apls-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-38276

 

APELLIS PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

27–1537290

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

6400 Westwind Way, Suite A

Crestwood, KY

40014

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (502) 241-4114

 

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.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Small reporting company

 

 

 

 

 

 

 

 

Emerging growth Company

 

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 5, 2018, the registrant had 56,242,571 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 


Table of Contents

 

 

 

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 Statement of Changes in Stockholders’ Equity

3

 

Condensed Consolidated Statements of Cash Flows

4

 

Notes to Unaudited Condensed Consolidated Financial Statements

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

10

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

19

Item 4.

Controls and Procedures

19

PART II.

OTHER INFORMATION

21

Item 1.

Legal Proceedings

21

Item 1A.

Risk Factors

21

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58

Item 6.

Exhibits

59

Signatures

 

60

 

i


 

PART I—FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited).

APELLIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

December 31,

 

 

September 30,

 

 

 

2017

 

 

2018

 

 

 

 

 

 

 

(Unaudited)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

175,643,529

 

 

$

220,640,818

 

Refundable research and development credit

 

 

1,297,361

 

 

 

1,364,259

 

Prepaid assets

 

 

5,059,593

 

 

 

16,846,183

 

Other current assets

 

 

14,823

 

 

 

81,532

 

Total current assets

 

 

182,015,306

 

 

 

238,932,792

 

Other assets

 

 

116,150

 

 

 

212,979

 

Total assets

 

$

182,131,456

 

 

$

239,145,771

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,663,253

 

 

$

5,468,800

 

Accrued expenses

 

 

2,890,705

 

 

 

10,565,640

 

Total current liabilities

 

 

6,553,958

 

 

 

16,034,440

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Term loan facility

 

 

19,806,944

 

 

 

20,270,032

 

Promissory note

 

 

6,583,402

 

 

 

6,636,449

 

Common stock warrant liability

 

 

244,292

 

 

 

250,000

 

Total liabilities

 

 

33,188,596

 

 

 

43,190,921

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 10,000,000 shares authorized, and zero

   shares issued and outstanding at December 31, 2017 and September 30, 2018

 

 

 

 

 

 

Common stock, $0.0001 par value; 200,000,000 shares authorized

   at December 31, 2017 and September 30, 2018 and 50,334,152 shares

   issued and outstanding at December 31, 2017 and 56,242,571

   shares issued and outstanding at September 30, 2018

 

 

5,033

 

 

 

5,624

 

Additional paid-in capital

 

 

298,201,480

 

 

 

435,915,657

 

Accumulated other comprehensive income

 

 

 

 

 

339,942

 

Accumulated deficit

 

 

(149,263,653

)

 

 

(240,306,373

)

Total stockholders' equity

 

 

148,942,860

 

 

 

195,954,850

 

Total liabilities and stockholders' equity

 

$

182,131,456

 

 

$

239,145,771

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

1


APELLIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

$

9,517,882

 

 

$

29,539,456

 

 

$

27,171,025

 

 

$

74,479,965

 

General and administrative

 

2,071,437

 

 

 

6,265,125

 

 

 

5,603,190

 

 

 

16,248,203

 

Operating loss

 

(11,589,319

)

 

 

(35,804,581

)

 

 

(32,774,215

)

 

 

(90,728,168

)

Unrealized foreign currency loss

 

 

 

 

(426,191

)

 

 

 

 

 

(426,191

)

Interest income (expense), net

 

16,847

 

 

 

280,891

 

 

 

32,813

 

 

 

198,214

 

Other income (expense), net

 

(801

)

 

 

(22,234

)

 

 

(8,796

)

 

 

(86,575

)

Net loss

 

(11,573,273

)

 

 

(35,972,115

)

 

 

(32,750,198

)

 

 

(91,042,720

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

 

 

339,942

 

 

 

 

 

 

339,942

 

Comprehensive loss, net of tax

$

(11,573,273

)

 

$

(35,632,173

)

 

$

(32,750,198

)

 

$

(90,702,778

)

Net loss per common share, basic and diluted

$

(1.37

)

 

$

(0.64

)

 

$

(3.88

)

 

$

(1.69

)

Weighted-average number of common shares used in net

   loss per common share, basic and diluted

 

8,442,072

 

 

 

56,201,299

 

 

 

8,432,983

 

 

 

53,770,400

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

2


 

Apellis Pharmaceuticals, Inc.

CONDENSED Consolidated Statement of CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

Other

 

 

 

 

Total

 

 

 

Outstanding

 

 

 

 

Paid-In

 

 

Comprehensive

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

Amount

 

 

Capital

 

 

Income

 

Deficit

 

 

Equity

 

Balance at January 1, 2018

 

 

50,334,152

 

 

$

5,033

 

 

$

298,201,480

 

 

 

 

 

 

 

$

(149,263,653

)

 

$

148,942,860

 

Issuance of common stock in follow-on offering, net of offering costs

 

 

5,500,000

 

 

 

550

 

 

 

131,193,480

 

 

 

 

 

 

 

 

-

 

 

 

131,194,030

 

Issuance of common stock upon exercise of stock options

 

 

408,419

 

 

 

41

 

 

 

616,058

 

 

 

 

 

 

 

 

-

 

 

 

616,099

 

Share-based compensation expense

 

 

 

 

 

 

 

 

5,904,639

 

 

 

 

 

 

 

 

-

 

 

 

5,904,639

 

Net loss

 

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

(91,042,720

)

 

 

(91,042,720

)

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

$

339,942

 

 

 

 

 

 

 

 

339,942

 

Balance at September 30, 2018

 

 

56,242,571

 

 

$

5,624

 

 

$

435,915,657

 

 

$

339,942

 

 

 

 

$

(240,306,373

)

 

$

195,954,850

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

3


 

Apellis Pharmaceuticals, Inc.

CONDENSED Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2018

 

Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(32,750,198

)

 

$

(91,042,720

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

1,254,370

 

 

 

5,904,639

 

Loss from remeasurement of fair value of warrants

 

 

 

 

 

5,708

 

Unrealized foreign currency loss

 

 

 

 

 

426,191

 

Accretion of discounts for promissory note

 

 

 

 

 

53,047

 

Accretion of discounts for term loan facility

 

 

 

 

 

463,088

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Refundable research and development credit

 

 

(895,761

)

 

 

(156,553

)

Prepaid assets

 

 

(1,737,387

)

 

 

(11,796,362

)

Other current assets

 

 

(188,477

)

 

 

(13,151

)

Other assets

 

 

(43,822

)

 

 

(96,829

)

Accounts payable

 

 

1,453,847

 

 

 

1,794,844

 

Accrued expenses

 

 

1,845,159

 

 

 

7,695,524

 

Net cash used in operating activities

 

 

(31,062,269

)

 

 

(86,762,574

)

Financing Activities

 

 

 

 

 

 

 

 

Deferred issuance costs

 

 

(570,218

)

 

 

(22,426

)

Proceeds for issuance of Series E convertible preferred stock, net of issuance costs

 

 

19,747,847

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

 

 

 

131,194,030

 

Proceeds from exercise of stock options

 

 

157,000

 

 

 

616,099

 

Net cash provided by financing activities

 

 

19,334,629

 

 

 

131,787,703

 

Effect of exchange rate changes on cash and cash equivalents

 

 

 

 

 

(27,840

)

Net (decrease) increase in cash and cash equivalents

 

 

(11,727,640

)

 

 

44,997,289

 

Cash and cash equivalents at beginning of period

 

 

24,863,488

 

 

 

175,643,529

 

Cash and cash equivalents at end of period

 

$

13,135,848

 

 

$

220,640,818

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

134,167

 

 

$

1,338,694

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

4


 

APELLIS PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017 AND 2018

1. Nature of Organization and Operations

Apellis Pharmaceuticals, Inc. (the “Company”) is a clinical-stage biopharmaceutical company focused on the development of novel therapeutic compounds to treat disease through the inhibition of the complement system, which is an integral component of the immune system, at the level of C3, the central protein in the complement cascade.

The Company was incorporated in September 2009 under the laws of the State of Delaware and has its principal office in Crestwood, Kentucky.

The Company’s operations since inception have been limited to organizing and staffing the Company, acquiring rights to product candidates, business planning, raising capital and developing its product candidates.

The Company is subject to risks common in the biotechnology industry including, but not limited to, raising additional capital, development by its competitors of new technological innovations, its ability to successfully complete preclinical and clinical development of product candidates and receive timely regulatory approval of products, market acceptance of the Company’s products, protection of proprietary technology, healthcare cost containment initiatives, and compliance with governmental regulations, including those of the U.S. Food and Drug Administration (“FDA”).

Liquidity and Financial Condition

The accompanying unaudited condensed consolidated financial statements have been prepared on the basis of the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. As of November 13, 2018, the date of issuance of these unaudited condensed consolidated financial statements, the Company believes that its cash and cash equivalents as of September 30, 2018 of $220.6 million will be sufficient to fund its operations and capital expenditures for at least twelve months. The future viability beyond that point is dependent on its ability to raise additional capital to finance its operations.

The Company is subject to risks common to other life science companies in the development stage including, but not limited to, uncertainty of product development and commercialization, lack of marketing and sales history, development by its competitors of new technological innovations, dependence on key personnel, market acceptance of products, product liability, protection of proprietary technology, ability to raise additional financing, and compliance with FDA and other government regulations. If the Company does not successfully commercialize any of its product candidates, it will be unable to generate recurring product revenue or achieve profitability. Management’s plans in order to meet its short-term and longer term operating cash flow requirements include obtaining additional funding.

There are uncertainties associated with the Company’s ability to (1) obtain additional debt or equity financing (2) enter into collaborative agreements with strategic partners, and (3) succeed in its future operations. If the Company is not able to obtain the required capital to fund its operations from any of these, or is not able to obtain such funding on terms that are favorable to the Company, it could be forced to delay, reduce or eliminate its research and development programs or future commercialization efforts and its business could be materially harmed.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Apellis Australia Pty Ltd. All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and following the requirements of the Securities and Exchange Commission (the “SEC”), for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted and, accordingly, the balance sheet as of December 31, 2017 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements. These financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of the Company’s financial information. The results of operations for the nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any other interim period or for any other future year.

5


 

The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 19, 2018.

Reverse Stock Split

On October 27, 2017, the Company effectuated a l-for-2.133 reverse stock split of its outstanding common stock, which was approved by the Company’s board of directors on October 27, 2017. The reverse stock split resulted in an adjustment to the conversion prices of its convertible preferred stock to reflect a proportional decrease in the number of shares of common stock to be issued upon conversion. The accompanying unaudited condensed consolidated financial statements and notes to the unaudited condensed financial statements give retroactive effect to the reverse stock split for all periods presented.  

Follow-on Offering

On April 23, 2018, the Company issued and sold 5,500,000 shares of its common stock at a price per share of $25.50 in a follow-on public offering.  The Company received net proceeds of $131.2 million after deducting underwriting discounts and commissions of $8.4 million and offering costs of $0.5 million.

Initial Public Offering

On November 13, 2017, the Company issued and sold 10,714,000 shares of its common stock at a price per share of $14.00 in its initial public offering (the “IPO”). The Company received net proceeds of $137.2 million after deducting underwriting discounts and commissions of $10.5 million and offering costs of $2.3 million.  In addition, on December 13, 2017, the Company issued and sold an additional 981,107 shares of its common stock at the initial public offering price of $14.00 per share pursuant to the underwriters’ partial exercise of their option to purchase additional shares of common stock, which resulted in net proceeds of approximately $12.8 million, after underwriting discounts and commissions of $1.0 million.

Automatic Conversion of Preferred Stock

On November 13, 2017, upon the closing of the Company’s IPO, all outstanding shares of the Company’s convertible preferred stock converted into 30,070,034 shares of the Company’s common stock.

Fair Value of Financial Instruments

Management believes that the carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts payable and accrued expenses, approximate the fair value due to the short-term nature of those instruments. The Company follows the fair value hierarchy within Accounting Standards Codification (“ASC”) 820, Fair Value Measurements.

Foreign Currency

Due to the growing volume of research contracts and intercompany loans that are now being exclusively denominated in local currency, effective August 1, 2018, the functional currency of the Company’s Australian subsidiary was changed from the U.S. dollar to the Australian dollar.   The impact of the change in functional currency was not material to the unaudited condensed consolidated financial statements for the three month period ended September 30, 2018, and is not expected to be material for the consolidated financial statements taken as a whole for the year ending December 31, 2018.  

As a result of the change in functional currency, the financial position and results of operations of the Company's Australian subsidiary are measured using the foreign subsidiary's local currency. Revenues and expenses of the Australian subsidiary have been translated into U.S. dollars at average exchange rates prevailing during the period from August 1, 2018 through September 30, 2018. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of stockholders’ equity.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). The standard applies one comprehensive revenue recognition model across all contracts, entities and sectors. The core principle of the new standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in

6


 

exchange for those goods or services. As the Company does not currently have revenue, the adoption of the new standard had no impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, which establishes a comprehensive new lease accounting model. The new standard: (a) clarifies the definition of a lease; (b) requires a dual approach to lease classification similar to current lease classifications; and, (c) causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. The new standard is effective for fiscal years and interim periods beginning after December 15, 2018 and requires modified retrospective application. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements, but due to its limited number of operating leases, does not expect the impact upon adoption to be material.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. These amendments expand the scope of Topic 718, Compensation - Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. The guidance is effective for public companies for fiscal years, and interim fiscal periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company is assessing ASU 2018-07 and does not expect it to have a material impact on its accounting and disclosures.

3. Convertible Preferred Stock

Series E Convertible Preferred Stock

In August 2017, the Company issued and sold 7,792,035 shares of series E convertible preferred stock at $2.571 per share for aggregate proceeds of $20,033,322, less issuance costs of $285,475.

Upon closing of the Company’s IPO on November 13, 2017, all shares of convertible preferred stock converted into shares of common stock.

4. Accrued Expenses

Accrued expenses are as follows:

 

 

 

December 31,

 

 

September 30,

 

 

 

2017

 

 

2018

 

Accrued research and development

 

$

2,463,808

 

 

$

7,855,107

 

Accrued payroll liabilities

 

 

251,491

 

 

 

2,349,845

 

Other

 

 

175,406

 

 

 

360,688

 

Total

 

$

2,890,705

 

 

$

10,565,640

 

 

5. Long term Debt

Term Loan Facility

On October 20, 2017, the Company entered into a loan and security agreement with Silicon Valley Bank (“SVB”) to provide for a $20.0 million term loan facility (the “term loan facility”). Borrowings under the term loan facility bear interest at a floating rate per annum equal to the WSJ prime rate plus 1.50%; provided, however, that in an event of default, as defined in the loan and security agreement, the interest rate applicable to borrowings under such agreement will be increased by 5.0%. Under the agreement, the Company is required to make monthly interest-only payments through November 1, 2019 and is required to make 24 equal monthly payments of principal, plus accrued interest, from November 1, 2019 through October 1, 2021, when all unpaid principal and interest becomes due and payable.

7


 

The Company may voluntarily prepay all, but not less than all, of the outstanding principal at any time prior to the maturity date, subject to a prepayment fee, which ranges from 0% to 2% of the outstanding principal. A final payment of $1.6 million is due upon the earlier to occur of the maturity of the loan, the acceleration or prepayment of all outstanding principal or the termination of the term loan facility. This amount is being accreted as additional interest expense over the term of the term loan facility.

Borrowings under the term loan facility are secured by a first priority lien on all of the Company’s assets, excluding intellectual property owned by the Company and its interest in its licenses from the Trustees of the University of Pennsylvania (“Penn”). The Company has agreed to a negative pledge on its intellectual property.   The term loan facility contains customary events of default and affirmative and negative covenants, including restrictions on the Company’s ability to pay dividends and incur additional debt, but does not contain any financial covenants.

In connection with the Company’s entry into the term loan facility, the Company issued to SVB a warrant to purchase 14,064 shares of the Company’s common stock with an exercise price per share of $5.484. The warrant has a ten-year term and includes a put option pursuant to which, in the event of an acquisition, change in control or dissolution or winding up of the Company, or the expiration of the warrant, SVB may require the Company to repurchase the warrant for a total aggregate purchase price of $250,000.

Promissory Note

On October 19, 2017, the Company issued and sold an unsecured promissory note in the principal amount of $7.0 million to Golda Darty Partners S.A. (“GDP”). The promissory note bears interest at a rate per annum of 8.0%, and is due and payable quarterly in arrears on the 19th day of each April, July, October and January beginning on January 19, 2018. The promissory note has a maturity date of October 19, 2022. The promissory note is contractually subordinated to the term loan facility with SVB.

In connection with the issuance and sale of the above promissory note, the Company issued to GDP a warrant to purchase 93,764 shares of the Company’s common stock at a price per share of $5.484, which was exercised in whole in October 2017. The Company recorded the fair value of the warrant in the aggregate amount of $430,160 as a discount to the promissory note. This amount is being accreted as additional interest expense over the term of the promissory note.

The contractual maturities of the Company’s long term debt obligations due subsequent to September 30, 2018 are as follows:

 

2018

 

$

 

2019

 

 

1,666,667

 

2020

 

 

10,000,000

 

2021

 

 

8,333,333

 

2022

 

 

7,000,000

 

 

 

$

27,000,000

 

 

6. Refundable Research and Development Credit and Income Taxes

The Company earns non-income related refundable Australian research and development credits that are settled and paid to the Company annually. The associated income from the credits are an offset to research and development expenses.

The Company’s income tax provision is computed based on the federal statutory rate and the average state statutory rates, net of the related federal benefit. For the three months ended September 30, 2018 and 2017, there were no current or deferred income tax expenses or benefits due to the Company’s net losses, research and development credits and increases in its deferred tax asset valuation allowance during those periods.

The Company’s estimate of the realizability of the deferred tax asset is dependent on estimates of projected future levels of taxable income. In analyzing future taxable income levels, the Company considered all evidence currently available, both positive and negative.  Based on this analysis, the Company has recorded a valuation allowance for all deferred tax assets as of September 30, 2018 and December 31, 2017.

Tax Act Enactment

During the fourth quarter of 2017, the Company accounted for the estimated impacts of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) including the re-measurement of the Company’s deferred tax assets and liabilities, which resulted in a total impact of $16.0 million to the gross deferred tax balance.  As there is a valuation allowance recorded for all deferred tax assets as of December 31, 2017 there was no impact to the net deferred tax assets balance. The Company was not subject to the one-time mandatory

8


 

transition tax on cumulative foreign subsidiary earnings as the Company has a net cumulative deficit in earnings and profits from foreign subsidiaries.  As of September 30, 2018, the estimated impacts of the Tax Act recorded remain provisional in nature, and the Company will continue to assess the impact that various provisions of the Tax Act will have on its business. While the amounts are provisional, given the full valuation allowance as of September 30, 2018, the Company does not anticipate an overall impact to the net deferred tax asset balance.

7. Commitments and Contingencies

The Company contracts to conduct research and development activities with remaining contract costs of approximately $1,062,000 at September 30, 2018, that will be incurred in future periods. The scope of the services under the research and development contracts can be modified and the contracts cancelled by the Company upon written notice. In some instances, the contracts may be cancelled by the third party upon written notice.

 

8. Net Loss per Share

Since the Company was in a loss position for all periods presented, basic net loss per common share is the same as diluted net loss per common share for all periods presented as the inclusion of all potential common shares outstanding would have been anti-dilutive. Shares outstanding presented below were excluded from the calculation of diluted net loss per share, prior to the use of the treasury stock method, as their effect is anti-dilutive:

 

 

For the Three Months Ended September 30,

 

For the Nine Months Ended September 30,

 

2017

 

2018

 

2017

 

2018

Convertible preferred stock

30,070,034

 

 

30,070,034

 

Common stock options

5,152,119

 

7,271,126

 

5,152,119

 

7,271,126

Common stock warrants

 

14,064

 

 

14,064

Total

35,222,153

 

7,285,190

 

35,222,153

 

7,285,190

 

9. Related Party Transaction

Effective as of May 1, 2018, the Company entered into a subscription license agreement and a services agreement with Revon Systems, Inc. (“Revon”).    Under the subscription license agreement, Revon granted the Company an exclusive license to use the Revon software platform and applications for any purpose with respect to the Company's programs in age-related macular degeneration, hemolytic diseases and complement-dependent nephropathies for an annual license fee of $175,000 and an option to obtain a perpetual, exclusive license thereafter for $350,000. Under the services agreement, Revon will provide development services with respect to the Revon software to the Company for $250,000 during the first year.

Each of Cedric Francois, the Company’s chief executive officer, Pascal Deschatelets, the Company’s chief operating officer, and Alec Machiels, a member of the board of directors, is an affiliate of Revon. The Board approved the Revon agreements after review by a subcommittee of the disinterested members of the Board and determination by the full Board that the terms of the Revon agreements were fair, reasonable and in the best interests of the Company.

 

 

 

 

9


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and related notes for the year ended December 31, 2017 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 19, 2018, which we refer to as the 2017 Annual Report on Form 10-K.

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report on Form 10-Q particularly including those risks identified in Part II—Item 1A “Risk Factors” and our other filings with the SEC.

Overview

We are a clinical-stage biopharmaceutical company focused on the development of novel therapeutic compounds to treat disease through the inhibition of the complement system, which is an integral component of the immune system, at the level of C3, the central protein in the complement cascade. We believe that this approach can result in broad inhibition of the principal pathways of the complement system and has the potential to effectively control a broad array of complement-dependent autoimmune and inflammatory diseases.

We have the most advanced clinical program targeting C3 with ongoing Phase 3 clinical trials of our lead product candidate, APL-2, in multiple indications. We believe that APL-2 has the potential to be a best-in-class treatment that may address the limitations of existing treatment options or provide a treatment option where there currently is none.  APL-2 has already shown activity that we believe is clinically meaningful in clinical trials for two distinct medical conditions - geographic atrophy in age-related macular degeneration, or GA, and paroxysmal nocturnal hemoglobinuria, or PNH. We are also conducting clinical trials of APL-2 in patients with wet age-related macular degeneration, or wet AMD, and in two other complement-dependent disease areas, autoimmune hemolytic anemia and complement-dependent nephropathies. In our Phase 2 clinical trial of APL-2 in patients with GA, treatment with APL-2 resulted in a significant reduction in the rate of GA lesion growth over 12 months. We have initiated a Phase 3 clinical program consisting of two identical Phase 3 clinical trials evaluating APL-2 in patients with GA in the second half of 2018.  In our ongoing Phase 1b trials in PNH, APL-2 has achieved improvements in transfusion dependency, hemoglobin levels and other hematological indicators that we believe are clinically meaningful. We have initiated a Phase 3 clinical trial evaluating APL-2 in patients with PNH who are anemic while being treated with eculizumab, the only approved therapy for PNH and plan to initiate a second Phase 3 clinical trial in patients with PNH who have not received eculizumab. We are also developing novel compounds targeting C3 and plan to conduct clinical trials of APL-2 and these compounds in additional complement dependent diseases. We hold worldwide commercialization rights to APL-2 and those other novel compounds targeting C3.

Since our commencement of operations in May 2010, we have devoted substantially all of our resources to developing our proprietary technology, developing product candidates, undertaking preclinical studies and conducting clinical trials for APL-2, building our intellectual property portfolio, organizing and staffing our company, business planning, raising capital, and providing general and administrative support for these operations.

We have not generated any revenue from product sales. We have incurred significant annual net operating losses in each year since our inception and expect to continue to incur net operating losses for the foreseeable future. Our net losses were $91.0 million and $32.8 million for the nine months ended September 30, 2018 and September 30, 2017, respectively. As of September 30, 2018, we had an accumulated deficit of $240.3 million. We expect to continue to incur significant expenses and increasing operating losses for the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase significantly if and as we continue to develop and conduct clinical trials in our current and new indications with APL-2, including the Phase 3 clinical program in GA and the ongoing and planned Phase 3 clinical trials in PNH; initiate and continue research and preclinical and clinical development efforts for any future product candidates; seek to identify and develop additional product candidates for complement-dependent diseases; seek regulatory and marketing approvals for our product candidates that

10


 

successfully complete clinical trials, if any; establish sales, marketing, distribution and other commercial infrastructure in the future to commercialize any products for which we may obtain marketing approval; require the manufacture of larger quantities of product candidates for clinical development and, potentially, commercialization; maintain, expand and protect our intellectual property portfolio; hire and retain additional personnel, such as clinical, quality control and scientific personnel; add operational, financial and management information systems and personnel, including personnel to support our product development and help us comply with our obligations as a public company; and add equipment and physical infrastructure to support our research and development programs. In addition, we expect to incur additional costs associated with operating as a public company.

 

As of September 30, 2018, we had cash and cash equivalents of $220.6 million. We believe that our cash and cash equivalents as of September 30, 2018, will be sufficient to fund our operating expenses and capital expenditures for at least twelve months into the fourth quarter of 2019.

Financial Operations Overview

Revenue 

We have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future. In the future, we will seek to generate revenue primarily from a combination of product sales and collaborations with strategic partners.

Research and Development Expenses 

Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts, and the development of our product candidates, which include:

 

employee-related expenses including salaries, bonuses, benefits and share-based compensation expense;

 

expenses incurred under agreements with third parties, including contract research organizations, or CROs, that conduct clinical trials and research and development activities on our behalf, and contract manufacturing organizations that manufacture quantities of drug supplies for both our preclinical studies and clinical trials;

 

the cost of consultants, including share-based compensation expense; and

 

various other expenses incident to the management of our preclinical studies and clinical trials.

Research and development costs are expensed as incurred. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed. We have not provided program costs since inception because historically we have not tracked or recorded our research and development expenses on a program-by-program basis.

The following summarizes our most advanced research and development programs:

 

GA. We are developing APL-2 as monotherapy for GA, administered by intravitreal injections. In our Phase 2 clinical trial of APL-2 in patients with GA, treatment with APL-2 resulted in a significant reduction in the rate of GA lesion growth at 12 months compared to sham. We are conducting a Phase 1b/2 trial of APL-2 in patients with wet AMD which we initiated in the second quarter of 2018.  We have initiated a Phase 3 clinical program consisting of two Phase 3 clinical trials of APL-2 in GA in the second half of 2018 with the goal of enrolling a total of 1,200 patients across approximately 200 sites worldwide. In October 2018, we announced that we had voluntarily implemented a temporary pause in dosing patients in the Phase 3 clinical program due to observed cases of non-infectious inflammation in patients treated from a single manufacturing lot of APL-2 intravitreal drug product. We have also voluntarily implemented a temporary pause in the Phase 1b/2 trial of APL-2 in patients with wet AMD for the same reason.

 

 •

PNH. We are developing APL-2 as monotherapy for patients with PNH, administered by subcutaneous injection. In our ongoing Phase 1b clinical trials of APL-2 in patients being treated with eculizumab and in patients who had not been previously treated with eculizumab, who we refer to as treatment-naïve patients, APL-2 treatment was associated with improvements in transfusion dependency, hemoglobin levels and other hematological indicators that we believe are clinically meaningful. We initiated a Phase 3 clinical trial in patients with PNH in June 2018. This Phase 3 clinical trial, which we refer to as our Pegasus trial, is a 70 patient randomized head-to-head study comparing APL-2 monotherapy to eculizumab monotherapy in patients with PNH currently on treatment with eculizumab. We also plan to initiate a 48 patient Phase 3 clinical trial in treatment-naïve patients in the first half of 2019.

11


 

We initiated a Phase 2 clinical trial of APL-2 in patients with autoimmune hemolytic anemia and a Phase 2 clinical trial of APL-2 in patients with complement-dependent nephropathies in the first half of 2018.

The successful development of our product candidates is highly uncertain. Accordingly, at this time, we cannot reasonably estimate the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of these product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from APL-2 or any other potential product candidates. This is due to the numerous risks and uncertainties associated with developing therapeutics, including the uncertainties of:

 

establishing an appropriate safety profile in preclinical studies;

 

successful enrollment in, and completion of clinical trials;

 

receipt of marketing approvals from applicable regulatory authorities;

 

establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;

 

obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;

 

launching commercial sales of the products, if and when approved, whether alone or in collaboration with others; and

 

an acceptable safety profile of the products following approval.

A change in the outcome of any of these variables with respect to the development of any of our product candidates would significantly change the costs and timing associated with the development of that product candidate.

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect research and development costs to increase significantly for the foreseeable future as our product candidate development programs progress. However, we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.

General and Administrative Expenses 

General and administrative expenses consist primarily of employee-related expenses including salaries, bonuses, benefits and share-based compensation. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters, and fees for accounting and consulting services.

We anticipate that our general and administrative expenses will increase in the future to support continued research and development activities, potential commercialization of our product candidates and increased costs of operating as a public company. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, attorneys and accountants, among other expenses. Additionally, we anticipate increased costs associated with being a public company including expenses related to services associated with maintaining compliance with exchange listing and SEC requirements, insurance costs and investor relations costs.

Critical Accounting Policies and Estimates 

This discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

During the three and nine months ended September 30, 2018, there were no material changes to our critical accounting policies. Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Judgements and Estimates” in our 2017 Annual Report on Form

12


 

10-K and the notes to the unaudited condensed financial statements included in Item 1, “Unaudited Financial Statements,” of this Quarterly Report on Form 10-Q. We believe that of our critical accounting policies, the following accounting policies are the most critical to fully understanding and evaluating our financial condition and results of operations:

 

Accrued research and development expenses; and

 

Share-based compensation.

If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected.

JOBS Act

In April 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an “emerging growth company,” or EGC, can take advantage of the extended transition period for complying with new or revised accounting standards. Thus, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

Subject to certain conditions, as an EGC, we have relied on certain exemptions, including exemptions from the requirement to provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis, as well as reduced reporting requirements.

Based on the market value of our common stock held by non-affiliates as of June 30, 2018, we will cease to be an EGC beginning December 31, 2018.

Results of Operations

Comparison of Three Months Ended September 30, 2017 and 2018

The following table summarizes our results of operations for the three months ended September 30, 2017 and 2018, together with the dollar increase or decrease and percentage change in those items:

 

 

 

For the Three Months Ended September 30,

 

 

Change

 

 

Change

 

 

 

2017

 

 

2018

 

 

$

 

 

%

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

9,517,882

 

 

$

29,539,456

 

 

$

20,021,574

 

 

 

210.4

%

General and administrative

 

 

2,071,437

 

 

 

6,265,125

 

 

 

4,193,688

 

 

 

202.5

 

Operating loss

 

 

(11,589,319

)

 

 

(35,804,581

)

 

 

(24,215,262

)

 

 

208.9

 

Unrealized foreign currency loss

 

 

 

 

 

(426,191

)

 

 

(426,191

)

 

 

100.0

 

Interest income (expense), net

 

 

16,847

 

 

 

280,891

 

 

 

264,044

 

 

 

1,567.3

 

Other income (expense), net

 

 

(801

)

 

 

(22,234

)

 

 

(21,433

)

 

 

2,675.8

 

Net loss

 

$

(11,573,273

)

 

$

(35,972,115

)

 

$

(24,398,842

)

 

 

210.8

 

 

13


 

Research and Development Expenses

The following table summarizes our research and development expenses incurred during the three months ended September 30, 2017 and 2018, together with the dollar increase or decrease and percentage change in those items:

 

 

 

For the Three Months Ended  September 30,

 

 

Change

 

 

Change

 

 

 

2017

 

 

2018

 

 

$

 

 

%

 

Clinical trial costs

 

$

3,540,861

 

 

$

13,713,828

 

 

$

10,172,967

 

 

 

287.3

%

Contract manufacturing

 

 

3,124,105

 

 

 

9,890,532

 

 

 

6,766,427

 

 

 

216.6

 

Compensation and related personnel costs

 

 

1,380,872

 

 

 

3,900,591

 

 

 

2,519,719

 

 

 

182.5

 

Other research and development costs

 

 

572,367

 

 

 

859,498

 

 

 

287,131

 

 

 

50.2

 

Preclinical study expenses

 

 

485,396

 

 

 

737,847

 

 

 

252,451

 

 

 

52.0

 

Device development expenses

 

 

414,281

 

 

 

437,160

 

 

 

22,879

 

 

 

5.5

 

Total research and development expenses

 

$

9,517,882

 

 

 

29,539,456

 

 

$

20,021,574

 

 

 

210.4

 

 

Research and development expenses increased by $20.0 million to $29.5 million for the three months ended September 30, 2018 from $9.5 million for the three months ended September 30, 2017, an increase of 210.4%. The increase in research and development expenses was primarily attributable to an increase of $10.2 million in clinical trial costs associated with the preparation for and commencement of our Phase 3 clinical trials, an increase of $6.8 million in manufacturing expenses in connection with the supply for our Phase 3 clinical trials of APL-2, an increase of $2.5 million in employee related costs primarily due to the hiring of additional personnel, an increase of $0.3 million related to research and development supporting activities and an increase of $0.2 million in preclinical study expenses.

General and Administrative Expenses

General and administrative expenses increased by $4.2 million to $6.3 million for the three months ended September 30, 2018, from $2.1 million for the three months ended September 30, 2017, an increase of 202.5%. The increase in general and administrative expenses was primarily attributable to an increase in employee related costs of $2.0 million due to the hiring of additional personnel, an increase in professional and consulting fees of $0.9 million, an increase in license agreement costs of $0.7 million attributable to our achievement of milestones, an increase of $0.4 million in director stock option compensation and an increase of $0.2 million in insurance costs.

Interest Income (Expense), Net

Interest income, net was $0.3 million for the three months ended September 30, 2018, an increase of $0.3 million, compared to $16,847 of interest income for the three months ended September 30, 2017. The interest income earned in 2017 related to interest earned from cash and cash equivalents.  In 2018, the interest income earned related to cash and cash equivalents and was offset by interest expense on the term loan facility and promissory note agreements.

 

Comparison of Nine Months Ended September 30, 2017 and 2018

The following table summarizes our results of operations for the nine months ended September 30, 2017 and 2018, together with the dollar increase or decrease and percentage change in those items:

 

 

 

For the Nine Months Ended September 30,

 

 

Change

 

 

Change

 

 

 

2017

 

 

2018

 

 

$

 

 

%

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

27,171,025

 

 

$

74,479,965

 

 

$

47,308,940

 

 

 

174.1

%

General and administrative

 

 

5,603,190

 

 

 

16,248,203

 

 

 

10,645,013

 

 

 

190.0

 

Operating loss

 

 

(32,774,215

)

 

 

(90,728,168

)

 

 

(57,953,953

)

 

 

176.8

 

Unrealized foreign currency loss

 

 

 

 

 

(426,191

)

 

 

(426,191

)

 

 

100.0

 

Interest income (expense), net

 

 

32,813

 

 

 

198,214

 

 

 

165,401

 

 

 

504.1

 

Other income (expense), net

 

 

(8,796

)

 

 

(86,575

)

 

 

(77,779

)

 

 

884.3

 

Net loss

 

$

(32,750,198

)

 

$

(91,042,720

)

 

$

(58,292,522

)

 

 

178.0

 

14


 

 

Research and Development Expenses

The following table summarizes our research and development expenses incurred during the nine months ended September 30, 2017 and 2018, together with the dollar increase and percentage change in those items:   

 

 

 

For the Nine Months Ended September 30,

 

 

Change

 

 

Change

 

 

 

2017

 

 

2018

 

 

$

 

 

%

 

Clinical trial costs

 

$

10,450,500

 

 

$

37,088,838

 

 

$

26,638,338

 

 

 

254.9

%

Contract manufacturing

 

 

9,622,888

 

 

 

21,569,350

 

 

 

11,946,462

 

 

 

124.1

 

Compensation and related personnel costs

 

 

3,358,052

 

 

 

9,584,489

 

 

 

6,226,437

 

 

 

185.4

 

Other research and development costs

 

 

1,386,880

 

 

 

3,015,491

 

 

 

1,628,611

 

 

 

117.4

 

Preclinical study expenses

 

 

1,282,820

 

 

 

1,987,461

 

 

 

704,641

 

 

 

54.9

 

Device development expenses

 

 

1,069,885

 

 

 

1,234,336

 

 

 

164,451

 

 

 

15.4

 

Total research and development expenses

 

$

27,171,025

 

 

$

74,479,965

 

 

$

47,308,940

 

 

 

174.1

 

 

Research and development expenses increased by $47.3 million to $74.5 million for the nine months ended September 30, 2018 from $27.2 million for the nine months ended September 30, 2017, an increase of 174.1%. The increase in research and development expenses was primarily attributable to an increase of $26.7 million in clinical trial costs associated with the preparation for and commencement of our Phase 3 clinical trials, an increase of $11.9 million in manufacturing expenses in connection with the supply for our Phase 3 clinical trials of APL-2, an increase of $6.2 million in employee related costs primarily due to the hiring of additional personnel, an increase of $1.6 million related to research and development supporting activities, an increase of $0.7 million in preclinical study expenses and an increase of $0.2 million in device development expenses.

General and Administrative Expenses

General and administrative expenses increased by $10.6 million to $16.2 million for the nine months ended September 30, 2018, from $5.6 million for the nine months ended September 30, 2017, an increase of 190.0%. The increase in general and administrative expenses was primarily attributable to an increase in employee related costs of $4.5 million, an increase in professional and consulting fees of $2.3 million, an increase of $1.2 million in director stock option compensation, an increase in license agreement costs of $1.0 million attributable to our achievement of milestones, an increase in office, travel and related costs of $0.9 million and an increase in insurance related costs of $0.7 million. The increased employee related costs of $4.5 million primarily consisted of $3.8 million related to an increase in salaries and benefits primarily due to the hiring of additional personnel and $0.7 million in recruitment expense. The increased professional and consulting fees of $2.3 million primarily consisted of an increase in consulting fees of $1.0 million, an increase of $0.7 million in legal fees, an increase of $0.5 million in accounting fees and an increase of $0.1 million in other professional fees.

Interest Income (Expense), net

Interest income, net was $198,214 for the nine months ended September 30, 2018, an increase of $165,401 compared to $32,813 of interest income for the nine months ended September 30, 2017. The interest income in 2017 was primarily attributable to interest income earned from cash and cash equivalents. In 2018, the interest income earned related to cash and cash equivalents and was offset by interest expense on the term loan facility and promissory note.

Liquidity and Capital Resources 

15


 

Sources of Liquidity

On November 13, 2017, we issued and sold 10,714,000 shares of common stock in our initial public offering, or IPO at a public offering price of $14.00 per share for net proceeds of $137.2 million after deducting underwriting discounts and commissions of $10.5 million and other offering expenses of approximately $2.3 million. On November 13, 2017, upon the closing of the IPO, all shares of preferred stock then outstanding converted into an aggregate of 30,070,034 shares of common stock. In addition, on December 13, 2017, we issued and sold an additional 981,107 shares of common stock at the IPO price of $14.00 per share pursuant to the underwriters’ partial exercise of their option to purchase additional shares of common stock, resulting in net proceeds of approximately $12.8 million, after underwriting discounts and commissions of $1.0 million.

 

On April 23, 2018, we issued and sold 5,500,000 shares of our common stock in a follow-on public offering at a public offering price of $25.50 per share for net proceeds of $131.2 million, after deducting underwriting discounts and commissions of $8.4 million and offering expenses of $0.5 million.

Prior to the IPO and the 2018 follow-on offering, we financed our operations primarily through $112.6 million in proceeds from the private placement of shares of our convertible preferred stock, $20.0 million in proceeds from borrowings under our term loan facility with Silicon Valley Bank, and $7.0 million in proceeds from our issuance and sale of a promissory note to Golda Darty Partners S.A., or GDP.

Indebtedness

On October 20, 2017, we entered into a loan and security agreement with Silicon Valley Bank providing for a $20.0 million term loan facility, which we refer to as the term loan facility.

Borrowings under the term loan facility bear interest at a floating rate per annum equal to the WSJ prime rate plus 1.50%. In an event of default, as defined in the loan and security agreement, the interest rate applicable to borrowings under such agreement will be increased by 5.0%. Under the agreement, we are required to make monthly interest-only payments through November 1, 2019 and are required to make 24 equal monthly payments of principal, plus accrued interest, from November 1, 2019 through October 1, 2021, when all unpaid principal and interest becomes due and payable.

We may voluntarily prepay all, but not less than all, of the outstanding principal at any time prior to the maturity date, subject to a prepayment fee, which ranges from 0% to 2% of the outstanding principal. A final payment of $1.6 million is due upon the earlier to occur of the maturity of the loan, the acceleration or prepayment of all outstanding principal or the termination of the term loan facility. This amount is being accreted as additional interest expense over the term of the term loan facility.

Borrowings under the term loan facility are secured by a first priority lien on all of our assets, excluding our intellectual property and our interest in our licenses from Penn. We have agreed to a negative pledge on our intellectual property. The term loan facility contains customary events of default and affirmative and negative covenants, including restrictions on our ability to pay dividends and incur additional debt, but does not contain any financial covenants.

 In connection with our entry into the term loan facility, we issued to Silicon Valley Bank a warrant to purchase 14,064 shares of our common stock, with an exercise price per share of $5.484. The warrant has a ten-year term and includes a put option pursuant to which, in the event of an acquisition, change in control or dissolution or winding up of our company, or the expiration of the warrant, Silicon Valley Bank may require us to repurchase the warrant for a total aggregate purchase price of $250,000.

On October 19, 2017, we issued and sold an unsecured promissory note in the principal amount of $7.0 million to GDP. The note bears interest at a rate per annum of 8.0%, and is due and payable quarterly in arrears on the 19th day of each April, July, October and January beginning on January 19, 2018. The note has a maturity date of October 19, 2022. The promissory note is contractually subordinated to the term loan facility with Silicon Valley Bank. We would be required to obtain the consent of the holder of our promissory note to increase or extend the maturity of the term loan facility with Silicon Valley Bank.

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In connection with the issuance and sale of the $7.0 million promissory note, we issued a warrant to purchase 93,764 shares of our common stock at a price per share of $5.484, which was exercised in October 2017 prior to the IPO. The warrant was exercisable at any time but would have expired if unexercised by the closing date of our IPO. We recorded the fair value of the warrant in the aggregate amount of $430,160 as a discount to the promissory note. This amount is being accreted as additional interest expense over the term of the promissory note.

Cash Flows

The following table provides information regarding our cash flows for the nine months ended September 30, 2018 and September 30, 2017:

 

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2018

 

Net cash used in operating activities

 

$

(31,062,269

)

 

$

(86,762,574

)

Net cash used in investing activities

 

 

 

 

 

 

Net cash provided by financing activities

 

 

19,334,629

 

 

 

131,787,703

 

Effect of exchange rate changes on cash and cash equivalents

 

 

 

 

 

(27,840

)

Net (decrease) increase in cash and cash equivalents

 

$

(11,727,640

)

 

$

44,997,289

 

Net Cash Used in Operating Activities 

Net cash used in operating activities was $86.8 million for the nine months ended September 30, 2018 and consisted primarily of a net loss of $91.0 million adjusted for non-cash items, including share-based compensation expense of $5.9 million, accretion of discounts on borrowings of $0.5 million and unrealized foreign currency loss of $0.4 million, a net increase in operating assets of $2.6 million, which resulted primarily from an increase in prepaid expenses of $11.8 million, an increase in other current assets of $0.2 million, an increase in other assets of $0.1 million, partially offset by a net increase in accrued expenses of $7.7 million and accounts payable of $1.8 million.

Net cash used in operating activities was $31.1 million for the nine months ended September 30, 2017 and consisted primarily of a net loss of $32.8 million adjusted for non-cash items, including share-based compensation expense of $1.3 million, and an increase in prepaid expenses of $1.7 million, an increase in income tax receivable of $0.9 million, an increase in other current assets of $0.2 million, and an increase in other assets of $0.1 million, partially offset by a net increase in accrued expenses of $1.8 million and accounts payable of $1.5 million.

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Net Cash Used in Investing Activities

There was no cash used in investing activities during the nine months ended September 30, 2018 and 2017.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $131.8 million during the nine months ended September 30, 2018 and consisted primarily of proceeds from the issuance of common stock in the follow-on public offering that we completed in April 2018.  Net cash provided by financing activities was $19.3 million during the nine months ended September 30, 2017 and consisted primarily of proceeds from the issuance of Series E convertible preferred stock in August 2017.

 Funding Requirements

We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development of, and seek marketing approval for, our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Furthermore, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.

We believe that our cash and cash equivalents as of September 30, 2018 will enable us to fund our operating expenses and capital expenditure requirements at least into the fourth quarter of 2019. We have based this estimate on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. We do not expect our cash and cash equivalents as of September 30, 2018 will be sufficient to enable us to complete our ongoing and planned Phase 3 clinical trials of APL-2 or to complete the development of APL-2 or any of our other product candidates. Because of the numerous risks and uncertainties associated with the development of APL-2 and other potential product candidates, and because the extent to which we may enter into collaborations with third parties for the development of these product candidates is unknown, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our future funding requirements will depend on many factors, including:

 

the scope, progress, timing, costs and results of clinical trials of, and research and preclinical development efforts for, APL-2 and future product candidates;

 

our ability to identify a collaborator for any of our product candidates and the terms and timing of any collaboration agreement that we may establish for the development and any commercialization of such product candidates;  

 

the number and characteristics of future product candidates that we pursue and their development requirements;

 

the outcome, timing and costs of clinical trials and of seeking regulatory approvals;

 

the costs of commercialization activities for any of our product candidates that receive marketing approval to the extent such costs are not the responsibility of any future collaborators, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;

 

subject to receipt of marketing approval, revenue, if any, received from commercial sales of our current and future product candidates;

 

our headcount growth and associated costs as we expand our research and development and establish a commercial infrastructure;

 

the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims;

 

the effect of competing technological and market developments;

 

our ability to obtain adequate reimbursement for any product we commercialize; and

 

the costs of operating as a public company.

Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of medicines that we do not expect to be commercially available for many

18


 

years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. We currently do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interests will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. Debt financing, if available, would result in fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business.

 

If we raise funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Contractual Obligations

The disclosure of our contractual obligations and commitments is set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations” in our 2017 Annual Report on Form 10-K. See Note 5 to our unaudited condensed financial statements included in Item 1, “Unaudited Financial Statements,” of this Quarterly Report on Form 10-Q for a discussion of obligations and commitments. During the nine months ended September 30, 2018, there were no material changes to our contractual obligations and commitments as of December 31, 2017 as described under Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2017 Annual Report on Form 10-K.

Off-Balance Sheet Arrangements 

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable SEC rules.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk related to changes in interest rates. As of September 30, 2018 and 2017, we had cash and cash equivalents of $220.6 million and $13.1 million, respectively, consisting primarily of money market funds. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our investment portfolio. We have the ability to hold our marketable securities until maturity, and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a change in market interest rates on our investments.

Item 4.Controls and Procedures.

Limitations on Effectiveness of Controls and Procedures

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

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Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2018.

Changes in Internal Control Over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

Item 1.

Legal Proceedings.

We are not currently subject to any material legal proceedings.

Item 1A.

Risk Factors.

Careful consideration should be given to the following risk factors, in addition to the other information set forth in this Quarterly Report on Form 10-Q and in other documents that we file with the SEC, in evaluating our company and our business. Investing in our common stock involves a high degree of risk. If any of the following risks actually occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected.

Risks Related to Our Financial Position and Need for Additional Capital

We have incurred significant losses since inception, expect to incur significant and increasing losses for at least the next several years, and may never achieve or maintain profitability.

We have incurred significant annual net operating losses in every year since our inception. We expect to continue to incur significant and increasing net operating losses for at least the next several years. Our net losses were $91.0 million for the nine months ended September 30, 2018 and $51.0 million for the year ended December 31, 2017. As of September 30, 2018, we had an accumulated deficit of $240.3 million. We have not generated any revenues from product sales, have not completed the development of any product candidate and may never have a product candidate approved for commercialization. We have financed our operations to date primarily through the sale of our common stock in our initial public offering and a subsequent follow-on offering, private placements of our preferred stock, borrowings under a term loan facility and the issuance and sale of a promissory note. We have devoted substantially all of our financial resources and efforts to research and development, including preclinical studies and our clinical trials. Our net losses may fluctuate significantly from quarter to quarter and year to year. Net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.

We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will increase substantially if and as we:

 

continue to develop and conduct clinical trials in our current and new indications with our lead product candidate, APL-2;

 

initiate and continue research and preclinical and clinical development efforts for any future product candidates;

 

seek to identify and develop additional product candidates for complement-dependent diseases;

 

seek regulatory and marketing approvals for our product candidates that successfully complete clinical trials, if any;

 

establish sales, marketing, distribution and other commercial infrastructure in the future to commercialize any products for which we may obtain marketing approval;

 

require the manufacture of larger quantities of product candidates for clinical development and, potentially, commercialization;

 

maintain, expand and protect our intellectual property portfolio;

 

hire and retain additional personnel, such as clinical, quality control and scientific personnel;

 

add operational, financial and management information systems and personnel, including personnel to support our product development and help us comply with our obligations as a public company; and

 

add equipment and physical infrastructure to support our research and development programs.

Our ability to become and remain profitable depends on our ability to generate revenue. We do not expect to generate significant revenue unless and until we are, or any future collaborator is, able to obtain marketing approval for, and successfully commercialize, one or more of our product candidates. Successful commercialization will require achievement of key milestones, including completing clinical trials of our product candidates, obtaining marketing approval for these product candidates, manufacturing, marketing and selling those products for which we, or any of our future collaborators, may obtain marketing approval, satisfying any post-marketing requirements and obtaining reimbursement for our products from private insurance or government payors. Because of the uncertainties and risks associated with these activities, we are unable to accurately predict the timing and amount of revenues, and if or when we might achieve profitability. We and any future collaborators may never succeed in these activities and, even if we do, or any future collaborators do, we may never generate revenues that are large enough for us to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

21


 

Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our pipeline of product candidates or continue our operations. A decline in the value of our company could cause our stockholders to lose all or part of their investment.

We have not yet successfully completed any Phase 3 clinical trials nor commercialized pharmaceutical products, which may make it difficult to evaluate our future prospects.  

Our operations to date have been limited to financing and staffing our company, developing our technology and conducting preclinical research and Phase 1 and Phase 2 clinical trials for our product candidates. Although we have initiated Phase 3 clinical trials and have begun planning commercial activities, we have not yet demonstrated an ability to successfully complete Phase 3 clinical trials, obtain marketing approvals, manufacture a commercial-scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Accordingly, our stockholders should consider our prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by companies in the early stages of development, especially clinical-stage biopharmaceutical companies such as ours. Any predictions made about our future success or viability may not be as accurate as they could be if we had a longer operating history or a history of successfully developing and commercializing pharmaceutical products.

We may encounter unforeseen expenses, difficulties, complications, delays and other known or unknown factors in achieving our business objectives. We will eventually need to transition from a company with a development focus to a company capable of supporting commercial activities. We may not be successful in such a transition.

We expect our financial condition and operating results to continue to fluctuate significantly from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. Accordingly, our stockholders should not rely upon the results of any quarterly or annual periods as indications of future operating performance.

We will need substantial additional funding, and if we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a very time-consuming, expensive and uncertain process that takes years to complete. We have consumed substantial amounts of cash since our inception. For example, in the nine months ended September 30, 2018 and the years ended December 31, 2017 and 2016, we used net cash of $86.8 million and $46.6 million and $26.0 million, respectively, in our operating activities substantially all of which related to research and development activities. As of September 30, 2018, our cash and cash equivalents were $220.6 million. We expect our expenses to increase in connection with our ongoing activities, particularly as we initiate new clinical trials of, initiate new research and preclinical development efforts for and seek marketing approval for, our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we may incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution to the extent that such sales, marketing, manufacturing and distribution are not the responsibility of a future collaborator. Furthermore, we expect to incur significant additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we may be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.

We will be required to expend significant funds in order to advance the development of APL-2 in multiple disease areas, as well as other product candidates we may seek to develop. In addition, while we may seek one or more collaborators for future development of our product candidates for one or more indications, we may not be able to enter into a collaboration for any of our product candidates for such indications on suitable terms, on a timely basis or at all. In any event, our cash and cash equivalents as of September 30, 2018, will not be sufficient to complete our ongoing and planned Phase 3 clinical trials of APL-2 or to complete development of APL-2 or any of our other product candidates. Accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources to achieve our business objectives. We do not have any committed external source of funds. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.

22


 

We believe that our cash and cash equivalents as of September 30, 2018 will enable us to fund our operating expenses and capital expenditure requirements at least into the fourth quarter of 2019. Our estimate as to how long we expect our cash and cash equivalents, to be able to continue to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Further, changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate, and we may need to seek additional funds sooner than planned. Our future funding requirements, both short-term and long-term, will depend on many factors, including:

 

the scope, progress, timing, costs and results of clinical trials of, and research and preclinical development efforts for, APL-2 and future product candidates;

 

our ability to identify a collaborator for any of our product candidates and the terms and timing of any collaboration agreement that we may establish for the development and any commercialization of such product candidates;

 

the number and characteristics of future product candidates that we pursue and their development requirements;

 

the outcome, timing and costs of clinical trials and of seeking regulatory approvals;

 

the costs of commercialization activities for any of our product candidates that receive marketing approval to the extent such costs are not the responsibility of any future collaborators, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;

 

subject to receipt of marketing approval, revenue, if any, received from commercial sales of our current and future product candidates;

 

our headcount growth and associated costs as we expand our research and development and establish a commercial infrastructure;

 

the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims;

 

the effect of competing technological and market developments;

 

our ability to obtain adequate reimbursement for any product we commercialize; and

 

the costs of operating as a public company.

Raising additional capital may cause dilution to our stockholders restrict our operations or require us to relinquish rights to our technologies or product candidates.

We expect our expenses to increase in connection with our planned operations. To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, the ownership interest of our then-existing stockholders may be diluted, and the terms of these securities could include liquidation or other preferences and anti-dilution protections that could adversely affect the rights of our common stockholders. In addition, debt financing, if available, would result in fixed payment obligations and may involve agreements that include grants of security interests on our assets and restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, creating liens, redeeming stock or declaring dividends, that could adversely impact our ability to conduct our business.

For example, in connection with our term loan facility with Silicon Valley Bank, we granted a security interest on all of our assets, excluding our intellectual property and our interest in our licenses from the Trustees of the University of Pennsylvania, or Penn. We have agreed to a negative pledge on our intellectual property. The term loan facility also contains restrictive covenants including, subject to certain exceptions, covenants that prohibit us from transferring all or any part of our business or property, changing our business, liquidating or dissolving, merging with or acquiring another entity, entering into a transaction that will result in a change of control, incurring additional indebtedness, creating any lien on our property, paying dividends or redeeming stock, making payments on subordinated debt or entering into material transactions with affiliates. Future debt securities or other financing arrangements could contain similar or more restrictive negative covenants. We also would be required to obtain the consent of the holder of our promissory note to increase or extend the maturity of the term loan facility with Silicon Valley Bank. In addition, securing financing could require a substantial amount of time and attention from our management and may divert a disproportionate amount of their attention away from day-to-day activities, which may adversely affect our management’s ability to oversee the development of our product candidates.

If we raise additional funds through collaborations or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or

23


 

terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Risks Related to the Discovery, Development and Commercialization of Our Product Candidates

There are no approved therapies that act by inhibiting C3, and we may not be able to successfully develop and commercialize APL-2 or other product candidates.

APL-2 is a novel therapeutic compound and its potential benefit in controlling autoimmune and inflammatory diseases has not been established. APL-2 is designed to control disease through inhibition of C3. There are no approved therapies that act by inhibiting C3 and only one approved therapy that acts by inhibiting the complement system. As a result, APL-2 may not demonstrate in patients any or all of the pharmacological benefits we believe it may possess. We have not yet demonstrated efficacy and safety for APL-2 or any other product candidates in a pivotal trial or obtained marketing approval of any product candidate. We have evaluated APL-2 in preclinical studies and in clinical trials, and have advanced APL-2 into Phase 3 clinical development in geographic atrophy, or GA and paroxysmal-nocturnal hemoglobinuria or PNH, but we have not obtained regulatory approval to sell any product based on our therapeutic approaches.

If we are unsuccessful in our development efforts, we may not be able to advance the development of APL-2 or any other product candidate, commercialize products, raise capital, expand our business or continue our operations.

We are dependent on the successful development and commercialization of our lead product candidate, APL-2. If we are unable to develop, obtain marketing approval for or successfully commercialize this product candidate, either alone or through a collaboration, or if we experience significant delays in doing so, our business could be harmed.

We currently have no products approved for sale and are investing a significant portion of our efforts and financial resources to fund the development of APL-2. Our prospects are substantially dependent on our ability, or that of any future collaborator, to develop, obtain marketing approval for and successfully commercialize APL-2 in one or more disease indications.

The success of APL-2 will depend on several factors, including the following:

 

successful recruitment of subjects, enrollment in and completion of our ongoing and planned clinical trials;

 

initiation and successful recruitment of subjects, enrollment in and completion of additional clinical trials;

 

safety, tolerability and efficacy profiles that are satisfactory to the U.S. Food and Drug Administration, or FDA, or any comparable foreign regulatory authority for marketing approval;

 

our ability to identify success criteria and endpoints for our clinical trials such that the FDA, the European Medicines Agency, or EMA, and other regulatory authorities will be able to determine the clinical efficacy and safety profile of any product candidates we may develop;

 

timely receipt of marketing approvals from applicable regulatory authorities;

 

the performance of our future collaborators, if any;

 

the extent of any required post-marketing approval commitments to applicable regulatory authorities;

 

establishment of supply arrangements with third-party suppliers and manufacturers of raw materials and drug intermediates;

 

establishment of arrangements with third-party manufacturers to obtain finished products that are appropriately packaged for sale;

 

developing, validating and maintaining a commercially viable manufacturing process that is compliant with current good manufacturing practices, or cGMPs;

 

obtaining APL-2 drug product from third-party manufacturers of sufficient quality to be used in our clinical trials and for commercial sale;

 

obtaining and maintaining patent, trade secret protection and regulatory exclusivity, both in the United States and internationally;

 

protection of our rights in our intellectual property portfolio;

 

successful launch of commercial sales following any marketing approval;

24


 

 

an acceptable safety profile following any marketing approval;

 

commercial acceptance of our products, if approved, by patients, the medical community and third-party payors;

 

our ability to compete with other therapies; and

 

obtaining and maintaining healthcare coverage and adequate reimbursement.

Many of these factors are beyond our control, including clinical development, the regulatory submission process, potential threats to our intellectual property rights and the manufacturing, marketing and sales efforts of any future collaborator. If we are unable to develop, receive marketing approval for and successfully commercialize APL-2 or another product candidate, on our own or with any future collaborator, or experience delays as a result of any of these factors or otherwise, our business could be substantially harmed.

If clinical trials of our product candidates fail to satisfactorily demonstrate safety and efficacy to the FDA and other regulators, we, or any future collaborators, may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of these product candidates.

We, and any future collaborators, are not permitted to commercialize, market, promote or sell any product candidate in the United States without obtaining marketing approval from the FDA. Foreign regulatory authorities, such as the EMA, impose similar requirements. We have not previously submitted a new drug application, or NDA, to the FDA or similar drug approval filings to comparable foreign regulatory authorities for any of our product candidates. We, and any future collaborators, may never receive such approvals. We, and any future collaborators, must complete extensive preclinical development and clinical trials to demonstrate the safety and efficacy of our product candidates in humans before we will be able to obtain these approvals.

 

Clinical testing is expensive, is difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. The clinical development of our product candidates is susceptible to the risk of failure inherent at any stage of product development, including failure to demonstrate efficacy in a clinical trial or across a broad population of patients, the occurrence of adverse events that are severe or medically or commercially unacceptable, failure to comply with protocols or applicable regulatory requirements and determination by the FDA or any comparable foreign regulatory authority that a product candidate may not continue development or is not approvable. It is possible that even if one or more of our product candidates has a beneficial effect, that effect will not be detected during clinical evaluation as a result of one or more of a variety of factors, including the size, duration, design, measurements, conduct or analysis of our clinical trials. Conversely, as a result of the same factors, our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any. Similarly, in our clinical trials we may fail to detect toxicity of or intolerability caused by our product candidates, or mistakenly believe that our product candidates are toxic or not well tolerated when that is not in fact the case. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achieving positive results in earlier development, and we cannot be certain that we will not face additional setbacks. It is possible that any of our development programs may be placed on full or partial clinical hold by regulatory authorities at any point, which would delay and possibly prevent further development of our product candidates.

 

In October 2018, we announced that we voluntarily implemented a temporary pause in dosing in our Phase 3 clinical program in patients with GA due to observed cases of non-infectious inflammation in patients treated from a single manufacturing lot of APL-2 intravitreal drug product.  We have also voluntarily implemented a temporary pause in the Phase 1b/2 trial of APL-2 in patients with wet AMD.  A total of eight patients, four in the Phase 3 GA program and four in the Phase 1b/2 clinical trial of APL-2 in patients with wet AMD, were treated with APL-2 from this manufacturing lot and each patient developed non-infectious inflammation.  Inflammation in seven of the eight patients has completely resolved and is expected to resolve in the eighth patient.  We have reviewed these events with the data safety monitoring board for the ophthalmology program.  We believe that the cause of inflammation is isolated to this single manufacturing lot of APL-2 intravitreal drug product based upon the results of a preliminary toxicity analysis and the extensive prior safety history from the Phase 2 clinical trial of APL-2 in patients with GA. We commenced a series of confirmatory non-human studies and anticipate completion of these non-human studies by late November 2018. If these studies support our conclusion that the single lot was the cause of the inflammation, we expect to resume dosing in the Phase 3 clinical program in GA by the end of 2018 and that there will be no delay to our projected enrollment timeline of 18 months for this program as a result of the pause in dosing.

 

Any inability to successfully complete preclinical and clinical development could result in additional costs to us, or any future collaborators, and impair our ability to generate revenues from product sales, regulatory and commercialization milestones and royalties. Moreover, if we, or any future collaborators, are required to conduct additional clinical trials or other testing of our product candidates beyond the trials and testing that we or they contemplate, if we or they are unable to successfully complete clinical trials of

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our product candidates or other testing or the results of these trials or tests are unfavorable, uncertain or are only modestly favorable, or there are unacceptable safety concerns associated with our product candidates, we, or any future collaborators may:

 

incur additional unplanned costs;

 

be delayed in obtaining marketing approval for our product candidates;

 

not obtain marketing approval at all;

 

obtain approval for indications or patient populations that are not as broad as intended or desired;

 

obtain approval with labeling that includes significant use or distribution restrictions or significant safety warnings, including boxed warnings;

 

be subject to additional post-marketing testing or other requirements; or

 

be required to remove the product from the market after obtaining marketing approval.

In addition, investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive compensation in connection with such services, including equity awards and option grants, and may have other financial interests in our company. We are required to collect and provide financial disclosure notifications or certifications for our clinical investigators to the FDA. If the FDA concludes that a financial relationship between us and a clinical investigator has created a conflict of interest or otherwise affected interpretation of the trial, the FDA may question the integrity of the data generated at the applicable clinical trial site and the utility of the clinical trial itself may be jeopardized. This could result in a delay in approval, or rejection, of our marketing applications by the FDA and may ultimately lead to the denial of marketing approval of our current and future product candidates.

Our failure to successfully complete clinical trials of our product candidates and to demonstrate the efficacy and safety necessary to obtain regulatory approval to market any of our product candidates would significantly harm our business.

Adverse events or undesirable side effects caused by, or other unexpected properties of, any of our product candidates may be identified during development that could delay or prevent their marketing approval or limit their use.

Adverse events or undesirable side effects caused by, or other unexpected properties of, our product candidates could cause us, any future collaborators, an institutional review board or regulatory authorities to interrupt, delay or halt clinical trials of one or more of our product candidates and could result in a more restrictive label, or the delay or denial of marketing approval by the FDA or comparable foreign regulatory authorities. For example, by design APL-2 has immunosuppressive effects and, in some cases, may be administered to patients with underlying significantly compromised health. Administration of our product candidates could make patients more susceptible to infection.

We voluntarily halted a Phase 1 clinical trial of a nebulized formulation of APL-1 in healthy volunteers after two subjects developed signs and symptoms consistent with a bacterial infection that were considered to be serious adverse events and possibly related to the pharmacology of APL-1. APL-2 is a conjugate of APL-1 formulated for subcutaneous and intravitreal administration. We vaccinate subjects against certain bacterial pathogens in all of our ongoing trials involving systemic administration of APL-2. However, there can be no assurance that these efforts will prevent serious adverse effects, including bacterial infection.

In addition, in preclinical studies of APL-2, we observed evidence of minimal to mild kidney toxicity when animals were administered relatively higher doses of APL-2 than the doses we intend to use in the treatment of patients. We believe this kidney toxicity is likely associated with the presence of polyethylene glycol, or PEG, which is a component of APL-2. If such kidney toxicity, or other adverse effects, were to arise in patients being treated with APL-2 or any other of our product candidates, it could require us to halt, delay or interrupt clinical trials of such product candidate or adversely affect our ability to obtain requisite approvals to advance the development and commercialization of such product candidate.

In our Phase 2 trial of APL-2 in patients with GA, the most frequently reported adverse events were associated with the injection procedure in the study eye. These adverse events included two cases of confirmed endophthalmitis, which is inflammation in the eye typically caused by infection, and one case of presumed endophthalmitis where the culture tested negative for bacterial growth. In addition, during the 12-month treatment period and the subsequent six-month period during which no treatment was administered, we observed a higher incidence of new onset exudation, or fluid leakage in the retinas of eyes in which exudation had not previously been reported, in the study eyes treated with APL-2, predominantly in patients with a history of wet AMD in the non-study eye, or fellow eye. Specifically, we observed that, after the 12 month treatment period and the six-month monitoring period, 21% of patients who received administration of APL-2 every month and 9% of patients who received administration of APL-2 every other month showed new onset exudation in the study eye as compared to 1% of the sham group. As we continue development of APL-2 for GA, if a

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significant number of patients develop new onset exudation, then we may need to limit development of intravitreal APL-2 to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective.

 

In our Phase 3 clinical trial of APL-2 in patients with GA and our Phase 1b/2 clinical trial of APL-2 in patients with wet AMD,

several patients treated from a single manufacturing lot of APL-2 intravitreal drug product experienced non-infectious inflammation.

A total of eight patients, four in the Phase 3 GA program and four in the Phase 1b/2 clinical trial of APL-2 in patients with wet AMD,

were treated with this APL-2 from this manufacturing lot and each patient developed non-infectious inflammation. Inflammation in seven of the eight patients has completely resolved and is expected to resolve in the eighth patient.

Serious adverse events have also been reported in our Phase 1b trials of APL-2 for PNH. In our Phase 1b trial of APL-2 in patients receiving treatment with eculizumab, one serious adverse event was noted as possibly related to the administration of APL-2. The patient with this serious adverse event experienced liver pain and elevated liver enzyme levels. As a result, treatment with APL-2 was temporarily discontinued but treatment with eculizumab continued. This discontinuation was followed by a recurrence of anemia and required a blood transfusion, and treatment with APL-2 was reinitiated. Following resumption of treatment, the patient had surgery, which resulted in a lowering of liver enzyme levels. In late October 2017, in our Phase 1b trial of APL-2 in treatment-naïve patients, we learned that one patient with concomitant aplastic anemia developed bone marrow failure after one year of treatment with APL-2. Treatment with APL-2 was discontinued on November 14, 2017. The investigator determined that the bone marrow failure in this patient was not related to the administration of APL-2. Development of bone marrow failure is a known risk in patients with PNH. In third-party studies, bone marrow failure occurred in between 15% and 30% of PNH patients, regardless of treatment with eculizumab. However, there can be no assurance that the administration of APL-2 could not have contributed to the bone marrow failure experienced by this patient.

In addition, in our Phase 1b clinical trial of APL-2 treatment naïve patients with PNH, one patient, who had been temporarily discontinued from dosing with APL-2 due to an unrelated medical condition, experienced increased hemolysis and required a transfusion.  This was classified as a serious adverse event unrelated to the administration of APL-2. This patient subsequently recovered and has resumed treatment with APL-2.  We believe that a sudden discontinuation of APL-2 may cause increased hemolysis in some patients.

If any of our product candidates is associated with adverse events or undesirable side effects or has properties that are unexpected, we, or any future collaborators, may need to abandon development or limit development of that product candidate to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. Many compounds that initially showed promise in clinical or earlier stage testing have later been found to cause undesirable or unexpected side effects that prevented further development of the compound.

In addition, clinical trials by their nature utilize a sample of the potential patient population. However, with a limited number of subjects and limited duration of exposure, rare and severe side effects of our product candidates may only be uncovered when a significantly larger number of patients are exposed to the product. If safety problems occur or are identified after one of our products reaches the market, the FDA or comparable non-U.S. regulatory authorities may require that we amend the labeling of our product, recall our product, or even withdraw approval for our product.

If we, or any future collaborators, experience any of a number of possible unforeseen events in connection with clinical trials of our product candidates, potential clinical development, marketing approval or commercialization of our product candidates could be delayed or prevented.

We, or any future collaborators, may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent clinical development, marketing approval or commercialization of our product candidates, including:

 

clinical trials of our product candidates may produce unfavorable or inconclusive results;

 

we, or any future collaborators, may decide, or regulators may require us or them, to conduct additional clinical trials or abandon product development programs;

 

the number of patients required for clinical trials of our product candidates may be larger than we, or any future collaborators, anticipate, patient enrollment in these clinical trials may be slower than we, or any future collaborators, anticipate or participants may drop out of these clinical trials at a higher rate than we, or any future collaborators, anticipate;

 

the cost of planned clinical trials of our product candidates may be greater than we anticipate;

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our third-party contractors or those of any future collaborators, including those manufacturing our product candidates or components or ingredients thereof or conducting clinical trials on our behalf or on behalf of any future collaborators, may deviate from the trial protocol, fail to comply with regulatory requirements or fail to meet their contractual obligations to us or any future collaborators in a timely manner or at all;

 

regulators or institutional review boards may not authorize us, any future collaborators or our or their investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

we, or any future collaborators, may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;

 

patients that enroll in a clinical trial may misrepresent their eligibility to do so or may otherwise not comply with the clinical trial protocol, resulting in the need to drop the patients from the clinical trial, increase the needed enrollment size for the clinical trial or extend the clinical trial’s duration;

 

we, or any future collaborators, may have to delay, suspend or terminate clinical trials of our product candidates for various reasons, including a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate, such as occurred in our Phase 1 clinical trial of APL-1;

 

regulators or institutional review boards may require that we, or any future collaborators, or our or their investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or their standards of conduct, a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate or findings of undesirable effects caused by a chemically or mechanistically similar product or product candidate;

 

the FDA or comparable foreign regulatory authorities may disagree with our, or any future collaborators’, clinical trial designs or our or their interpretation of data from preclinical studies and clinical trials;

 

the FDA or comparable foreign regulatory authorities may fail to approve or subsequently find fault with the manufacturing processes or facilities of third-party manufacturers with which we, or any future collaborators, enter into agreements for clinical and commercial supplies;

 

the supply or quality of raw materials, drug intermediates or manufactured product candidates, other products evaluated in our clinical trials or other materials necessary to conduct clinical trials of our product candidates may be insufficient, inadequate or not available at an acceptable cost, or we may experience interruptions in supply; and

 

the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient to obtain marketing approval.

Product development costs for us, or any future collaborators, will increase if we, or they, experience delays in testing or pursuing marketing approvals and we, or they, may be required to obtain additional funds to complete clinical trials and prepare for possible commercialization of our product candidates. We do not know whether any preclinical tests or clinical trials will begin as planned, will need to be restructured, or will be completed on schedule or at all. Significant preclinical study or clinical trial delays also could shorten any periods during which we, or any future collaborators, may have the exclusive right to commercialize our product candidates or allow our competitors, or the competitors of any future collaborators, to bring products to market before we, or any future collaborators, do and impair our ability, or the ability of any future collaborators, to successfully commercialize our product candidates and may harm our business and results of operations. In addition, many of the factors that lead to clinical trial delays may ultimately lead to the denial of marketing approval of any of our product candidates.

If we, or any future collaborators, experience delays or difficulties in the enrollment of patients in clinical trials, our or their receipt of necessary regulatory approvals could be delayed or prevented.

We, or any future collaborators, may not be able to initiate or continue clinical trials for any of our product candidates if we, or they, are unable to locate and enroll a sufficient number of eligible patients to participate in clinical trials as required by the FDA or comparable foreign regulatory authorities. Patient enrollment is a significant factor in the timing of clinical trials, and is affected by many factors, including:

 

the size and nature of the patient population;

 

the severity of the disease under investigation;

 

the proximity of patients to clinical sites;

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the patient referral practices of physicians;

 

the eligibility criteria for the trial;

 

the design of the clinical trial;

 

efforts to facilitate timely enrollment;

 

competing clinical trials; and