8. Redeemable Convertible Preferred Stock

In November 2015, upon the closing of the Company’s IPO, all issued and outstanding redeemable convertible preferred stock was automatically converted into 17,647,054 shares of common stock, see Note 2.

The Company has newly authorized preferred stock amounting to 5,000,000 and 0 shares as of December 31, 2015 and 2014, respectively. The newly authorized preferred stock was classified under stockholders’ equity (deficit) at December 31, 2015.

The Company’s redeemable convertible preferred stock (“Preferred Stock”) has been classified as temporary equity on the accompanying balance sheets instead of in stockholders’ deficit in accordance with authoritative guidance for the classification and measurement of redeemable securities as the redeemable convertible preferred stock is redeemable at the option of the holder after the redemption date, February 2021.

Series A Preferred Stock

45,000,000 shares of Series A Preferred Stock were issued during 2014 and 2015.These shares were issued at various closings in 2014 and 2015 for $1.00 per share. The shares were issued in exchange for cash proceeds of $42,039,000, net of issuance costs of $32,000, and the exchange of outstanding redeemable Convertible Notes, including accrued interest, of approximately $2,929,000.

Tranche Rights Issued with Series A Preferred Stock

Included in the terms of the January 2014 Series A Preferred Stock Purchase Agreement were certain rights (“Tranche Rights”) granted to the investors of Series A Preferred Stock purchased in January 2014, including the holders of the redeemable Convertible Notes who exchanged the redeemable Convertible Notes. The Tranche Rights obligated the investors in Series A Preferred Stock to purchase and the Company to sell an additional 18,500,000 shares of Series A Preferred Stock at $1.00 per share contingent upon successful near term in‑licensing and progress on initial experiments and research and development planning (“Tranche Right I”). In addition, the investors are obligated to purchase and the Company is obligated to sell an additional 20,000,000 shares of Series A Preferred Stock upon the development of project engine and achievement of certain clinical milestones (“Tranche Right II”). In addition, the Tranche Rights allowed the investors the ability to purchase the additional shares at their option at any time. The Tranche Rights were transferrable by the investors, subject to approval by the Board.

The Company has concluded the Tranche Rights meet the definition of a freestanding financial instrument, as the Tranche Rights are legally detachable and separately exercisable from the Series A Preferred Stock. Therefore, the Company has allocated the proceeds between the Tranche Rights and the Series A Preferred Stock. As the Series A Preferred Stock is redeemable at the holder’s option, the Tranche Rights are classified as an asset or liability and are initially recorded at fair value. The Tranche Rights are measured at fair value at each reporting period. Since the Tranche Rights are subject to fair value accounting, the Company allocated the proceeds to the Tranche Rights based on the fair value at the date of issuance with the remaining proceeds being allocated to the Series A Preferred Stock. The estimated fair value of the Tranche Rights was determined using a probability‑weighted present value model that considers the probability of closing a tranche, the estimated future value of Series A Preferred Stock each closing, and the investment required at each closing. Future values are converted to present value using a discount rate appropriate for probability‑adjusted cash flows.

The following table summarizes the initial value of the Tranche Rights included in the Series A Preferred Stock Purchase Agreement (in thousands):


		Fair Value of
		Tranche Right
		Asset (Liability)
	(in thousands)
Tranche Right I		$	1,495
Tranche Right II			(4,095)
Total value of Tranche Rights		$	(2,600)

Tranche Right I was initially recorded as an asset of $1,495,000 as the purchase price of the additional shares was greater than the estimated value of the Series A Preferred Stock at the expected settlement date. The Company issued 18,500,000 additional shares under Tranche Right I, in three separate closings during the year ended December 31, 2014 with total proceeds of $18,491,000, net of issuance costs. Prior to each closing, any change in the value of Tranche Right I was recorded as other financing expense. The fair value of the portion of the Tranche Right I settled at each closing was reclassified to Series A Preferred Stock. The Company recognized income of $261,000 related to the mark to market of Tranche Right I during the year ended December 31, 2014, which is included in other financing expense.

Tranche Right II was initially recorded as a liability of $4,095,000 as the purchase price of the additional shares was less than the estimated price of the Series A Preferred Stock at the expected settlement date. The Company recognized expense of $2,210,000 related to the mark to market of Tranche Right II during the year ended December 31, 2014, which is included in other financing expense.

In February 2015, Tranche Right II was settled when the Company closed the final issuance of Series A Preferred Stock. The Company recognized expense of $9,750,000 related to the mark to market of Tranche Right II during the period ended December 31, 2015, which is included in other financing expense. The fair value of the Tranche Right II settled at closing was reclassified to Series A Preferred Stock. The initial carrying amount of the Series A Preferred Stock issued upon the closing of Tranche Right II amounted to approximately $36,054,000 which exceeds the redemption value, therefore the carrying value is not being subsequently adjusted. However, the Company has reflected accrued dividends of approximately $1,245,000 related to this issuance in the net loss attributable to common shareholders for the year ended December 31, 2015.

Series B Preferred Stock

30,000,001 shares of Series B Preferred Stock were issued during 2015. These shares were issued for $3.00 per share. This issuance resulted in cash proceeds of $89,780,000, net of issuance costs of $220,000. Additionally, a discount of $5,000,000 was recorded against the proceeds as the amount paid by Genzyme was in excess of fair value of the Series B Preferred Stock at issuance.

Preferred Stock

The rights, preferences, and privileges of the Preferred Stock are listed below:

Conversion

Shares of Preferred Stock are convertible at any time at the option of the holder into such number of shares as is determined by dividing the original issuance price by the conversion price in effect at the time. Immediately prior to the IPO, the conversion price was $4.25 for Series A Preferred Stock and $12.75 for Series B Preferred Stock, subject to adjustments to reflect the issuance of Common Stock, options, warrants, or other rights to subscribe for or to purchase Common Stock for a consideration per share, less than the conversion price then in effect and subsequent stock dividends and stock splits. In addition any reorganization, recapitalization, reclassification, consolidation or merger in which common stock is exchanged for securities, cash or other property.

All outstanding shares of Preferred Stock are automatically converted upon the completion of either an IPO resulting in gross proceeds to the Company of at least $50.0 million or the vote or written consent of 67% of the then outstanding shares of preferred stock.

Dividends

Holders of Preferred Stock are entitled to receive, before any cash is paid out or set aside for any Common Stock, cash dividends at a rate of 8% of the original purchase price per share annually (the “Accruing Dividends”). The dividends accrue cumulatively on a daily basis and are payable only when, and if, declared by the Board of Directors or upon liquidation or redemption.

In addition, the holders of Preferred Stock are entitled to additional dividends based on dividends declared to common stockholders, thereby giving the preferred stockholders the right to participate in undistributed earnings of the Company above the stated per share dividend rate. The preferred stockholders do not have a contractual obligation to share in the losses of the Company.

Redemption

The Preferred Stock is redeemable at the option of the holder after the redemption date of February 2021. The redemption value of the Preferred Stock is equal to $3.00 per share for Series B Preferred Stock and $1.00 per share for Series A Preferred Stock plus any accrued but unpaid dividends. Accordingly, the Preferred Stock is being accreted to redemption value through its redemption date, including accruals for cumulative dividend rights. If the initial carrying value exceeds the redemption value the carrying value is not adjusted.

Liquidation Preference

Holders of Series B Preferred Stock and Series A Preferred Stock have preference to the assets of the Company in the event of any voluntary or involuntary liquidation, dissolution or winding‑up of the Company, equal to $3.00 per share for Series B Preferred Stock and $1.00 per share for Series A Preferred Stock, plus any accrued but unpaid dividends, whether or not declared, plus any dividends declared but unpaid thereon, on a pari passu basis. After the payment of the preference amounts to the holders of Series B Preferred Stock and Series A Preferred Stock, the remaining assets of the Company are to be distributed among the holders of Series A Preferred Stock and holders of Common Stock on a pro rata basis. However, if the aggregate amount which the holders of Series A Preferred Stock would be entitled to receive exceeds $2.50 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination, reclassification or other similar event) (the “Maximum Participant Amount”), each holder of Series A Preferred Stock will receive the greater of the Maximum Participant Amount or the amount such holder would have received if all shares of Series A Preferred Stock had been converted into Common Stock immediately prior to such liquidation.

Voting Rights

Holders of Series A Preferred Stock and Series B Preferred Stock are entitled to vote as a single class with the holders of Common Stock on all matters submitted for vote to the Stockholders of the Company. The holders of Preferred Stock are entitled to one vote for each equivalent common share on an as‑converted basis. In addition, the holders of Series A Preferred Stock are entitled to elect two (2) directors. The remaining directors shall be elected by the holders of Common Stock voting together with the holders of the Series B Preferred Stock as one class on an as‑converted basis.

The holders of Series A Preferred Stock and Series B Preferred Stock have certain protective rights as defined. These protective rights require the Required Vote before action can be taken to (i) increase or decrease the number of shares of Series A Preferred Stock or Series B Preferred Stock that the Company has authority to issue, (ii) change the par value of the Series A Preferred Stock or Series B Preferred Stock, (iii) amend the Certificate of Incorporation in any way that adversely affects the holders of the Series A Preferred Stock or Series B Preferred Stock.