UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

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

 

For the quarterly period ended June 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 001-38150

 

 

 

KALA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

(781) 996-5252

(Registrant’s telephone number, including area code)

 

 

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 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, a 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.

 

 

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  ☒.

 

There were 24,227,050 shares of Common Stock, $0.001 par value per share, outstanding as of July 31, 2017.

 

 

 

 

 

TABLE OF CONTENTS

 

 

SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward‑looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical fact, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management, are forward‑looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “target,” “potential,” “would,” “could,” “should,” “continue” and similar expressions are intended to identify forward‑looking statements, although not all forward‑looking statements contain these identifying words.

The forward‑looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about:

We may not actually achieve the plans, intentions or expectations disclosed in our forward‑looking statements, and you should not place undue reliance on our forward‑looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward‑looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward‑looking statements that we make. Our forward‑looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. The forward‑looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and we do not assume any obligation to update any forward‑looking statements except as required by applicable law.

 

 

PART I – FINANCIAL INFORMATION

Item  1 Financial Statements

KALA PHARMACEUTICALS, INC.

CONDENSED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share and per share amounts)

 

See accompanying notes to these unaudited condensed financial statements.

KALA PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

 

See accompanying notes to these unaudited condensed financial statements.

 

 

KALA PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

 

See accompanying notes to these unaudited condensed financial statements.

 

 

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business—Kala Pharmaceuticals, Inc. (the “Company”) was incorporated on July 7, 2009, and is a biopharmaceutical company focused on the development and commercialization of therapies using its proprietary nanoparticle‑based Mucus Penetrating Particles, or MPP, technology, with an initial focus on the treatment of eye diseases. KPI‑121, the Company’s lead program, consists of topically applied MPP nanosuspensions of loteprednol etabonate, or LE, a corticosteroid designed for ocular applications. Under its KPI‑121 program, the Company has two product candidates in Phase 3 development, one for the indications of the treatment of post‑operative inflammation and pain following ocular surgery and one for the temporary relief of the signs and symptoms of dry eye disease. The Company is also evaluating compounds in its topically applied MPP receptor Tyrosine Kinase Inhibitor program, or rTKI program, that inhibit the vascular endothelial growth factor, or VEGF, pathway, for the potential treatment of a number of retinal diseases.

The Company is engaged in research and development activities, raising capital and recruiting skilled personnel. The Company is subject to a number of risks similar to those of other companies conducting high‑risk, early‑stage research and development of pharmaceutical product candidates. Principal among these risks are dependence on key individuals and intellectual property, competition from other products and companies and the technical risks associated with the successful research, development and marketing of its product candidates. The Company’s success is dependent upon its ability to raise additional capital in order to fund ongoing research and development, obtain regulatory approval of its product candidates, successfully commercialize its products, generate revenue, meet its obligations, and, ultimately, attain profitable operations.

On July 19, 2017, the Company’s registration statement on Form S‑1 (File No. 333-218936) relating to the initial public offering (“IPO”) of its common stock became effective and on July 25, 2017, the IPO closed. Pursuant to the IPO, the Company issued and sold 6,900,000 shares of common stock at a public offering price of $15.00 per share, which included 900,000 shares sold pursuant to the exercise of the underwriters’ option to purchase additional shares. The Company received net proceeds of $94.9 million after deducting underwriting discounts and commissions of $7.2 million and offering costs incurred in 2017 of $1.4 million. The shares began trading on the NASDAQ Global Select Market on July 20, 2017. Upon the closing of the IPO, all of the Company’s outstanding shares of convertible preferred stock automatically converted into 16,101,970 shares of common stock at the applicable conversion ratio then in effect and all of the Company’s outstanding warrants to purchase preferred stock automatically converted into warrants to purchase 202,020 shares of common stock.

Unaudited Interim Financial Information

The condensed financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. The accompanying condensed financial statements reflect all adjustments consisting of normal, recurring adjustments, that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented.  Interim results are not necessarily indicative of results for a full year.  Accordingly, these financial statements should be read in conjunction with the financial statements as of and for the year ended December 31, 2016, and notes thereto, included in the Company’s final prospectus for the IPO filed with the Securities and Exchange Commission pursuant to Rule 424(b)(4) on July 20, 2017 (the “Prospectus”).

Reverse Stock Split—On July 7, 2017, the Company effected a one-for-5.2083 reverse stock split of the Company’s issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for the Company’s convertible preferred stock. The par value per share and authorized shares of common and convertible preferred stock were not adjusted as a result of the reverse stock split. All common stock and common stock per share amounts within the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this reverse stock split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital.

Automatic Conversion of Preferred Stock – On July 7, 2017, the Company effected an amendment to its Amended and Restated Certificated of the Incorporation, as amended. This amendment eliminated the minimum price per share of Common Stock for an underwritten public offering that would result in the automatic conversion of all outstanding shares of the Company’s Series Seed, Series A, Series B, Series B‑1 and Series C Preferred Stock.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expense, and related disclosures. The Company bases estimates and assumptions on historical experience when available and on various factors that it believes to be reasonable under the circumstances. The Company evaluates its estimates and assumptions on an ongoing basis. Estimates relied upon in preparing these financial statements relate to, but are not limited to, the fair value of common stock, preferred stock, warrants, stock compensation, accrued expenses and the recoverability of the Company’s net deferred tax assets and related valuation allowance. Actual results may differ from these estimates under different assumptions or conditions.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in the Prospectus. There have been no material changes to the significant accounting policies during the period ended June 30, 2017.

Recently Adopted Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016‑09, Improvements to Employee Share‑Based Payment Accounting (“ASU 2016‑09” or “Topic 718”), which simplifies share‑based payment accounting through a variety of amendments. The standard is effective for annual periods beginning after December 15, 2016 and for interim periods within those fiscal years. The changes resulting from the adoption of this standard impact the accounting for income taxes, accounting for forfeitures, statutory tax withholding and the presentation of statutory tax withholding on the statement of cash flows. The Company adopted this standard on January 1, 2017. Under guidance within ASU 2016‑09, excess tax benefits and deficiencies are to be recognized as income tax expense or benefit in the statement of operations in the period in which they occur rather than as an increase or decrease in stockholders’ equity (deficit). Since the Company maintains a full valuation allowance on its net deferred tax asset, there was no net impact to its accumulated deficit or its net loss resulting from the adoption of this standard. Also under the guidance in ASU 2016‑09, an entity may elect to account for forfeitures as they occur or continue to estimate the total number of awards that are vested or expected to vest. The Company elected to account for forfeitures as they occur and applied the accounting change on a modified retrospective basis as a cumulative effect adjustment to accumulated deficit as of the date of adoption, January 1, 2017. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or statement of cash flows.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016‑02, Leases (Topic 842) (“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 and 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 (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 impact that the adoption of ASU 2016‑02 will have on its financial statements.

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”), to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. ASU 2016-15 should be applied restrospectively and early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact that the adoption of ASU 2016‑15, but believes its adoption will not have a material impact on its statement of cash flows.

In November 2016, the FASB issued ASU 2016‑18, Statement of Cash Flows Restricted Cash (“ASU 2016‑18”). This new standard requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning‑of‑period and end‑of‑period total amounts shown on the statement of cash flows. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017, and requires retrospective application. The Company does not believe that the adoption of ASU 2016‑18 will have a material impact on its financial statements and related disclosures.

In May 2017, the FASB issued ASU Update No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”), which provides 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 ASU 2017-09 are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact that ASU 2017-09 will have on the Company’s balance sheets, results of operations and statements of cash flows.

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. The amendments also clarify existing disclosure requirements for equity-classified instruments. The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for, including adoption in an interim period. The Company is currently evaluating the impact of adopting this standard on its financial statements and related disclosures.

 

3. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following (in thousands):

 

 

4. ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

 

 

 

5. DEBT

2014 Debt Facility

In November 2014, the Company entered into a venture debt facility (“2014 Debt Facility”) for a total loan commitment of $10.0 million.  On October 13, 2016, the Company entered into the First Amendment. The First Amendment reaffirmed the initial commitment to a total of $10.0 million of funding (“Term Loan A”) and increased the Company’s total borrowing capacity by an additional $10.0 million (“Term Loan B” and together with Term Loan A, “Term Loans”). Under the terms of the facility, the borrowings accrued interest at an annual rate equal to the greater of (i) 3.00% above the Prime Rate then in effect, or (ii) 6.25%. The interest rate was 6.50% as of December 31, 2016 and 7.00% as of June 30, 2017. The unpaid principal balance under the 2014 Debt Facility was $10.0 million as of June 30, 2017 and December 31, 2016. The unamortized discount was $290,000 and $346,000 as of June 30, 2017 and December 31, 2016, respectively. During the three months ended June 30, 2017 and 2016, the Company recognized interest expense of $208,000 and $186,000, respectively, which consisted of amortization of the debt discount of $28,000 and $22,000 and the contractual coupon interest of $180,000 and $164,000, respectively.  During the six months ended June 30, 2017 and 2016, the Company recognized interest expense of $406,000 and $380,000, respectively, which consisted of amortization of the debt discount of $56,000 and $52,000 and the contractual coupon interest of $350,000 and $328,000, respectively.

In connection with the 2014 Debt Facility and the initial borrowing of $5.0 million under Term Loan A, the Company issued warrants to the lender to purchase 138,889 shares of Series B Preferred Stock at an exercise price of $1.44 per share (the “2014 Warrants”). During 2015 the Company borrowed an additional $5.0 million under Term Loan

A and the number of exercisable shares underlying the 2014 Warrants increased to 277,778 shares. Upon executing the First Amendment, the Company issued warrants to purchase up to 251,951 shares of Series C Preferred Stock at an exercise price of $1.59 per share (the “2016 Warrants”). Consistent with the warrants issued under the original 2014 Debt Facility, the number of shares of Series C Preferred Stock that become exercisable increases in proportion to the amount of Term Loan B borrowings. The 2016 Warrants were not exercisable into shares as of the First Amendment date or June 30, 2017, as the Company had not borrowed under the Term B Loan during 2016 or the six months ended June 30, 2017.

Upon issuance of the 2014 Warrants and 2016 Warrants, the Company estimated the fair value of the warrants using the Black‑Scholes option‑pricing model (see Note 6), and recorded the estimated fair value of the warrants as a liability separate from the loan balance, resulting in additional debt discount included within long‑term debt that is amortized to interest expense over the term of the loan using the effective interest method. The initial fair value of the 2014 Warrants and 2016 Warrants was $140,000 and $225,000, respectively. The warrants are subsequently re‑measured to fair value at every reporting date with changes in fair value recorded in the statement of operations as a component of other income (expense), as the shares underlying the warrants are exercisable into contingently redeemable shares.

As of June 30, 2017 and December 31, 2016, the estimated fair value of the warrant liability associated with the original 2014 Debt Facility was $533,000 and $274,000, respectively, and the estimated fair value of the warrant liability associated with the First Amendment was $504,000 and $263,000, respectively.

The future annual principal payments due under the 2014 Debt Facility as of June 30, 2017 are as follows (in thousands):

 

 

6. PREFERRED STOCK WARRANTS

In addition to the warrants issued in connection with the 2014 Debt Facility and the First Amendment, the Company has issued warrants in connection with debt transactions that were completed prior to 2014, all of which are classified as liabilities and are remeasured at fair value at each reporting period, as the warrants are exercisable into contingently redeemable shares. The following table summarizes the warrants outstanding at each of the dates identified:

 

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

Certain assets and liabilities are carried at fair value. 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 osf the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The Company’s preferred stock warrant liability is carried at fair value determined according to the fair value hierarchy and classified as a Level 3 measurement. The carrying value of accounts payable and accrued expenses approximate their fair value due to the short‑term nature of these assets and liabilities. Management believes that the Company’s long‑term debt (See Note 5) bears interest at the prevailing market rate for instruments with similar characteristics and, accordingly, the carrying value of long‑term debt, including the current portion, also approximates its fair value. The fair value of the outstanding debt was estimated using a discounted cash flow analysis based on current market interest rates for debt issuances with similar remaining years to maturity, adjusted for credit risk, which represents a Level 3 measurement.

The Company’s preferred stock warrants associated with the issuances of the 2014 Debt Facility and the First Amendment, as well as debt transactions entered into prior to 2014, are recorded at fair value. The assets and liabilities measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016, and the input categories associated with those assets and liabilities are as follows (in thousands):

 

The Company has classified the value of the warrants as Level 3 measurements within the fair value hierarchy because the fair value is derived using significant unobservable inputs, which include the estimated volatility, the estimated fair value of the underlying preferred stock, and to the extent that the number of exercisable shares underlying the warrants are adjustable based on the amount of the Term Loans drawn down, the probability that the Company will draw down on the debt facility.

The following table provides a summary of changes in the fair value of the Company’s derivative liability, which is included as a component of other (income) expense (in thousands):

 

 

The Company determined the fair values of the warrants, using the Black‑Scholes option‑pricing model using the following assumptions:

 

For purposes of determining the fair value of the warrants to purchase Series C Preferred Stock, the Company estimated that there is a 100% probability that it will draw down on the remaining $10.0 million available under the 2014 Debt Facility, and as such, assumed that the warrants will be exercisable into the maximum number of shares stipulated in the First Amendment. With respect to the aggregate warrant liabilities recorded as of June 30, 2017 and 2016, a

change in the assumptions regarding estimated volatility and/or the estimated fair value of the preferred stock could have a significant impact on the resulting fair values of the warrant liabilities.

8. CONVERTIBLE PREFERRED STOCK

Preferred stock consisted of the following as of June 30, 2017 and December 31, 2016 (in thousands, except share amounts):

On July 25, 2017, upon the closing of the Company’s IPO, all outstanding shares of the Convertible Preferred Stock converted into 16,101,970 shares of the Company’s common stock.

Series Seed Convertible Preferred Stock

In December 2009, the Company issued an aggregate of 2,000,001 shares of Series Seed Preferred Stock for gross proceeds of $2.0 million or $1.00 per share. In October 2010, the Company issued an aggregate of 2,000,003 shares of Series Seed Preferred Stock to existing investors for gross proceeds of $2.0 million or $1.00 per share. In February 2012, the Company issued an aggregate of 7,243,205 shares of Series Seed Preferred Stock to existing and new investors, which included 6,150,000 shares for gross proceeds of $6.2 million and 1,093,205 shares converted from convertible debt of $1.0 million principal and $93,000 accrued interest. Costs incurred in connection with each of the individual issuances of Series Seed Preferred Stock were $124,000, $39,000 and $15,000 respectively, which have been recorded as a reduction to the carrying amount of the Series Seed Preferred Stock.  On July 25, 2017, upon the closing of the Company’s IPO, all outstanding shares of Series Seed Convertible Stock converted into 2,158,708 shares of the Company’s common stock.

Series A Convertible Preferred Stock

In February 2013, the Company issued 4,791,716 shares of Series A Preferred Stock, at a purchase price of $1.20 per share for gross proceeds of $5.8 million.

Additionally, in accordance with the terms of the Series A Preferred Stock Purchase Agreement, investors were granted the right to purchase up to an additional 4,791,716 shares of Series A Preferred Stock, at a price of $1.20 per share, upon the Company meeting certain milestone criteria by December 31, 2013, approval of the Board and approval of the investors holding a majority of the outstanding shares of Series A Preferred Stock.

In June 2013, the Board approved waiving one of the milestone events provided for in the Series A Preferred Stock Purchase Agreement. Accordingly, the second tranche of Series A Preferred Stock closed on July 15, 2013 and the Company issued 4,791,716 shares of Series A Preferred Stock for gross proceeds of $5.8 million, or $1.20 per share. Costs incurred in connection with the issuance of the Series A Preferred Stock were $93,000, which have been recorded as a reduction in the carrying amount of the Series A Preferred Stock. On July 25, 2017, upon the closing of the Company’s IPO, all outstanding shares of Series A Convertible Stock converted into 1,840,029 shares of the Company’s common stock.

Series B Convertible Preferred Stock

In April 2014, the Company issued 15,624,999 shares of Series B Preferred Stock for gross proceeds of $22.5 million or $1.44 per share which included conversion of the outstanding principal and interest on the 2013 Notes (See Note 7) of $5.1 million, which converted into 3,562,785 shares of Series B Preferred Stock pursuant to the terms of the Notes. Costs incurred in connection with the issuance of the Series B Preferred Stock were $315,000, which have been recorded as a reduction in the carrying amount of the Series B Preferred Stock. On July 25, 2017, upon the closing of the Company’s IPO, all outstanding shares of Series B Convertible Stock converted into 3,000,017 shares of the Company’s common stock.

Series B‑1 Convertible Preferred Stock

On August 17, 2015, the Company issued 4,629,629 shares of Series B‑1 Senior Convertible Preferred Stock (“Series B‑1 Preferred Stock”) for gross proceeds of $7.0 million or $1.512 per share. Costs incurred in connection with the issuance of the Series B‑1 Preferred Stock were $115,000, which have been recorded as a reduction in the carrying amount of the Series B‑1 Preferred Stock. On July 25, 2017, upon the closing of the Company’s IPO, all outstanding shares of Series B-1 Convertible Stock converted into 888,894 shares of the Company’s common stock.

Series C Convertible Preferred Stock

On April 5, 2016, the Company issued 42,782,688 shares of Series C Preferred Stock for gross proceeds of $67.9 million or $1.5876 per share. Costs incurred in connection with the issuance of the Series C Preferred Stock were $402,000, which have been recorded as a reduction in the carrying amount of the Series C Preferred Stock. On July 25, 2017, upon the closing of the Company’s IPO, all outstanding shares of Series C Convertible Stock converted into 8,214,322 shares of the Company’s common stock.

Treatment of Preferred Stock Generally

The rights, preferences, and privileges of the Series Seed, Series A, Series B, Series B-1 and Series C (collectively the “Preferred Stock”) are included in the Prospectus. There were no changes to the rights, preferences, and privileges of the Preferred Stock during the six months ended June 30, 2017.

As described in Note 1, on July 7, 2017, the Company effected an amendment to its Amended and Restated Certificated of the Incorporation, as amended. This amendment eliminated the minimum price per share of Common Stock for an underwritten public offering that would result in the automatic conversion of all outstanding shares of the Company’s Series Seed, Series A, Series B, Series B‑1 and Series C Preferred Stock.

As described in Note 1, on July 7, 2017, the Company effected a one-for-5.2083 reverse stock split of the Company’s issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for the Company’s convertible preferred stock.

 

9. COMMON STOCK

The Company was authorized to issue up to 110,251,951 shares of common stock with a $0.001 par value per share as of June 30, 2017 and December 31, 2016, respectively. As of June 30, 2017 and December 31, 2016, the Company had 1,181,429 shares of common stock issued and outstanding.

The rights, preferences, and privileges of the Company’s common stock are included in the Prospectus.  There were no changes to the rights, preferences, and privileges of the common stock during the six months ended June 30, 2017.

Reserved Shares—As of June 30, 2017 and December 31, 2016, the Company has reserved the following shares of common stock for potential conversion of the outstanding convertible preferred stock, convertible preferred stock issuable upon exercise of rights under warrants and exercise of stock options:

 

10. STOCK‑BASED COMPENSATION

Stock Incentive Plan—On December 11, 2009, the Board adopted the 2009 Employee, Director and Consultant Equity Incentive Plan (the “2009 Plan”) for the issuance of common stock and stock options to employees, officers, directors, consultants, and advisors. As of June 30, 2017 and December 31, 2016, the Board had authorized, 3,711,949 shares and 3,711,949 shares, respectively, of common stock to be issued under the 2009 Plan.  Under the 2009 Plan, the Board determined the number of shares of common stock to be granted pursuant to the awards, as well as

the exercise price and terms of such awards. The exercise price of incentive stock options cannot be less than the fair value of the common stock on the date of grant.

Stock options awarded under the 2009 Plan expire 10 years after the grant date, unless the Board sets a shorter term. Options granted under the plan generally vest over a four‑year period. As of June 30, 2017 and December 31, 2016, there were 241,548 shares and 338,256 shares, respectively, of common stock available for future grant under the 2009 Plan.  On July 19, 2017, the Company’s 2017 Equity Incentive Plan (the “2017 Plan”) became effective and no further stock options or other awards will be made under the 2009 Plan. The 241,548 shares of common stock that remained available for grant under the 2009 Plan will be available for grant under the 2017 Plan. In addition, any shares of common stock subject to awards under the 2009 Plan that expire, terminate, or are otherwise surrendered, cancelled, forfeited or repurchased without having been fully exercised or resulting in any common stock being issued will become available for issuance under the 2017 Plan, up to a specified number of shares.  Upon the exercise of stock options, the Company issues new shares of common stock. The Company does not hold any treasury shares.

Stock Options—In determining the exercise prices for options granted, the Board has considered the fair value of the common stock as of the measurement date. The fair value of the common stock has been determined by the Board based on a variety of factors, including the Company’s financial position, the status of development efforts within the Company, the composition and ability of the current scientific and management teams, the current climate in the market place, the illiquid nature of the Company’s common stock, arm’s‑length sale of the Company’s preferred stock, the effect of the rights and preferences of the preferred stockholders, and the prospects of a liquidity event, among others.

The Company has granted 86,056 stock options which contain performance‑based vesting criteria. These criteria are milestone events that are specific to the Company’s corporate goals. Stock‑based compensation expense associated with performance‑based stock options are recognized if the achievement of the performance condition is considered probable using management’s best estimates. These milestones have not been deemed probable as of June 30, 2017 and December 31, 2016. As of the six months ended June 30, 2017 and 2016, unrecognized compensation expense related to the performance‑based awards was $25,000 and $35,000, respectively.

The Company granted 4,224 and 0 stock options to non‑employees for the three months ended June 30, 2017 and 2016, respectively and 4,224 and 0 stock options for the six months ended June 30, 2017 and 2016, respectively. During the three months ended June 30, 2017 and 2016, the Company recognized $22,000 and $15,000, respectively, in stock compensation expense related to non‑employees. During the six months ended June 30, 2017 and 2016, the Company recognized $37,000, and $28,000, respectively, in stock compensation expense related to non‑employees.

A portion of the unvested stock options will vest upon the sale of all or substantially all of the stock or assets of the Company.

A summary of option activity for employee and non‑employee awards under the 2009 Plan for the six months ended June 30, 2017 is as follows (in thousands, except share and per share amounts):