kod-10q_20180930.htm

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 every Interactive Data File required to be submitted 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 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.

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

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

As of November 14, 2018, the registrant had 36,829,857 shares of common stock, $0.0001 par value per share, outstanding.

This Quarterly Report on Form 10-Q, or Quarterly Report, contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. This Quarterly Report should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this report. The statements contained in this Quarterly Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words.

These statements involve risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Forward-looking statements in this Quarterly Report include, but are not limited to, statements about:

You should refer to the “Part II, Item 1A — Risk Factors” section of this Quarterly Report for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report, and although we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted a thorough inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

You should read this Quarterly Report and any documents that we reference in this Quarterly Report that we have filed with the Securities and Exchange Commission, or SEC, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

	September 30, 2018			December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	11,590		$	1,395
Prepaid expenses and other current assets		703			200
Total current assets		12,293			1,595
Restricted cash		140			140
Property and equipment, net		1,198			1,509
Deferred offering costs		3,484			—
Total assets	$	17,115		$	3,244
Liabilities, redeemable convertible preferred stock and stockholders’ deficit
Current liabilities:
Accounts payable	$	1,724		$	3,356
Accrued and other current liabilities		3,659			5,802
Total current liabilities		5,383			9,158
Convertible notes (includes $18,487 and $7,937 at September 30, 2018 and December 31, 2017 due to related parties)		41,476			9,921
Redeemable convertible preferred stock warrant liability (includes $4,000 and $1,840 at September 30, 2018 and December 31, 2017 attributable to warrants held by related parties)		5,000			2,300
Derivative instrument (includes $2,467 at September 30, 2018 attributable to related parties)		8,517			—
Other liabilities		552			586
Total liabilities		60,928			21,965
Commitments and contingencies (Note 7)
Redeemable convertible preferred stock, $0.0001 par value, 18,753,595 shares authorized at September 30, 2018 and December 31, 2017; 12,385,154 shares issued and outstanding at September 30, 2018 and December 31, 2017; liquidation value of $50,324 at September 30, 2018 and December 31, 2017		50,017			50,017
Stockholders’ deficit:
Common stock, $0.0001 par value, 28,500,000 shares authorized at September 30, 2018 and December 31, 2017; 8,011,734 shares issued and outstanding at September 30, 2018 and 7,936,434 shares issued and outstanding at December 31, 2017		1			1
Additional paid-in capital		2,273			584
Accumulated deficit		(96,104	)		(69,323	)
Total stockholders’ deficit		(93,830	)		(68,738	)
Total liabilities, redeemable convertible preferred stock and stockholders’ deficit	$	17,115		$	3,244

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Operating expenses
Research and development	$	4,709		$	3,148		$	11,942		$	13,246
General and administrative		1,671			831			5,075			2,517
Total operating expenses		6,380			3,979			17,017			15,763
Loss from operations		(6,380	)		(3,979	)		(17,017	)		(15,763	)
Interest expense (includes $1,076 and $311 attributable to related parties for the three months ended September 30, 2018 and 2017 and $2,944 and $311 attributable to related parties for the nine months ended September 30, 2018 and 2017)		(1,982	)		(395	)		(5,329	)		(407	)
Other income (expense), net (includes $1,129 and $176 other expense attributable to related parties for the three months ended September 30, 2018 and 2017 and $2,714 and $176 other expense attributable to related parties for the nine months ended September 30, 2018 and 2017)		(2,090	)		(209	)		(4,435	)		(196	)
Net loss and comprehensive loss	$	(10,452	)	$	(4,583	)	$	(26,781	)	$	(16,366	)
Net loss per share attributable to common stockholders, basic and diluted	$	(1.33	)	$	(0.61	)	$	(3.45	)	$	(2.19	)
Weighted-average shares outstanding used in computing net loss per share attributable to common stockholders, basic and diluted		7,851,560			7,549,711			7,764,888			7,479,523

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

	Nine Months Ended September 30,
	2018			2017
Cash flows from operating activities
Net loss	$	(26,781	)	$	(16,366	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		367			363
Non-cash interest expense and amortization of debt discount and issuance cost		5,295			392
Change in fair value of redeemable convertible preferred stock warrant liability		2,700			220
Change in fair value of derivative instrument		1,914			—
Stock-based compensation		1,549			207
Changes in assets and liabilities:
Prepaid expense and other current assets		(503	)		423
Accounts payable		(1,754	)		2,015
Accrued and other current liabilities		(3,511	)		(45	)
Other liabilities		33			33
Net cash used in operating activities		(20,691	)		(12,758	)
Cash flows from investing activities
Purchase of property and equipment		(56	)		(159	)
Net cash used in investing activities		(56	)		(159	)
Cash flows from financing activities
Proceeds from issuance of convertible notes (includes $9,560 and $8,000 from related parties for the nine months ended September 30, 2018 and 2017)		33,000			10,000
Deferred offering costs		(1,815	)		—
Debt issuance cost		(140	)		(181	)
Principal payments of capital lease		(81	)		(70	)
Proceeds from issuance of common stock		49			3
Principal payments of tenant improvement allowance payable		(71	)		(65	)
Net cash provided by financing activities		30,942			9,687
Net increase (decrease) in cash, cash equivalents and restricted cash		10,195			(3,230	)
Cash, cash equivalents and restricted cash, at beginning of period		1,535			9,762
Cash, cash equivalents and restricted cash, at end of period	$	11,730		$	6,532
Reconciliation of cash, cash equivalents and restricted cash to statement of financial position
Cash and cash equivalents	$	11,590		$	6,392
Restricted cash	$	140		$	140
Cash, cash equivalents and restricted cash in statement of financial position	$	11,730		$	6,532
Supplemental cash flow information:
Cash paid for interest	$	14		$	13
Supplemental disclosures of non-cash investing and financing information:
Acquisition of equipment through capital lease	$	—		$	73
Redeemable convertible preferred stock warrant issued in connection with convertible notes	$	—		$	1,040
Issuance of derivative instrument related to convertible notes payable	$	6,603		$	—
Unpaid deferred offering costs	$	1,577		$	—
Deferred offering costs paid in restricted stock awards	$	91		$	—

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

Kodiak Sciences Inc. (the “Company”) is a clinical stage biopharmaceutical company specializing in novel therapeutics to treat high-prevalence ophthalmic diseases. The Company devotes substantially all of its time and efforts to performing research and development, raising capital and recruiting personnel.

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

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

The Company has incurred significant losses and negative cash flows from operations since inception and had an accumulated deficit of $96.1 million as of September 30, 2018. The Company believes that its cash and cash equivalents as of September 30, 2018 along with the net proceeds from its initial public offering (“IPO”) will be sufficient for the Company to continue as a going concern for at least 12 months from the issuance date of these condensed consolidated financial statements for the period ended September 30, 2018.

In October 2018, the Company sold and issued 9,000,000 shares of common stock at a price to the public of $10.00 per share for gross proceeds of $90.0 million. In November 2018, the Company sold and issued an additional 400,000 shares of common stock at $10.00 per share to the underwriters of the IPO following the partial exercise of their over-allotment option for gross proceeds of $4.0 million. The aggregate net proceeds to the Company from the IPO, inclusive of the partial over-allotment option exercise, were approximately $83.7 million after deducting underwriting discounts and commissions and other offering costs.

Upon the closing of the IPO, all convertible preferred shares then outstanding automatically converted into 12,385,154 shares of common stock, 500,000 redeemable convertible preferred stock warrants automatically converted into common stock warrants and 100,000 of such warrants were exercised immediately following the closing of the IPO. The 2017 convertible notes converted into 2,637,292 shares of common stock and the 2018 convertible notes converted into 4,295,677 shares of common stock upon closing of the IPO. In connection with the IPO, the Company amended and restated its certificate of incorporation and bylaws. The condensed consolidated financial statements as of September 30, 2018, including share and per share amounts, do not give effect to the IPO, as it closed subsequent to September 30, 2018.

The Company’s unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”). 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. Accordingly, these financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2017 and notes thereto, included in the Company’s final prospectus for the IPO filed with the SEC pursuant to Rule 424(b)(4) on October 5, 2018 (“final prospectus”).

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited financial statements. In the opinion of the Company's management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments which are necessary to present fairly the Company's financial position as of September 30, 2018, the results of its operations for the three and nine months ended September 30, 2018 and 2017 and cash flows for the nine months ended September 30, 2018 and 2017. Such adjustments are of a normal and recurring nature. The results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results for the year ending December 31, 2018, or for any future period.

The year-end condensed consolidated balance sheet data as of December 31, 2017 was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and expenses during the reporting period. Such estimates include the valuation of redeemable convertible preferred stock warrant liability, derivative instruments, deferred tax assets, useful lives of property and equipment, and stock-based compensation. Actual results could differ from those estimates.

There were no changes to the Company’s significant accounting policies, as described in the final prospectus, that have a material impact on these condensed consolidated financial statements.

From time to time, new accounting pronouncements are issued by the FASB, under its ASC or other standard setting bodies, and adopted by the Company as of the specified effective date, unless otherwise discussed below.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting. ASU 2017-09 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 this update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Company adopted this new guidance beginning January 1, 2018, on a prospective basis, which did not result in a material impact on its consolidated financial statements and related disclosures.

In November 2016, the FASB issued ASU 2016-18, Restricted Cash. The amendments of this standard provide guidance on restricted cash disclosures and presentation in the statement of cash flows. This guidance is effective for interim and annual periods beginning after December 15, 2017. The Company adopted ASU 2016-18 effective January 1, 2018, which required the change in restricted cash to be included as part of the total change in cash and cash equivalents on the statement of cash flows. While restricted cash is still presented as a separate line item in the Company’s balance sheet, it will no longer be presented as a separate item in the statements of cash flows. This did not result in a material impact on the Company’s consolidated financial statements and related disclosures.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The Company adopted this new guidance beginning January 1, 2018, which did not result in a material impact on its consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which requires changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this update are effective for interim and annual periods beginning after December 15, 2017. The Company adopted this new guidance beginning January 1, 2018, on a retrospective basis, which did not result in a material impact on its consolidated financial statements and related disclosures.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The amendment to the standard is effective for financial statements issued for interim and annual periods beginning after December 15, 2017. The Company adopted this new guidance beginning January 1, 2018, on a retrospective basis, which did not result in a material impact on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements, which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB’s disclosure framework project. The standard is effective for interim and annual periods beginning after December 15, 2019. The standard specifies certain amendments which should be applied prospectively while all other amendments should be applied retrospectively. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements and related disclosures.

In June 2018, the FASB issued ASU 2018-07, Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. The transition method provided by ASU 2018-07 is a modified retrospective basis which recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The amendments in ASU 2018-07 are effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements and related disclosures.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815) (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. This update simplifies the accounting for certain financial instruments with down round features, a provision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price based on the price of future equity offerings. Down round features are common in warrants, preferred shares, and convertible debt instruments issued by private companies and early-stage public companies. This update requires companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. The provisions of this update related to down rounds are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The amendments in Part I should be applied (1) retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim periods; (2) retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), 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. Topic 842 supersedes the previous leases standard, ASC 840 Leases. In July 2018, the FASB issued ASU 2018-10, Leases (Topic 842), Codification Improvements, and ASU 2018-11, Leases (Topic 842), Targeted Improvements. ASU 2018-10 clarifies certain provisions and correct unintended applications of the guidance such as the application of implicit rate, lessee reassessment of lease classification, and certain transition adjustments that

should be recognized to earnings rather than to stockholders' equity. ASU 2018-11 provides an alternative transition method and practical expedient for separating contract components for the adoption of Topic 842. ASU 2016-02, ASU 2018-10, and ASU 2018-11 (collectively, "the new lease standards") is effective for interim and annual periods beginning after December 15, 2018 and should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, and early adoption is permitted. The Company is currently evaluating the impact of the new lease standards on its consolidated financial statements and related disclosures; however, the Company anticipates recognizing assets and liabilities arising from any leases that meet the requirements under the new lease standards on the adoption date and including qualitative and quantitative disclosures in its consolidated financial statements.

	September 30, 2018			December 31, 2017
Leasehold improvement	$	1,260		$	1,260
Laboratory equipment		1,225			1,174
Computer equipment		52			52
Computer software		178			173
Furniture and fixtures		225			225
Office equipment		79			79
Total property and equipment		3,019			2,963
Less: Accumulated depreciation		(1,821	)		(1,454	)
Property and equipment, net	$	1,198		$	1,509

All long-lived assets are maintained in the United States. Depreciation expense, including depreciation of assets under capital leases, was $0.1 million and $0.1 million for the three months ended September 30, 2018 and 2017, respectively, and $0.4 million and $0.4 million for the nine months ended September 30, 2018 and 2017, respectively.

Accrued liabilities and other current liabilities consist of the following (in thousands):

The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

Level 1—Observable inputs, such as quoted prices in active markets for identical assets or liabilities at the measurement date.

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

Level 3—Unobservable inputs which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

The following tables present the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis (in thousands):

	Fair Value Measurements at September 30, 2018
	Quoted Price in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Money market funds	$	11,350	$	—	$	—	$	11,350
Total	$	11,350	$	—	$	—	$	11,350
Liabilities:
Redeemable convertible preferred stock warrant liability	$	—	$	—	$	5,000	$	5,000
2018 derivative instrument		—		—		8,517		8,517
Total	$	—	$	—	$	13,517	$	13,517

	Fair Value Measurements at December 31, 2017
	Quoted Price in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Money market funds	$	1,217	$	—	$	—	$	1,217
Total	$	1,217	$	—	$	—	$	1,217
Liabilities:
Redeemable convertible preferred stock warrant liability	$	—	$	—	$	2,300	$	2,300
Total	$	—	$	—	$	2,300	$	2,300

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial instruments (in thousands):

The estimated fair value of the 2017 convertible notes (Level 3 instrument for disclosure purposes) was $26.4 million as of September 30, 2018 and $19.0 million as of December 31, 2017. The estimated fair value of the 2018 convertible notes (Level 3 instrument for disclosure purposes) was $43.0 million as of September 30, 2018.

The fair value of the redeemable convertible preferred stock warrants, 2017 and 2018 convertible notes and derivative instruments as of September 30, 2018 was inferred from the $10.00 per share of common stock from the IPO completed in October 2018. Upon the closing of the IPO, the redeemable convertible preferred stock warrants automatically converted into common stock warrants and the 2017 and 2018 convertible notes were converted into common stock. The estimated fair value of the 2017 derivative instrument was immaterial as of September 30, 2018, due to the probability of occurrence of the underlying events being remote. The estimated fair value of the 2018 derivative instrument considered the probability and timing of occurrence of the IPO and assumed a discount rate of 40%.

The Company used a hybrid method between the probability-weighted expected return method (“PWERM”) and the Black-Scholes option pricing model (“OPM”) to estimate the fair value of the warrants, 2017 and 2018 convertible notes and derivative instruments as of December 31, 2017. The PWERM is a scenario-based analysis that estimates value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to the Company, as well as the economic and control rights of each share class. Under the OPM, shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class. The values of the preferred and common stock are inferred by analyzing these options. The Company estimated the probability-weighted value across multiple scenarios, using the OPM to estimate the allocation of value within one of or more of those scenarios. In this valuation, the Company considered two possible outcomes under PWERM: (1) an IPO and (2) continued operations as a private company scenario, which is modeled using the OPM. For the IPO scenario, the fair value of the Company’s common stock is consistent with the methods outlined in the Practice Aid. Estimates of fair value using valuation the OPM are affected by assumptions regarding a number of complex variables, including expected term, expected volatility, expected dividend, and risk-free interest rate. The Company considered as inputs to the PWERM the probability of occurrence of an IPO, the enterprise value and the discount rate, which is a blended rate that reflects the risk associated with the business during the forecasted period. At December 31, 2017, the fair values recognized for the warrants and the derivative instruments, and for disclosure purposes of the fair value of convertible notes, assumed a discount rate of 57.5%, volatility of 75%, a risk-free rate of 1.97%, no dividends expected to be paid, and an expected term based on the timing for the IPO scenario and the private scenario.

In August 2017, the Company received $10.0 million in gross proceeds from the issuance of the 2017 convertible notes and warrants to purchase Series B redeemable convertible preferred stock (Note 11). Of this, $8.0 million aggregate principal amount of the 2017 convertible notes were issued to related parties. Interest on the unpaid principal balance of the 2017 convertible notes accrued and compounded monthly from October 1, 2017 at a rate of 2.5% per month and was payable at maturity. Unless converted or redeemed upon occurrence of certain events, the 2017 convertible notes were to mature on December 1, 2020. The 2017 convertible notes included embedded derivatives that were required to be bifurcated and accounted for separately as a single, compound derivative instrument (Note 12).

The discount on 2017 convertible notes was amortizable over the contractual period of 3.31 years, using the effective interest rate method. The 2017 convertible notes had an annual effective interest rate of 38.18% per year. The 2017 convertible notes interest expense for the three months ended September 30, 2018 was $1.0 million, consisting of $1.0 million of contractual interest expense and less than $0.1 million of debt discount and issuance costs amortization. The 2017 convertible notes interest expense for the nine months ended September 30, 2018 was $2.8 million, consisting of $2.7 million of contractual interest expense and $0.1 million of debt discount and issuance costs amortization.

The Company’s obligations with respect to the 2017 convertible notes were secured by all of its tangible and intangible assets. The 2017 convertible notes included covenants that restricted the Company’s ability to issue capital stock, repurchase or redeem capital stock, dispose of assets, incur debt, incur liens and make distributions to stockholders, including dividends. The 2017 convertible notes had customary events of default.

After January 31, 2018, each holder of 2017 convertible notes may have at any time, at its option, elected to convert the principal amount and accrued interest of such convertible notes into shares of Series B redeemable convertible preferred stock at a price of $5.00 per share. In September 2018, the purchase agreement for the 2017 convertible notes was amended and effective immediately prior to the closing of the Company’s IPO. Following the amendment, the 2017 convertible notes were convertible into an equivalent number of shares of common stock in lieu of Series B redeemable convertible preferred stock and interest accrued from the initial public filing of a Registration Statement on Form S-1 on September 7, 2018 to immediately prior to the closing of the Company’s IPO would be waived. The Company issued 2,637,292 shares of common stock to the holders of the 2017 convertible notes at the closing of the Company’s IPO on October 9, 2018.

In February 2018, the Company received $33.0 million in gross proceeds from the issuance of 2018 convertible notes, of which the Company issued $31.2 million aggregate principal amount on February 2, 2018 (“first tranche”) and $1.8 million aggregate principal amount on February 23, 2018 (“second tranche”). Of this, $9.6 million were issued to related parties. Interest on the unpaid principal balance of the 2018 convertible notes accrued from the date of issuance and compounded monthly from February 28, 2018 at a rate of 6.0% per year and is payable at maturity. Unless converted, the 2018 convertible notes were to mature on the earlier of (1) December 1, 2020 and (2) the date of the consummation of a change of control. The 2018 convertible notes included embedded derivatives that are required to be bifurcated and accounted for separately as a single, compound derivative instrument (Note 12).

The discount on 2018 convertible notes for the first and second tranche was amortizable over the contractual period of 2.83 years and 2.77 years, respectively, using the effective interest rate method. The 2018 convertible notes had an annual effective interest rate of 15.10% per year for the first tranche and 15.45% per year for the second tranche. The 2018 convertible notes interest expense for the three months ended September 30, 2018 was $1.0 million, consisting of $0.5 million of contractual interest expense and $0.5 million of debt discount and issuance costs amortization. The 2018 convertible notes interest expense for the nine months ended September 30, 2018 was $2.5 million, consisting of $1.3 million of contractual interest expense and $1.2 million of debt discount and issuance costs amortization.

The Company’s obligations with respect to the 2018 convertible notes were unsecured and subordinated to its obligations with respect to the 2017 convertible notes. The 2018 convertible notes included covenants that restricted the Company’s ability to issue capital stock, repurchase or redeem capital stock, dispose of assets, incur debt, incur liens and make distributions to stockholders, including dividends. The 2018 convertible notes had customary events of default.

The 2017 and 2018 convertible notes contained a clause in which failure to communicate to the lender any material adverse change or effect on the business, condition, operations, or ability to perform obligations under the terms of the 2017 and 2018 notes was considered an event of default.

The 2018 convertible notes were automatically convertible into shares of the Company’s common stock at a price equal to (1) 80% of the initial price to public in a qualified initial public offering if such offering was completed prior to February 2, 2019 and (2) 75% of the initial price to public in a qualified initial public offering if such offering was completed on or after February 2, 2019. A qualified initial public offering for the purposes of the 2018 convertible notes was one in which the Company generated aggregate gross proceeds of at least $75.0 million or all of the 2017 convertible notes converted into shares of the Company’s common stock. The Company issued 4,295,677 shares of common stock to the holders of the 2018 convertible notes at the closing of the Company’s IPO on October 9, 2018.

In January 2013, the Company executed a non-cancellable lease agreement for office and laboratory space in Palo Alto, California. The lease began in October 2013 and would expire in October 2018. In March 2016, the Company executed a lease amendment agreement which was effective March 2016 and extended the lease term until October 2023.

The Company recognizes rent expense on a straight-line basis over the lease period. Rent expense was $0.1 million and $0.1 million for the three months ended September 30, 2018 and 2017, respectively, and $0.4 million and $0.4 million for the nine months ended September 30, 2018 and 2017, respectively.

The following table summarizes the Company’s future minimum commitments under non-cancelable contracts (in thousands):

The Company has entered into service agreements with Lonza AG and its affiliates (“Lonza”), pursuant to which Lonza agreed to perform activities in connection with the manufacturing process of certain compounds. Such agreements, and related amendments, state that planned activities that are included in the signed work orders are, in some cases, binding and, hence, obligate the Company to pay the full price of the work order upon satisfactory delivery of products and services. Per the terms of the agreements, the Company has the option to cancel signed orders at any time upon written notice, which may or may not be subject to payment of a cancellation fee. The level of cancellation fees is sometimes dependent on the timing of the written notice in relation to the commencement date of the work, with the maximum cancellation fee equal to the full price of the work order. As of September 30, 2018, the total amount of unconditional purchase obligations, including accrued amounts, under these agreements was $2.9 million. Purchases under this agreement for the nine months ended September 30, 2018 and 2017 were $2.1 million and $8.5 million, respectively. As of September 30, 2018, the Company had not incurred any cancellation fees for the work performed by Lonza.

The Company is also party to a cancellable assignment and license agreement that would require the Company to make milestone payments of up to $33.2 million and royalty payments on net sales of products utilizing KSI-201 and related technology. Such milestones and royalties are dependent on future activity or product sales and are not estimable.

From time to time, the Company may become involved in legal proceedings arising from the ordinary course of its business. Management is currently not aware of any matters that could have a material adverse effect on the Company’s financial position, results of operations or cash flows. The Company records a legal liability when it believes that it is both probable that a liability may be imputed, and the amount of the liability can be reasonably estimated. Significant judgment by the Company is required to determine both probability and the estimated amount.

To the extent permitted under Delaware law, the Company has agreed to indemnify its directors and officers for certain events or occurrences while the director or officer is, or was serving, at the Company’s request in such capacity. The indemnification period covers all pertinent events and occurrences during the director’s or officer’s service. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is not specified in the agreements; however, the Company has director and officer insurance coverage that reduces its exposure and enables the Company to recover a portion of any future amounts paid. The Company believes the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

As of September 30, 2018 and December 31, 2017, the Company’s certificate of incorporation authorized the Company to issue up to 18,753,595 shares of redeemable convertible preferred stock.

As of September 30, 2018 and December 31, 2017, redeemable convertible preferred stock consisted of the following (in thousands, except per share and share amounts):

	Redeemable Convertible Preferred Stock				Liquidation		Carrying		Original Issuance
	Authorized		Outstanding		Value		Value		Price ⁽¹⁾
Series A redeemable convertible preferred stock		6,253,595		5,593,154	$	16,364	$	16,283	$	3.17
Series B redeemable convertible preferred stock		12,500,000		6,792,000		33,960		33,734	$	5.00
Total		18,753,595		12,385,154	$	50,324	$	50,017

On October 9, 2018, upon the closing of the Company’s IPO, all outstanding redeemable convertible preferred stock automatically converted into shares of common stock. Prior to the closing of the Company’s IPO, the holders of redeemable convertible preferred stock had the following various rights and preferences:

In the event of any liquidation event, the holders of the Series B redeemable convertible preferred stock are entitled to receive in any distribution of any of the assets of the Company in preference to the holders of the Series A redeemable convertible preferred stock or common stock, an amount equal to the original issue price, adjusted for any stock splits, stock dividends, recapitalizations, reclassifications, combinations or similar transactions (collectively, “anti-dilution adjustments”), plus all declared and unpaid dividends on such shares. After full payment to holders of the Series B redeemable convertible preferred stock, payment should be made to the holders of Series A redeemable convertible preferred stock, in preference to the holders of the common stock, an amount equal to the original issue price, adjusted for any anti-dilution adjustments, plus all declared and unpaid dividends on such shares. After the payment of the liquidation preference, all remaining assets available for distribution will be distributed ratably among the holders of the common stock. If available assets are insufficient to pay the full liquidation preference of a given series of redeemable convertible preferred stock, the assets available for distribution to holders of such preferred stock will be distributed among such holders on a pro rata basis.

Notwithstanding the above, for purposes of determining the amount each holder of shares of redeemable convertible preferred stock is entitled to receive with respect to a liquidation event, each such holder of shares of a series of redeemable convertible preferred stock shall be deemed to have converted such holder’s shares of such series into shares of common stock immediately prior to the liquidation event if, as a result of an actual conversion, such holder would receive, in the aggregate, an amount greater than the amount that would be distributed to such holder if such holder did not convert such series of redeemable convertible preferred stock into shares of common stock. If any such holder shall be deemed to have converted shares of redeemable convertible preferred stock into common stock pursuant to this paragraph, then such holder shall not be entitled to receive any distribution that would otherwise be made to holders of redeemable convertible preferred stock that have not converted into shares of common stock.

Shares of any series of redeemable convertible preferred stock can be converted, at the option of the stockholder, into such number of fully paid and non-assessable shares of common stock. The conversion price is determined by dividing the original issuance price applicable to each series of redeemable convertible preferred stock, adjusted for any anti-dilution adjustments, by the applicable conversion price for such series. As of September 30, 2018, the Company’s redeemable convertible preferred stock is convertible into the Company’s shares of common stock on a one-for-one basis.

Shares of redeemable convertible preferred stock shall automatically be converted into shares of common stock at the then effective conversion rate for such share, upon earlier to occur of: (1) the date, or the occurrence of event, specified by the vote of or written consent of the holders of at least a majority of the redeemable convertible preferred stock voting together as a single class on an as-converted basis; and (2) immediately prior to the consummation of a firm commitment underwritten initial public offering pursuant to an effective registration statement filed under the Securities Act, covering the offer and sale of the Company’s common stock, provided that the per share price is at least $10.00 and gross proceeds to the Company are equal to or greater than $75.0 million.

The redeemable convertible preferred stock dividends are not cumulative and are payable only when declared by the board of directors. No such dividends have been declared. Such dividends are in preference to any dividends to holders of common stock.

Each holder of redeemable convertible preferred stock shall be entitled to the number of votes equal to the number of shares of common stock into which the shares of redeemable convertible preferred stock held by such holder could be converted as of the record date. Holders of redeemable convertible preferred stock and common stock generally vote as a single class.

The redeemable convertible preferred stock is recorded in mezzanine equity because while it is not mandatorily redeemable, it will become redeemable at the option of the stockholders upon the occurrence of certain deemed Liquidation Events that are considered not solely within the Company’s control.

As of September 30, 2018 and December 31, 2017, the Company’s certificate of incorporation authorized the Company to issue 28,500,000, shares of common stock at the par value of $0.0001 per share. The holder of each share of common stock is entitled to one vote per share. The number of authorized shares of common stock may be increased or decreased (but not below the number of shares thereof then outstanding or reserved for issuance) by the affirmative vote of the holders of a majority (assuming the conversion of all redeemable convertible preferred stock into shares of the Company’s common stock) of the capital stock of the Company entitled to vote and without a separate class vote of the common stock.

In September 2015, the Company adopted the 2015 Equity Incentive Plan (the “2015 Plan”) under which 2,810,513 shares of common stock were reserved for issuance through grants of incentive stock options (“ISOs”), nonqualified stock options (“NSOs”) and restricted stock awards to employees, directors and consultants of the Company. The awards outstanding under the previously terminated 2009 Share Incentive Plan continued to be governed by their existing terms. Options under the Plans may be granted for periods of up to ten years and at prices based upon the estimated fair value of the shares on the date of grant as determined by the board of directors; provided, however, that (1) the exercise price of an option shall not be less than 100% of the estimated fair value of the shares on the date of grant, and (2) the exercise price of an ISO granted to a greater than 10% stockholder shall not be less than 110% of the estimated fair value of the shares on the date of grant, and (3) the term of an ISO granted to a greater than 10% stockholder should not exceed five years. Options granted generally vest over four years. Shares issued under the 2015 Plan may, but need not, be exercisable immediately, but subject to a right of repurchase by the Company of any unvested shares.

Stock option activity under the 2015 Plan is summarized as follows (in thousands, except share and per share data).

				Outstanding Awards
	Number of Shares Available for Grant			Number of Shares Underlying Outstanding Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Balance, December 31, 2017		605,557			1,204,414		$	0.98		8.49	$	41
Shares authorized		2,125,000			—
RSAs granted		(27,500	)		—
Options granted		(2,824,698	)		2,824,698		$	6.29
Options exercised		—			(47,800	)	$	1.03				2
Options forfeited or canceled		185,000			(185,000	)	$	5.19
Balance, September 30, 2018		63,359			3,796,312		$	4.73		9.07	$	21,117
Shares exercisable, September 30, 2018					1,632,095		$	2.88		8.47	$	12,094
Vested and expected to vest, September 30, 2018					3,796,312		$	4.73		9.07	$	21,117

During the nine months ended September 30, 2018 and 2017, the Company granted 2,429,698 and 107,500 stock options, respectively, to employees with a weighted-average grant date fair value of $3.46 and $0.62 per share, respectively.

The total fair value of employee options vested during the nine months ended September 30, 2018 and 2017 was $0.6 million and $0.2 million, respectively.

The fair value of the shares of common stock underlying the stock options was determined by the board of directors as there has been no historical public market for the Company’s common stock prior to the IPO.

The Company estimated the fair value of employee stock options using the Black-Scholes valuation model. The fair value of employee stock options was estimated using the following weighted-average assumptions:

The Company granted 395,000 and 30,000 stock options to non-employees during the nine months ended September 30, 2018 and 2017, respectively.

The fair value of stock options granted to non-employees is calculated at each grant date and remeasured at each reporting date using the Black-Scholes option pricing model. The fair value of non-employee stock options was estimated using the following weighted-average assumptions:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Expected volatility		58	%		63	%		56	%		63	%
Risk-free interest rate		3.01	%		2.29	%		2.68	%		2.28	%
Dividend yield		0	%		0	%		0	%		0	%
Expected term		9.39			9.64			9.11			9.63

Stock-based compensation is classified in the condensed consolidated statements of operations and comprehensive loss as follows (in thousands):

As of September 30, 2018, the unrecognized stock-based compensation of unvested employee options and unvested RSAs was $8.2 million and it is expected to be recognized over a weighted-average period of 1.59 years.

On August 11, 2017 with the issuance of the 2017 convertible notes (Note 6), the Company issued warrants to purchase 500,000 shares of Series B redeemable convertible preferred stock at an exercise price of $0.01 per share, including warrants issued to related parties to purchase an aggregate of 400,000 shares of Series B redeemable convertible preferred stock.

Upon the conversion of the Series B redeemable convertible preferred stock into shares of common stock, the outstanding warrants would convert into warrants to purchase 500,000 shares of common stock at an exercise price of $0.01 per share. The outstanding warrants terminate at the earlier of August 11, 2022 and a change of control unless exercised. These warrants have a net exercise provision under which their holders may, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net number of shares based on the fair market value of the Company’s stock at the time of exercise of the warrants after deduction of the aggregate exercise price. These warrants contain provisions for adjustment of the exercise price and number of shares issuable upon the exercise of warrants in the event of certain stock dividends, stock splits, reorganizations, reclassifications and consolidations.

The estimated fair value of the redeemable convertible preferred stock warrants on the date of issuance of $1.0 million was recorded as a debt discount. The redeemable convertible preferred stock warrant liability had a fair value of $5.0 million as of September 30, 2018 and $2.3 million as of December 31, 2017. The change in fair value was recorded in the condensed consolidated statements of operations and comprehensive loss.

As of September 30, 2018, all redeemable convertible preferred stock warrants remained outstanding. Upon the closing of the IPO, 500,000 redeemable convertible preferred stock warrants automatically converted into common stock warrants and 100,000 of such warrants were exercised immediately following the closing of the IPO.

The redemption features of the 2017 convertible notes met the requirements for separate accounting and were accounted for as a single, compound derivative instrument. The 2017 derivative instrument is recorded at fair value, which was immaterial as of the issuance date, December 31, 2017 and September 30, 2018, due to the probability of occurrence of the underlying events being remote.

The redemption features of the 2018 convertible notes met the requirements for separate accounting and are accounted for as a single, compound derivative instrument. The 2018 derivative instrument was recorded at fair value, which was $6.6 million as of the issuance date and $8.5 million as of September 30, 2018.

The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders which excludes shares which are legally outstanding, but subject to repurchase by the Company (in thousands, except share and per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Numerator:
Net loss attributable to common stockholders	$	(10,452	)	$	(4,583	)	$	(26,781	)	$	(16,366	)
Denominator:
Weighted-average shares outstanding		7,980,457			7,933,130			7,954,583			7,931,606
Less: weighted-average unvested restricted shares and shares subject to repurchase		(128,897	)		(383,419	)		(189,695	)		(452,083	)
Weighted-average shares outstanding used in computing net loss per share attributable to common stockholders, basic and diluted		7,851,560			7,549,711			7,764,888			7,479,523
Net loss per share attributable to common stockholders, basic and diluted	$	(1.33	)	$	(0.61	)	$	(3.45	)	$	(2.19	)

The following potentially dilutive securities, presented on an as-converted to common stock basis, were excluded from the computation of diluted net loss per share attributable to common stockholders for the period presented because including them would have been antidilutive:

Delaware	27-0476525
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2631 Hanover Street Palo Alto, CA	94304
(Address of principal executive offices)	(Zip Code)

		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations and Comprehensive Loss	2
	Condensed Consolidated Statements of Cash Flows	3
	Notes to Unaudited Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25
PART II.	OTHER INFORMATION	26
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3.	Defaults Upon Senior Securities	62
Item 4.	Mine Safety Disclosures	62
Item 5.	Other Information	62
Item 6.	Exhibits	63
Signatures		64

	September 30, 2018		December 31, 2017
Accrued salaries and benefits	$	1,068	$	1,129
Accrued legal fees		858		35
Accrued research and development		730		4,293
Accrued professional fees		704		19
Accrued other liabilities		299		326
Total accrued and other current liabilities	$	3,659	$	5,802

As of September 30, 2018:	Operating Lease
Remaining Fiscal 2018	$	138
2019		564
2020		581
2021		598
2022		616
Thereafter		526
Total payments	$	3,023

	Number of Shares Underlying Outstanding RSAs		Weighted Average Grant Date Fair Value
Unvested, December 31, 2017		291,633	$	0.45
Granted		27,500	$	5.38
Vested		210,959	$	1.03
Unvested, September 30, 2018		108,174	$	0.57

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☐

Emerging growth company	☒

	Redeemable Convertible Preferred Stock Warrant Liability		2018 Derivative Instrument Liability
Fair value as of December 31, 2017	$	2,300	$	—
Issuance of financial instruments		—		6,603
Change in fair value included in other income (expense), net		2,700		1,914
Fair value as of September 30, 2018	$	5,000	$	8,517

	As of September 30,
	2018		2017
Redeemable convertible preferred stock		12,385,154		12,385,154
2017 convertible notes (1)		2,689,744		2,000,000
2018 convertible notes (2)		4,289,955		—
Series B redeemable convertible preferred stock warrants		500,000		500,000
Options to purchase common stock		3,796,312		1,229,212
Unvested restricted stock awards		108,174		356,062
Unvested early exercised common stock