8. Redeemable Convertible Preferred Stock

Redeemable Convertible Preferred Stock

In May, June and July 2018, the Company raised an aggregate total of $85.4 million in funding through the sale and issuance of 319,305,718 shares of Series E redeemable convertible preferred stock, at $0.2674 per share. The Series E redeemable convertible preferred stock per share price was less than the conversion price per share in each of the Company’s prior redeemable convertible preferred stock financings, and therefore, each prior conversion price was lowered by applying a broad-based weighted average adjustment. With certain senior rights, preferences and privileges provided for the Series E redeemable convertible preferred stock, all prior series (Series A through Series D-2) of issued redeemable convertible preferred stock will be hereafter referred to collectively as the “Junior Preferred.”

Redeemable convertible preferred stock, $0.001 par value, as of September 30, 2018 consisted of:

 

 

Redeemable convertible preferred stock, $0.001 par value, as of December 31, 2017 consisted of:

 

 

The significant rights, preferences and privileges of the redeemable convertible preferred stock are as follows:

Redemption

At the election of the holders of a majority of the then-outstanding shares of preferred stock, voting together as a single class on an as-converted to common stock basis, the Company will redeem all outstanding shares of preferred stock in three equal annual installments commencing May 24, 2023, by paying in cash an amount per share equal to the original issuance prices of $0.59 per share of Series A redeemable convertible preferred stock, $0.8822 per share of Series B redeemable convertible preferred stock, $0.4797 per share of Series C redeemable convertible preferred stock, $0.5996 per share of Series C-2 redeemable convertible preferred stock, $0.5996 per share of Series D redeemable convertible preferred stock, $0.6596 per share of Series D-2 redeemable convertible preferred stock, and $0.2674 per share of Series E redeemable convertible preferred stock, plus 8% of the applicable original issuance prices per annum calculated from the original issuance date of each share of preferred stock. If funds legally available for redemption of the preferred stock are insufficient to pay such holders the full redemption prices, the Company will effect such redemption first to the holders of Series E redeemable convertible preferred stock, until the related redemption price has been paid in full, and second to the Junior Preferred holders, pro rata among such holders, based on a formula.

Additionally, all shares of preferred stock are redeemable in the event of a change in control or sale of substantially all of the assets of the Company. As certain redemption events are outside the control of the Company, all preferred stock amounts have been presented outside of stockholders’ deficit.

The carrying value of the redeemable convertible preferred stock has not been accreted up to its redemption value as no redemption events are considered probable as of September 30, 2018.

Dividends

The holders of preferred stock are entitled to receive, when and as declared by the Board of Directors, dividends at the per annum rate of $0.0472 per share of Series A redeemable convertible preferred stock, $0.07056 per share of Series B redeemable convertible preferred stock, $0.03838 per share of Series C redeemable convertible preferred stock, $0.048 per share of Series C-2 redeemable convertible preferred stock, $0.048 per share of Series D redeemable convertible preferred stock, $0.0528 per share of Series D-2 redeemable convertible preferred stock, and $0.0214 per share of Series E redeemable convertible preferred stock, prior and in preference to any declaration or payment of a dividend to the common stockholders. Additionally, the holders of Series E redeemable convertible preferred stock are entitled to receive dividends prior and in preference to Junior Preferred holders and holders of common stock of the Company. Payment of any dividends to the Junior Preferred holders shall be on a pro rata, pari passu basis in proportion to the dividend rates set forth above for each series of Junior Preferred stock. Such dividends are not cumulative, and no right to such dividends shall accrue to holders of the preferred stock unless declared by the Board of Directors. Following payment of these dividends to the preferred stockholders, any additional dividends will be payable to the holders of the Company’s common and preferred stock on an as-if-converted-to-common-stock basis. No dividends have been declared to date.

Liquidation

In the event of any liquidation, dissolution, or winding up of the Company, either voluntary or involuntary, the holders of Series E redeemable convertible preferred stock are entitled to receive any distribution of assets or surplus funds in an amount equal to the original issuance price of the Series E redeemable convertible preferred stock (as adjusted for stock splits, stock dividends or distributions, recapitalizations, and similar events) and all declared but unpaid dividends, if any, prior and in preference to Junior Preferred holders and holders of common stock of the Company. Junior Preferred holders shall be entitled to receive pro rata, prior and in preference to any distribution to the holders of the common stock, an amount equal to the original issuance prices of each series (in each case, as adjusted for stock splits, stock dividends or distributions, recapitalizations, and similar events) and all declared but unpaid dividends, if any.

After giving effect to the liquidation preferences noted above, all of the remaining assets of the Company shall be distributed to the holders of preferred stock and common stock pro rata based on the number of shares of common stock held by each such holder, treating, for this purpose, all such securities as if they had been converted to common stock immediately prior to the liquidation event. However, if the aggregate amount that the holders of preferred stock are entitled to receive exceeds two times the applicable original issuance prices per share for such series of preferred stock plus any dividends declared but unpaid thereon (the “Maximum Participation Amount”), each holder of preferred stock shall be entitled to receive upon such liquidation the greater of (i) the Maximum Participation Amount and (ii) the amount such holder would have received if all shares of such series of preferred stock had been converted into common stock immediately prior to the liquidation event.

Unless the holders of a majority of the then-outstanding shares of preferred stock, voting together as a single class on an as-converted to common stock basis, elect otherwise, any of the following events shall be treated as a liquidation: (i) any consolidation, merger, acquisition, or any other corporate reorganization in which the stockholders of the Company immediately prior to such event own less than 50% of the voting power of the surviving or successor entity or its parent immediately after such event; (ii) any transaction or series of related transactions in which in excess of 50% of the Company’s voting power is transferred; or (iii) any sale, lease, transfer, exclusive license, or other disposition of all or substantially all of the assets of the Company.

Voting

Each share of redeemable convertible preferred stock is entitled to voting rights equivalent to the number of shares of common stock into which each share can be converted.

The holders of Series E redeemable convertible preferred stock are entitled to elect one director of the Company, the holders of Series C redeemable convertible preferred stock are entitled to elect two directors of the Company, and the holders of Series A redeemable convertible preferred stock and Series B redeemable convertible preferred stock are each entitled to elect one director of the Company. Additionally, holders of common stock are entitled to elect one director of the Company, and all stockholders can elect the balance of the total number of directors of the Company.

Conversion

The conversion price as of September 30, 2018 of each series of redeemable convertible preferred stock listed below is subject to adjustment upon certain dilutive events, including in the event the Company issues certain additional equity securities at a purchase price less than the current conversion price.

Each share of Series E redeemable convertible preferred stock shall be convertible, at the option of the holder thereof, into such number of fully paid and nonassessable shares of common stock as is determined by dividing $0.2674 by the Series E redeemable convertible preferred stock conversion price in effect at the time of conversion. The Series E redeemable convertible preferred stock conversion price as of September 30, 2018 is $0.2674 per share of common stock. The Series E redeemable convertible preferred stock conversion price is subject to adjustment upon certain dilutive events. As of October 1, 2018, each share of Series E redeemable convertible preferred stock did convert into common stock on a 1-for-0.0275 basis.

Each share of Series D-2 redeemable convertible preferred stock shall be convertible, at the option of the holder thereof, into such number of fully paid and nonassessable shares of common stock as is determined by dividing $0.6596 by the Series D-2 redeemable convertible preferred stock conversion price in effect at the time of conversion. The Series D-2 redeemable convertible preferred stock conversion price as of September 30, 2018 is $0.4336 per share of common stock. The Series D-2 redeemable convertible preferred stock conversion price is subject to adjustment upon certain dilutive events. As of October 1, 2018, each share of Series D-2 redeemable convertible preferred stock did convert into common stock on a 1-for-0.0419 basis.

Each share of Series D redeemable convertible preferred stock shall be convertible, at the option of the holder thereof, into such number of fully paid and nonassessable shares of common stock as is determined by dividing $0.5996 by the Series D redeemable convertible preferred stock conversion price in effect at the time of conversion. The Series D redeemable convertible preferred stock conversion price as of September 30, 2018 is $0.4081 per share of common stock. The Series D redeemable convertible preferred stock conversion price is subject to adjustment upon certain dilutive events. As of October 1, 2018, each share of Series D redeemable convertible preferred stock did convert into common stock on a 1-for-0.0405 basis.

Each share of Series C-2 redeemable convertible preferred stock shall be convertible, at the option of the holder thereof, into such number of fully paid and nonassessable shares of common stock as is determined by dividing $0.5996 by the Series D redeemable convertible preferred stock conversion price in effect at the time of conversion. The Series C-2 redeemable convertible preferred stock conversion price as of September 30, 2018 is $0.4081 per share of common stock. The Series C-2 redeemable convertible preferred stock conversion price is subject to adjustment upon certain dilutive events. As of October 1, 2018, each share of Series C-2 redeemable convertible preferred stock did convert into common stock on a 1-for-0.0405 basis.

Each share of Series C redeemable convertible preferred stock shall be convertible, at the option of the holder thereof, into such number of fully paid and nonassessable shares of common stock as is determined by dividing $0.4797 by the Series C redeemable convertible preferred stock conversion price in effect at the time of conversion. The Series C redeemable convertible preferred stock conversion price as of September 30, 2018 is $0.3573 per share of common stock. The Series C redeemable convertible preferred stock conversion price is subject to adjustment upon certain dilutive events. As of October 1, 2018, each share of Series C redeemable convertible preferred stock did convert into common stock on a 1-for-0.0370 basis.

Each share of Series B redeemable convertible preferred stock shall be convertible, at the option of the holder thereof, into such number of fully paid and nonassessable shares of common stock as is determined by dividing $0.8822 by the Series B redeemable convertible preferred stock conversion price in effect at the time of conversion. The Series B redeemable convertible preferred stock conversion price as of September 30, 2018 is $0.4203 per share of common stock. The Series B redeemable convertible preferred stock conversion price is subject to adjustment upon certain dilutive events. As of October 1, 2018, each share of Series B redeemable convertible preferred stock did convert into common stock on a 1-for-0.0578 basis.

Each share of Series A redeemable convertible preferred stock shall be convertible, at the option of the holder thereof, into such number of fully paid and nonassessable shares of common stock as is determined by dividing $0.59 by the Series A redeemable convertible preferred stock conversion price in effect at the time of conversion. The Series A redeemable convertible preferred stock conversion price as of September 30, 2018 is $0.3756 per share of common stock. The Series A redeemable convertible preferred stock conversion price is subject to adjustment upon certain dilutive events. As of October 1, 2018, each share of Series A redeemable convertible preferred stock did convert into common stock on a 1-for-0.0433 basis.

Warrants

During the period from 2008 to 2012, the Company issued various warrants for the purchase of redeemable convertible preferred stock in connection with debt financings and the issuance of redeemable convertible preferred stock.

In August 2017, the Company issued warrants to Oxford and SVB to purchase an aggregate of 682,230 shares of Series D-2 redeemable convertible preferred stock at an exercise price of $0.6596 per share in connection with the issuance of August 2017 Loan (see Note 6). If there is a subsequent convertible preferred stock or other senior equity securities financing with a per share price less than the Series D-2 redeemable convertible preferred per share price, then the warrant shall automatically convert to a warrant to purchase such class of shares, based on the per share price of such equity. Given that the price per share of the Series E redeemable convertible preferred stock described above was less than the price per share of the Series D-2 redeemable convertible preferred stock, the 2017 Warrant converted into a warrant to purchase a total of 1,682,871 shares of Series E redeemable convertible preferred stock at an exercise price of $0.2674 per share. The warrant is exercisable from the original date of issuance and has a 10-year term.

As of September 30, 2018 and December 31, 2017, the warrants outstanding and exercisable were as follows:

 

 

The warrants were valued using the Option Pricing Method and were estimated using the following assumptions:

 

 

Common Stock

Holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders of the Company.

As of September 30, 2018, the Company had reserved common stock, on an if-converted basis, for issuance as follows: