Kodiak Sciences Inc. Notes to Consolidated Financial Statements (in thousands, except share and per share data) 117 6. Convertible Notes 2017 Convertible Notes 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 12). 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 13). The discount on 2017 convertible notes was amortized 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 year ended December 31, 2018 was $2.8 million, consisting of $2.7 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 year ended December 31, 2017 was $1.1 million, consisting of $0.8 million of contractual interest expense and $0.3 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. The Company recorded the carrying value of the debt including principal and accrued interest of $13.5 million, net of the unamortized debt discount of $0.7 million, into its capital accounts on the consolidated balance sheets on the date of conversion upon the closing of the IPO. 2018 Convertible Notes 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 13). The discount on 2018 convertible notes for the first and second tranche was amortized 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 year ended December 31, 2018 was $2.6 million, consisting of $1.4 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.