference of $12.125 per share for Series B, plus, in each case, an amount equal to any dividends declared but unpaid thereon (the “Series B Liquidation Preference”). If upon any such liquidation, dissolution or winding up of the Company or deemed liquidation event, the assets of the Company available for distribution to its stockholders had been insufficient to pay the holders of shares of Series B convertible preferred stock the full amount to which they shall be entitled, the holders of the Series B convertible preferred stock would have shared ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise have been payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

After the payment or setting aside for payment to the holders of the Series B convertible preferred stock of the full amount of the Series B Liquidation Preference, prior to any distribution of any of the assets of the Company to the holders of the common stock, the holders of Series A-1 and Series A-2 convertible preferred stock would have been paid, on a pari passu basis, an amount per share equal to $0.864 per share for Series A-1 and $0.876 per share for Series A-2, plus, in each case, an amount equal to any dividends declared but unpaid thereon (the “Series A Liquidation Preference”). If upon any such liquidation, dissolution or winding up of the Company or deemed liquidation event, the assets of the Company available for distribution to its stockholders had been insufficient to pay the holders of shares of Series A-1 and Series A-2 convertible preferred stock the full amount to which they shall be entitled, the holders of the Series A-1 and Series A-2 convertible preferred stock would have shared ratably in any

16


 

distribution of the assets available for distribution in proportion to the respective amounts which would otherwise have been payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

After the payments or setting aside for payment to the holders of convertible preferred stock of the full amounts specified above, the entire remaining assets of the Company legally available for distribution shall be distributed pro rata to holders of the common stock of the Company in proportion to the number of shares of common stock held by them.

Voting Rights

The holders of outstanding shares of Series A-1 and Series A-2 convertible preferred stock, voting together as a single class, were entitled to elect two members of the Company’s Board of Directors. The holders of outstanding shares of Series B convertible preferred stock, voting together as a single class, were entitled to elect one member of the Company’s Board of Directors.

Additionally, each holder of the Company’s convertible preferred stock was entitled to a vote equal to the number of shares of common stock into which the shares of convertible preferred stock could have been converted as of the record date. The holders of convertible preferred were entitled to vote on all matters on which the common stock shall be entitled to vote.

Dividend Rights

Holders of the Series A-1, Series A-2, Series B and Series C convertible preferred stock were entitled to receive non-cumulative dividends at a rate of 6% of the original respective series of convertible preferred stock issuance price. Only after payment of the dividends to the holders of Series C convertible preferred stock were the holders of shares of Series B, Series A-1 and Series A-2 convertible preferred stock be entitled to receive dividends, out of any assets legally available therefore, prior and in preference to any declaration or payment of any dividend (other than dividends on the common stock payable solely in common stock) on the common stock.

After the payment or setting aside for payment of the dividends described above, any additional dividends (other than dividends on common stock payable solely in common stock) set aside or paid in any fiscal year could have been set aside or paid among the holders of the convertible preferred stock and common stock then outstanding on a pari passu basis in proportion to the greatest whole number of shares of common stock which would have been held by each such holder if all shares of convertible preferred stock were converted at the then-effective conversion rate.

Dividends were only payable as and if declared by the Board of Directors. To date, the Company has not declared or paid any dividends.

Redemption Rights

The convertible preferred stock was not mandatorily redeemable as it did not have a set redemption date or a date after which the shares may be redeemed by the holders. A redemption event would have occurred only upon the occurrence of certain change in control events that are outside the Company’s control, including a sale, lease, transfer, or other disposition of all or substantially all of the Company’s assets. The Company has elected not to adjust the carrying values of the convertible preferred stock to the liquidation preferences of such shares because it is uncertain whether or when an event would have occurred that would obligate the Company to pay the liquidation preferences to holders of shares of convertible preferred stock. Subsequent adjustments to the carrying values of the liquidation preferences will be made only when it becomes probable that such a liquidation event will occur. 

 

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9.  Stock-Based Compensation

2018 Incentive Award Plan

In March 2018, the Company’s board of directors adopted the Company’s 2018 Incentive Award Plan (the “2018 Plan”). The 2018 Plan was approved by the Company’s stockholders in April 2018 and became effective on May 2, 2018.  The 2018 Plan initially reserved 4,289,936 shares for the issuance of stock options as well as any automatic annual increases in the number of shares of common stock reserved for future issuance under the 2018 Plan.  Awards granted under the 2018 Plan expire no later than ten years from the date of grant. For stock options, the option price shall not be less than 100% of the estimated fair value on the day of grant. Options granted typically vest over a four-year period but may be granted with different vesting terms. Unvested options not exercised in connection with an employee’s termination of employment are added back to the 2018 Plan.

 

Following the Company’s IPO and in connection with the effectiveness of the 2018 Plan, the 2013 Equity Incentive Plan (the “2013 Plan”) terminated and no further awards will be granted under that plan. All outstanding awards under the 2013 Plan will continue to be governed by their existing terms and the shares that remained outstanding for issuance under the 2013 Plan were transferred into the 2018 Plan. As of June 30, 2018, there was an aggregate 5,058,434 shares of common stock authorized for issuance under the 2018 Plan.

 

Prior to its termination, the 2013 Plan provided for the granting of incentive stock options (“ISOs”), non-statutory stock options (“NSOs”) and restricted shares to employees, directors, and consultants at the discretion of management and the Board of Directors. The exercise price of an ISO and NSO shall not be less than 100% of the estimated fair value of the shares on the date of grant, and the exercise price of an ISO and NSO granted to a 10% stockholder shall not be less than 110% of the estimated fair value of the shares on the date of grant. For awards granted between September 2017 and June 2018 with an exercise price of $3.42, a deemed fair value ranging from $3.95 to $5.43 per share was used in calculating stock-based compensation expense, which was determined using management hindsight. Options granted under the 2013 Plan expire no later than 10 years from the date of grant and generally vest over a four-year period but may be granted with different vesting terms. Unvested options not exercised in connection with an employee’s termination of employment are added back to the 2018 Plan.