6. Convertible Preferred Stock

On December 24, 2013, the Company raised $5.1 million through the issuance of 971,928 Series A convertible preferred shares at $5.25 per share. The financing arrangement included a contract for the forward sale of an additional 837,594 Series A convertible preferred shares at a price of $5.25 per share, contingent upon certain milestones being met. This freestanding financial instrument was classified as a liability because the underlying preferred share were contingently redeemable. The fair value of the forward sale contract at issuance was $440,000. The fair value of the forward sale contract at settlement on July 15, 2014 was $1.9 million.

The change in fair value of the derivative liability was recorded as Other Income (Expense) in the consolidated statements of operations. For the year ended December 31, 2014, the Company recognized $1.4 million in expense due to changes in fair value of the derivative liability. The forward sale contract was settled on July 15, 2014 when the Company issued and received payment for additional Series A convertible preferred shares, and the fair value of the financial instrument on that date was reclassified to Series A convertible preferred shares.

On July 15, 2014, the Company raised $5.6 million through the issuance of 1,067,592 Series A convertible preferred shares at $5.25 per share (including 837,594 convertible preferred shares related to the forward sale contract). The Series A convertible preferred shares issued on July 15, 2014 were recorded at their fair value of $7.56 per share (see Note 11). The Company recognized $531,000 in expense for the 229,998 Series A convertible preferred shares that were not covered by the forward sale contract and were issued to an investor providing sponsored research and employees of the company at a discount. The expense was primarily recorded as research and development expense because the counterparties were engaged in such activities on behalf of the Company (see Note 14).

On March 10, 2015, the Company converted from a Delaware limited liability company into a Delaware corporation and changed the Company’s name from Aeglea BioTherapeutics Holdings, LLC to Aeglea BioTherapeutics, Inc. In connection with the LLC Conversion, all of the Company’s outstanding common shares and convertible preferred shares were converted into shares of common stock and convertible preferred stock. Further, the outstanding Common B share awards were converted into a combination of vested and unvested restricted common stock and vested and unvested stock options with no changes to the vesting provisions (see Note 9). Upon the LLC Conversion, each then-outstanding Series A convertible preferred share was converted into one share of Series A convertible preferred stock, par value $0.0001 per share. The Company determined that the LLC Conversion resulted in a deemed dividend from stockholders of common stock to stockholders of Series A convertible preferred stock of $0.11 per share of Series A convertible preferred stock. The Company recorded $228,000 as an increase in the carrying amount of the Series A convertible preferred stock and as a reduction of additional paid-in capital. Such dividend was determined by comparing the fair value of the Series A convertible preferred shares immediately prior to the conversion to the fair value of the Series A convertible preferred stock issued in the conversion.

Also on March 10, 2015, the Company issued 4,929,948 shares of Series B convertible preferred stock, par value $0.0001 per share, at an issuance price equal to $8.93 per share and received gross proceeds of $44.0 million. In connection with the financing, the Company incurred total offering costs of $321,000.

On April 12, 2016, immediately prior to the closing of the IPO, all of the Company’s outstanding convertible preferred stock was automatically converted into an aggregate total of 7,172,496 shares of common stock (see Note 1). As of December 31, 2016, there were no shares of preferred stock outstanding.

Convertible preferred stock consisted of the following as of December 31, 2015 (in thousands, except share amounts):

	December 31, 2015
	Preferred Stock Authorized		Preferred Stock Issued and Outstanding		Liquidation Preference		Carrying Value		Common Stock Issuable Upon Conversion
Series A convertible preferred stock		2,172,524		2,172,520	$	11,406	$	13,573		2,172,520
Series B convertible preferred stock		5,008,210		4,999,976	$	44,625	$	44,738		4,999,976

Prior to the closing of the IPO, the holders of convertible preferred stock had various rights, privileges, and preferences as follows:

Conversion

Each share of convertible preferred stock was convertible at any time and at the option of the holder into that number of fully-paid and non-assessable common stock determined by dividing the original issue price of the convertible preferred stock by the conversion price in effect on the date of conversion (a 1:1 ratio at the time of the conversion).

The convertible preferred stock was automatically convertible into shares of common stock at the then-current conversion rate upon (i) a vote of 62% of the outstanding Series B convertible preferred stock, or (ii) the closing of a firm commitment underwritten public offering that met aggregate gross proceed and pricing terms.

The respective applicable conversion price was subject to adjustment upon any future stock splits or stock combinations, reclassifications or exchanges of similar stock, upon a reorganization, merger or consolidation of the Company, upon the issuance or sale by the Company of common stock for consideration less than the applicable conversion price, or upon the issuance of any share purchase rights that are exercisable at a strike price less than the applicable conversion price.

Dividends

Each share of convertible preferred stock was entitled to non-cumulative dividends of 8% of the original issue price per share, per annum, if, as and when declared by the Board of Directors. Dividends to Series A and Series B stockholders were to be paid in advance of any distributions to common stockholders. No dividends were declared prior to the conversion of the shares into common stock upon the closing of the IPO.

Voting

Each share of convertible preferred stock had voting rights equal to an equivalent number of shares of common stock into which it was convertible and voted together as one class along with the common stock. The holders of convertible preferred stock had the right to vote on all significant matters as to which holders of common stock had the right to vote.

For as long as at least 342,857 shares of any series of convertible preferred stock (subject to adjustment in the event of a recapitalization affecting the convertible preferred stock) remained outstanding, the Company had to obtain the affirmative vote or written consent by at least 62% of the then-outstanding Series B convertible preferred stock along with Board consent to consummate significant transactions including, but not limited to, the authorization and issuance of additional shares or share classes, amending the certificate of incorporation, and the approval of a deemed liquidation event.

Liquidation

In the event of any liquidation, dissolution, or winding up of the Company, either voluntary or involuntary, the holders of the Series A and Series B convertible preferred stock were entitled to be paid out of the assets of the Company an amount per share equal to $5.25 and $8.93 respectively, prior to and in preference to any distribution to the holders of common stock.

If assets were insufficient to make payments in full to all holders of Series A and Series B convertible preferred stock, then the assets or consideration would be distributed ratably among the convertible preferred stockholders. Prior to the LLC Conversion, distributions were determined based upon the distribution preferences in the LLC agreement discussed further below. Subsequent to the LLC Conversion, remaining assets would be distributed among the holders of convertible preferred stock and holders of common stock on pro rata basis based on the number of shares held, treating all shares of preferred stock as if they had been converted to common stock pursuant to the then-applicable conversion terms.

LLC Distributions

Prior to the LLC Conversion, the holders of the Series A convertible preferred shares were entitled to receive distributions out of any assets legally available, prior and in preference to any distributions to Common A-1, Common A, and Common B shares, up to the preference amount that equals the original issue price of $5.25 per share adjusted for share splits, share distributions, combinations and reclassifications.

After the payment of the preference amount to holders of Series A convertible preferred shares, any remaining amount would be paid to the holders of the Series A convertible preferred shares and Common A-1 shares on a pro rata basis; until the Company had distributed an aggregate of $1.0 million to the Common A-1 shares. Any remaining amount would be paid to the holders of Series A convertible preferred shares and Common A shares on a pro rata basis; until the Company had distributed to Common A shares an aggregate amount equal to the amount Common A-1 shares received.

Thereafter, if assets remained in the Company, they would be paid to the holders of the Series A convertible preferred shares, Common A-1 shares, Common A shares and Common B shares on a per share pro rata basis; provided that with respect to all Common B shares having a threshold amount, no distribution would be paid with respect to such Common shares until the aggregate amount of all distributions exceeded the threshold amount. All Common B Shares were issued with an applicable Threshold Amount set by the Board of Directors to qualify the shares as “profits interest” within the meaning of Revenue Procedure 93-27 as clarified by Revenue Procedure 2001-43.

To the extent that the amounts available for distribution were insufficient to pay the full amounts to which holders of the shares would otherwise be entitled, the holders of such shares entitled to receive distributions should share ratably in any such distribution in proportion to the respective amounts that would otherwise be payable.

No distributions were declared or paid by the Company prior to the LLC Conversion.

Redemption

The Series A and Series B convertible preferred stock were not mandatorily redeemable as they did not have a set redemption date or date after which the stock could be redeemed by the holders. However, the stock was contingently redeemable upon a deemed liquidation event and the trigger of certain anti-dilution provisions upon conversion to common stock without an adequate number of authorized common stock.