apls-10q_20190331.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 March 31, 2019

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  

Securities registered pursuant to Section 12(b) of the Act:

C

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

APLS

Nasdaq Global Select Market

 

As of April 30, 2019, the registrant had 63,232,476 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 Statements 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

12

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

21

Item 4.

Controls and Procedures

22

PART II.

OTHER INFORMATION

23

Item 1.

Legal Proceedings

23

Item 1A.

Risk Factors

23

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

62

Item 6.

Exhibits

64

Signatures

 

65

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

APELLIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

December 31,

 

 

March 31,

 

 

 

2018

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

176,267,666

 

 

$

288,246,706

 

Refundable research and development credit

 

 

1,473,591

 

 

 

1,755,639

 

Prepaid assets

 

 

24,333,851

 

 

 

20,509,948

 

Other current assets

 

 

364,113

 

 

 

15,570

 

Total current assets

 

 

202,439,221

 

 

 

310,527,863

 

Non-current Assets:

 

 

 

 

 

 

 

 

Right-of-use assets

 

 

 

 

 

6,621,807

 

Property and equipment, net

 

 

977,918

 

 

 

1,041,063

 

Other assets

 

 

116,420

 

 

 

162,345

 

Total assets

 

$

203,533,559

 

 

$

318,353,078

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

10,254,938

 

 

$

11,916,152

 

Accrued expenses

 

 

5,103,002

 

 

 

7,342,601

 

Current portion of long-term debt

 

 

1,666,667

 

 

 

 

Current portion of right of use liabilities

 

 

 

 

 

1,127,720

 

Total current liabilities

 

 

17,024,607

 

 

 

20,386,473

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Development derivative liability

 

 

 

 

 

60,736,000

 

Term loan facility

 

 

18,722,321

 

 

 

 

Promissory note

 

 

6,655,193

 

 

 

6,673,970

 

Right-of-use liabilities

 

 

 

 

 

5,566,811

 

Other liabilities

 

 

158,783

 

 

 

234,932

 

Total liabilities

 

 

42,560,904

 

 

 

93,598,186

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

   shares issued and outstanding at December 31, 2018 and March 31, 2019

 

 

 

 

 

 

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

   at December 31, 2018 and March 31, 2019 and 56,279,307 shares

   issued and outstanding at December 31, 2018 and 63,218,476 shares

   issued and outstanding at March 31, 2019

 

 

5,628

 

 

 

6,322

 

Additional paid in capital

 

 

437,855,681

 

 

 

552,209,429

 

Accumulated other comprehensive loss

 

 

(122,807

)

 

 

(120,645

)

Accumulated deficit

 

 

(276,765,847

)

 

 

(327,340,214

)

Total stockholders' equity

 

 

160,972,655

 

 

 

224,754,892

 

Total liabilities and stockholders' equity

 

$

203,533,559

 

 

$

318,353,078

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

1


APELLIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

 

 

For the Three Months Ended March 31,

 

 

2018

 

 

2019

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

$

17,402,890

 

 

$

40,479,899

 

General and administrative

 

4,035,255

 

 

 

8,170,671

 

Operating loss

 

(21,438,145

)

 

 

(48,650,570

)

Loss on extinguishment of debt

 

 

 

 

(1,208,132

)

Loss from remeasurement of development

      derivative liability

 

 

 

 

(736,000

)

Interest expense

 

(667,087

)

 

 

(593,505

)

Interest income

 

400,401

 

 

 

867,017

 

Other expense, net

 

(31,473

)

 

 

(253,177

)

Net loss

 

(21,736,304

)

 

 

(50,574,367

)

Other comprehensive gain:

 

 

 

 

 

 

 

    Foreign currency gain

 

 

 

 

2,162

 

Total other comprehensive gain

 

 

 

 

2,162

 

Comprehensive loss, net of tax

$

(21,736,304

)

 

$

(50,572,205

)

Net loss per common share, basic and diluted

$

(0.43

)

 

$

(0.87

)

Weighted-average number of common shares used in net

   loss per common share, basic and diluted

 

50,353,812

 

 

 

57,897,390

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

2


 

Apellis Pharmaceuticals, Inc.

CONDENSED Consolidated Statements of CHANGES IN STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Outstanding

 

 

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

 

 

Capital

 

 

Loss

 

 

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 upon exercise of

      stock options

 

 

94,868

 

 

 

9

 

 

 

225,352

 

 

 

 

 

 

 

 

 

225,361

 

Share-based compensation expense

 

 

 

 

 

 

 

 

1,610,188

 

 

 

 

 

 

 

 

 

1,610,188

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21,736,304

)

 

 

(21,736,304

)

Balance at March 31, 2018

 

 

50,429,020

 

 

$

5,042

 

 

$

300,037,020

 

 

$

 

 

$

(170,999,957

)

 

$

129,042,105

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Outstanding

 

 

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance at January 1, 2019

 

 

56,279,307

 

 

$

5,628

 

 

$

437,855,681

 

 

$

(122,807

)

 

$

(276,765,847

)

 

$

160,972,655

 

Issuance of common stock in follow-on offering,

     net of offering costs

 

 

6,900,000

 

 

 

690

 

 

 

109,603,159

 

 

 

 

 

 

 

 

 

109,603,849

 

Issuance of common stock upon exercise of

      stock options

 

 

39,169

 

 

 

4

 

 

 

192,001

 

 

 

 

 

 

 

 

 

192,005

 

Share-based compensation expense

 

 

 

 

 

 

 

 

4,558,588

 

 

 

 

 

 

 

 

 

4,558,588

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(50,574,367

)

 

 

(50,574,367

)

Foreign currency gain

 

 

 

 

 

 

 

 

 

 

 

2,162

 

 

 

 

 

 

2,162

 

Balance at March 31, 2019

 

 

63,218,476

 

 

$

6,322

 

 

$

552,209,429

 

 

$

(120,645

)

 

$

(327,340,214

)

 

$

224,754,892

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

3


 

Apellis Pharmaceuticals, Inc.

CONDENSED Consolidated Statements of Cash Flows

 

 

 

 

For the Three Months Ended March 31,

 

 

 

2018

 

 

2019

 

Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(21,736,304

)

 

$

(50,574,367

)

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

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

1,610,188

 

 

 

4,558,588

 

Loss on early extinguishment of debt

 

 

 

 

 

1,208,132

 

Loss from remeasurement of development derivative liability

 

 

 

 

 

736,000

 

Amortization of right-of-use assets

 

 

 

 

 

72,725

 

Depreciation expense

 

 

 

 

 

40,503

 

Accretion of discounts for promissory note

 

 

17,073

 

 

 

18,777

 

Accretion of discounts for term loan facility

 

 

208,624

 

 

 

104,172

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Refundable research and development credit

 

 

(531,204

)

 

 

(275,218

)

Prepaid assets

 

 

(3,062,009

)

 

 

3,824,196

 

Other current assets

 

 

(188,226

)

 

 

24,854

 

Other assets

 

 

 

 

 

(45,925

)

Accounts payable

 

 

921,805

 

 

 

1,906,521

 

Accrued expenses

 

 

(180,904

)

 

 

2,764,408

 

Other liabilities

 

 

5,708

 

 

 

76,150

 

Net cash used in operating activities

 

 

(22,935,249

)

 

 

(35,560,484

)

Investing Activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

 

 

 

(875,111

)

Net cash used in investing activities

 

 

 

 

 

(875,111

)

Financing Activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

 

 

 

110,262,000

 

Deferred issuance costs

 

 

(2,664

)

 

 

(334,462

)

Proceeds from development derivative liability

 

 

 

 

 

60,000,000

 

Proceeds from exercise of stock options

 

 

225,361

 

 

 

192,005

 

Repayment of term loan facility

 

 

 

 

 

(21,701,292

)

Net cash provided by financing activities

 

 

222,697

 

 

 

148,418,251

 

Effect of exchange rate changes on cash and cash equivalents

 

 

 

 

 

(3,616

)

Net (decrease) increase in cash and cash equivalents

 

 

(22,712,552

)

 

 

111,979,040

 

Cash and cash equivalents at beginning of period

 

 

175,643,529

 

 

 

176,267,666

 

Cash and cash equivalents at end of period

 

$

152,930,977

 

 

$

288,246,706

 

Supplemental Disclosure of Financing Activities

 

 

 

 

 

 

 

 

Cash paid for Interest

 

$

551,750

 

 

$

588,473

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

4


 

APELLIS PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 AND 2019

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”).

Development Derivative Liability

On February 28, 2019, the Company entered into a development funding agreement with SFJ Pharmaceuticals Group (“SFJ”) under which SFJ agreed to provide funding to the Company to support the development of APL-2 for the treatment of patients with paroxysmal nocturnal hemoglobinuria (“PNH”) (“SFJ Agreement”).  Pursuant to the agreement, SFJ paid the Company $60.0 million following the signing of the agreement, and agreed to pay the Company up to an additional $60.0 million in the aggregate in three equal installments upon the achievement of specified development milestones with respect to the Company’s Phase 3 program for APL-2 in PNH and subject to the Company having cash resources at the time sufficient to fund at least 10 months of the Company’s operations. The Company expects that those milestones will occur during 2019. In addition, upon the mutual agreement of the Company and SFJ, at any time after the earlier of the date that the Company has reviewed the primary endpoint data from its PEGASUS Phase 3 trial of APL-2 in patients with PNH and March 31, 2020, SFJ may fund an additional $50.0 million of the Company’s development costs (the “Additional SFJ Funding”).

Follow-on Public Offering

On March 11, 2019, the Company issued and sold 6,900,000 shares of its common stock at a price per share of $17.00 in a follow-on public offering (“2019 follow-on offering”).  The Company received net proceeds of $109.6 million after deducting underwriting discounts and commissions of $7.0 million and offering costs of $0.7 million.

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 (“2018 follow-on 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.

  

     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 May 7, 2019, the date of issuance of these unaudited condensed consolidated financial statements, the Company believes that its cash and cash equivalents as of March 31, 2019 of $288.2 million will be sufficient to fund its operations for at least the next twelve months from the issuance of the unaudited interim consolidated financial statements. 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

5


 

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 subsidiaries, Apellis Australia Pty Ltd, Apellis Ireland Ltd and Apellis Switzerland GmbH. 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, 2018 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 three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other interim period or for any other future year.

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, 2018 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2019.

 

Fair Value of Financial Instruments

The Company is required to disclose information on the fair value of financial instruments and inputs that enable an assessment of the fair value.  The three levels of the fair value hierarchy prioritize valuation inputs based upon the observable nature of those inputs as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities;

Level 2 – Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly;

Level 3 – Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. 

The Company’s financial instruments, in addition to those presented in Note 5, Long-Term Debt, and Note 6, Fair Value Measurement, include cash and cash equivalents, the Australian research and development credit, accounts payable and accrued liabilities.  Management believes that the carrying amounts of cash and cash equivalents, the Australian research and development credit, accounts payable and accrued expenses approximate the fair value due to the short-term nature of those instruments.

Cash and Cash Equivalents

Cash and cash equivalents are defined as cash in banks and investment instruments having maturities of three months or less from their acquisition date. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents are valued at cost, which approximates their fair value.

6


 

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 audited consolidated financial statements for the year ended 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 January 1, through March 31, 2019. 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.

Reclassifications

Certain prior year amounts have been reclassified to conform to the 2019 presentation.

 

 

3. Accrued Expenses

Accrued expenses are as follows:

 

 

 

December 31,

 

 

March 31,

 

 

 

2018

 

 

2019

 

Accrued research and development

 

$

3,481,570

 

 

$

4,702,232

 

Accrued payroll liabilities

 

 

269,046

 

 

 

1,777,244

 

Other

 

 

1,352,386

 

 

 

863,125

 

Total

 

$

5,103,002

 

 

$

7,342,601

 

 

4. Development Derivative Liability

 

On February 28, 2019, the Company entered into the SFJ Agreement under which SFJ agreed to provide funding to the Company to support the development of APL-2 for the treatment of patients with PNH.  Pursuant to the agreement, SFJ paid the Company $60.0 million following the signing of the agreement, and agreed to pay the Company up to an additional $60.0 million in the aggregate in three equal installments upon the achievement of specified development milestones with respect to the Company’s Phase 3 program for APL-2 in PNH and subject to the Company having cash resources at the time sufficient to fund at least 10 months of the Company’s operations. The Company expects that those milestones will occur during 2019. In addition, upon the mutual agreement of the Company and SFJ, at any time after the earlier of the date that the Company has reviewed the primary endpoint data from its PEGASUS Phase 3 trial of APL-2 in patients with PNH and March 31, 2020, SFJ may fund an additional $50.0 million of the Company’s development costs (the “Additional SFJ Funding”).

Following regulatory approval by the FDA or the European Medicines Agency (“EMA”) for the use of APL-2 as a treatment for PNH the Company will be obligated to pay SFJ an initial payment of $2.5 million (or a total of $5 million if regulatory approval is granted by the FDA and the EMA) and then an additional $192.5 million in the aggregate (or $385 million if regulatory approval is granted by the FDA and the EMA) in six additional annual payments with the majority of the payments being made from the third anniversary to the sixth anniversary of regulatory approval. Such payments will be proportionately adjusted in the event that the actual funding from SFJ is lower or greater than $120 million (including as a result of the payment of the Additional SFJ Funding). Additionally, the Company granted a security interest in all of its assets, excluding intellectual property and license agreements to which it is a party. In connection with the grant of the security interest, the Company agreed to certain affirmative and negative covenants, including restrictions on its ability to pay dividends, incur additional debt or enter into licensing transactions with respect to its intellectual property, other than specified types of licenses.

The SFJ Agreement is presented as a derivative liability on the balance sheet as of March 31, 2019. The liability was initially recorded at the value of the aggregate cash received pursuant to the contractual terms, which was determined to have been fair value, and subsequently remeasured at the end of the fiscal quarter as a level 3 derivative, with the change in fair value of $736,000 recorded in loss from remeasurement of development derivative liability on the income statement.

7


 

The derivative is valued using a scenario-based discounted cash flow method, whereby each scenario makes assumptions about the probability and timing of cash flows, and such cash flows are present valued using a risk-adjusted discount rate. The analysis is calibrated such that the value of the derivative as of the date of the SFJ Agreement was consistent with an arm’s-length transaction. Key inputs to the level 3 fair value model include (i) the probability and timing of achieving stated development goals to receive the next tranche of funding, (ii) the probability and timing of achieving FDA and EMA approval, (iii) SFJ’s cost of borrowing (8.00%), and (iv) the Company’s cost of borrowing (16.16%).

SFJ’s implied cost of borrowing was 8.00% and the Company’s implied cost of borrowing was 16.16.% as of the reporting date. These implied costs of borrowing were determined assuming the SFJ Agreement was initially executed with arm’s-length terms. If the SFJ Agreement was instead not determined to be an arm’s-length transaction, then implied discount rates could differ.

 

 

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 accrued interest at a floating rate per annum equal to the WSJ prime rate plus 1.50%. Under the agreement, the Company was required to make monthly interest-only payments through November 1, 2019 and was 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 became due and payable.

On March 26, 2019, the Company voluntarily repaid all outstanding amounts due and owed, including applicable termination fees, under the term loan facility.  The final payment of $21,802,403 totaled per diem interest of $101,111 and $21,701,292 for the outstanding balance of the term loan which included (i) a final payment equal to 8% of the original principal amount of the term loan of $1,600,000, and (ii) a prepayment fee contractually owed of $100,000 plus other fees of $1,292 which resulted in a total loss on extinguishment of debt of $1,208,132.

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.

Related Party 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”), an affiliate of one of the Company’s stockholders. The promissory note accrues 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. The promissory note has a maturity date of October 19, 2022 when the $7,000,000 is due and payable in its entirety. The promissory note is contractually subordinated to the Company’s obligations to SFJ under the SFJ Agreement.

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.

 

 

6. Leases

On January 1, 2019, The Company adopted ASU 2016-02 Leases (Topic 842) using a modified retrospective method.  The Company recognized $5.5 million of lease assets and liabilities.  There was no impact to retained earnings upon adoption of Topic 842.  The underlying assets of the Company’s leases primarily relate to office space leases, but also include some equipment leases. The Company determines if an arrangement qualifies as a lease at its inception.

As a practical expedient permitted under Topic 842, the Company has elected to account for the lease and non-lease components as a single lease component for all leases of which it is the lessee.  Lease payments, which may include lease and non-lease components, are included in the measurement of the Company’s lease liabilities to the extent that such payments are either fixed

8


 

amounts or variable amounts that depend on a rate or index as stipulated in the lease contract. When the Company cannot readily determine the rate implicit in the lease, the Company determines its incremental borrowing rate by using the rate of interest that it would have to pay to borrow on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment.

The Company enters into lease agreements with terms generally ranging from 2-7 years. Some of the Company’s lease agreements include Company options to extend the lease on a month to month basis or for set periods for up to 5 years. Many leases also include options to terminate the leases within 1 year or per other contractual terms. Renewal and termination options were generally not included in the lease term for the Company’s existing operating leases.

As of March 31, 2019, all leases were classified as operating lease assets and liabilities.  Operating lease assets were $6.6 million and operating lease liabilities were $6.7 million at March 31, 2019.  At March 31, 2019, the weighted average remaining lease term of operating leases was 5.29 years and the weighted average discount rate used to measure the outstanding operating lease liabilities leases was 8.54%.

For the three months ended March 31, 2019, the total lease cost for operating lease expense was: $403,542.

 

Supplemental cash flow information related to operating leases for the three months ended March 31, 2019 is as follows:

 

Operating cash flows from operating leases

 

 

 

$330,816

Right of use assets obtained in exchange for

     lease obligations

 

 

 

$6,940,332

 

The maturity of the Company’s operating lease liabilities as of March 31, 2019 are as follows:

 

2019

 

 

 

$1,154,778

2020

 

 

 

1,691,742

2021

 

 

 

1,320,200

2022

 

 

 

1,353,133

2023 and thereafter

 

 

 

2,829,649

Total future minimum lease payments

 

 

 

8,349,502

     Less imputed interest

 

 

 

(1,654,971)

Total operating lease liabilities

 

 

 

$6,694,531

 

Comparative disclosures under ASC 840:

Rental expense under operating leases totaled $136,215 for the three months ended March 31, 2018.

 

As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting standard, ASC 840, Leases, Future minimum rental payments for lease obligations with initial terms in excess of one year as of December 31, 2018 were as follows:

 

2019

 

 

 

$1,251,720

2020

 

 

 

1,292,025

2021

 

 

 

975,750

2022

 

 

 

998,350

2023 and thereafter

 

 

 

2,341,219

 

 

 

 

$6,859,064

 

7. Fair Value Measurements

 

The fair value of the following financial instruments are based on level 2 inputs. As of December 31, 2018 and March 31, 2019, the fair value of the Company's promissory note was approximately $7.4 million, based on discounted cash flows, market-based expectations for interest rates, credit risk and the contractual terms of the debt instrument. The term loan facility paid interest at a variable interest rate and accordingly the carrying amount approximated fair value at December 31, 2018.

 

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The fair value of the SFJ Agreement is presented as a derivative liability based on level 3 inputs.  The derivative is valued using a scenario-based discounted cash flow method, whereby each scenario makes assumptions about the probability and timing of cash flows, and such cash flows are present valued using a risk-adjusted discount rate. The analysis is calibrated such that the value of the derivative as of the date of the SFJ Agreement was consistent with an arm’s-length transaction. Key inputs to the level 3 fair value model include (i) the probability and timing of achieving stated development goals to receive the next tranche of funding, (ii) the probability and timing of achieving FDA and EMA approval, (iii) SFJ’s cost of borrowing (8.00%), and (iv) the Company’s cost of borrowing (16.16%).

 

SFJ’s implied cost of borrowing was 8.00% and the Company’s implied cost of borrowing was 16.16% as of the reporting date. These implied costs of borrowing were determined assuming the SFJ Agreement was initially executed with arm’s-length terms. If the SFJ Agreement was instead not determined to be an arm’s-length transaction, then implied discount rates could differ.

 

8. 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 March 31, 2019 and 2018, 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 March 31, 2019.

 

9. Commitments and Contingencies

The Company contracts to conduct research and development activities with third parties.  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. If the Company were to cancel these contracts as of March 31, 2019, the Company would be required to pay certain termination costs and other fees of approximately $1,768,400 that would be incurred in future periods.

The Company also has certain payment and other obligations under the SFJ Agreement, which are discussed above in Note 4.

 

10. 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 March 31,

 

 

 

2018

 

 

2019

 

Common stock options

 

 

7,418,316

 

 

 

9,191,033

 

Common stock warrants

 

 

14,064

 

 

 

14,064

 

Total

 

 

7,432,380

 

 

 

9,205,097

 

 

11. Related Party Transaction

10


 

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.

 

          

 

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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, 2018 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2019, which we refer to as the 2018 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 C3with 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 four distinct medical conditions — geographic atrophy in age-related macular degeneration, or GA; paroxysmal nocturnal hemoglobinuria, or PNH; cold agglutinin disease, or CAD; and warm antibody autoimmune hemolytic anemia, or w/AIHA. In additional to trials for these indications, we have also initiated clinical trials of APL-2 in patients with glomerular diseases with complement involvement.

 

We initiated a Phase 3 clinical program consisting of two Phase 3 clinical trials evaluating APL-2 in patients with GA in September 2018.  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 also initiated a Phase 3 clinical program evaluating APL-2 in patients with PNH who are anemic while being treated with eculizumab, an approved therapy for PNH, in June 2018, and plan to initiate a second Phase 3 clinical trial in patients with PNH who have not been treated with eculizumab in mid 2019. 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. In our ongoing Phase 2 clinical trials of APL-2 in patients with CAD and wAIHA, patients with CAD and with wAIHA have achieved reduced extravascular hemolysis, measured by increased hemoglobin levels, reduced reticulocytes and bilirubin levels, and reduced intravascular hemolysis, measured by reduced lactate dehydrogenase.  We plan to continue clinical development of APL-2 for these indications.  We are also conducting clinicals trials of APL-2 for glomerular diseases with complement involvement. We are also developing novel compounds targeting C3 and plan to conduct clinical trials of these compounds in additional complement-dependent diseases. We hold worldwide commercialization rights to APL-2 and those other novel compounds targeting C3.

 

In our clinical trials of APL-2 for the treatment of PNH, we are currently using an off-the-shelf, FDA-cleared device that enables patients to self-administer APL-2 through subcutaneous infusion. In addition, we are developing, with a third-party manufacturer, a custom, on-body drug delivery system that is expected to further improve the ease of self-administration of APL-2.  Initial clinical testing in a Phase 1 trial with healthy volunteers indicates that the pharmacokinetic (PK) profile of APL-2 administered subcutaneously at 2x weekly at a dose of 1,080 mg, both with the 510(k) approved device used in the PEGASUS Phase 3 trial and with the custom delivery system is comparable to that of APL-2 administered once daily at a dose between 270 mg and 360 mg.

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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.

 

On February 28, 2019, we entered into a development funding agreement, which we refer to as the SFJ agreement, with SFJ Pharmaceuticals Group or SFJ, under which SFJ agreed to provide funding to us to support the development of APL-2 for the treatment of patients with PNH.  Pursuant to the agreement, SFJ paid us $60.0 million following the signing of the agreement, and agreed to pay us up to an additional $60.0 million in the aggregate in three equal installments upon the achievement of specified development milestones with respect to our Phase 3 program for APL-2 in PNH and subject to our having cash resources at the time sufficient to fund at least 10 months of our operations. We expect that those milestones will occur during 2019. In addition, upon the mutual agreement of us and SFJ, at any time after the earlier of the date that we have reviewed the primary endpoint data from our PEGASUS Phase 3 trial of APL-2 in patients with PNH and March 31, 2020, SFJ may fund an additional $50.0 million of our development costs which we refer to as the Additional SFJ Funding.

 

On March 11, 2019, we issued and sold 6,900,000 shares of our common stock in a follow-on offering at a public offering price of $17.00 per share for net proceeds of $109.6 million, after deducting underwriting discounts and commissions of $7.0 million and estimated offering expenses of $0.7 million.  

To date, we have financed our operations primarily through $391.5 million in net proceeds from public offerings of our common stock, including our initial public offering, or IPO, $112.6 million in proceeds from the private placement of shares of our convertible preferred stock, $60.0 million from the SFJ agreement, $20.0 million in proceeds from borrowings under a 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, an affiliate of one of our stockholders.

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 $50.6 million and $21.7 million for the three months ended March 31, 2019 and March 31, 2018, respectively. As of March 31, 2019, we had an accumulated deficit of $327.3 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 trials 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 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.

As of March 31, 2019, we had cash and cash equivalents of $288.2 million. We believe that our cash and cash equivalents as of March 31, 2019, which include the net proceeds of $109.6 million from our follow-on offering in March of 2019 and the $60.0 million in proceeds from the SFJ agreement, will be sufficient to fund our operating expenses and capital expenditures into the second quarter of 2020.

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;

13


 

 

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. In October 2018, we voluntarily implemented a 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.   In March 2019, we restarted enrollment of our Phase 3 clinical program in GA and expect to have fully enrolled both trials in the GA program by the end of the first quarter of 2020, within the originally planned timeline for completion. 

 

 

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 treatment-naïve patients, APL-2 treatment has been 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.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.

 

 

CAD.  We are developing APL-2 for patients with CAD, administered by subcutaneous injection. We initiated a Phase 2 clinical trial of APL-2 in patients with CAD in the first quarter of 2018, reported interim data in December 2018 and intend to provide additional data in the second quarter of 2019.

 

wAIHA.  We are developing APL-2 for patients with wAIHA, administered by subcutaneous injection. We initiated a Phase 2 clinical trial of APL-2 in patients with wAIHA in the first quarter of 2018, reported interim data in December 2018 and intend to provide additional data in the second quarter of 2019.

We are also conducting a Phase 2 clinical trial of APL-2 in patients with glomerular diseases with complement involvement, which we began in the first quarter 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.

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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.

The following critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our 2018 Annual Report on Form 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

In addition, we identified the following policy as a new critical policy that reflects significant judgements or uncertainties, and potentially may result in materially different results under different assumptions and conditions.

Development Derivative Liability  

On February 28, 2019, the Company entered into the SFJ Agreement under which SFJ agreed to provide funding to the Company to support the development of APL-2 for the treatment of patients with PNH.  Pursuant to the agreement, SFJ paid the Company $60.0 million following the signing of the agreement, and agreed to pay the Company up to an additional $60.0 million in the aggregate in three equal installments upon the achievement of specified development milestones with respect to the Company’s Phase 3 program for APL-2 in PNH and subject to the Company having cash resources at the time sufficient to fund at least 10 months of the Company’s operations. The Company expects that those milestones will occur during 2019. In addition, upon the mutual agreement of the Company and SFJ, at any time after the earlier of the date that the Company has reviewed the primary endpoint data from its PEGASUS Phase 3 trial of APL-2 in patients with PNH and March 31, 2020, SFJ may fund an additional $50.0 million of the Company’s development costs (the “Additional SFJ Funding”).

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Following regulatory approval by the FDA or the European Medicines Agency (“EMA”) for the use of APL-2 as a treatment for PNH the Company will be obligated to pay SFJ an initial payment of $2.5 million (or a total of $5 million if regulatory approval is granted by the FDA and the EMA) and then an additional $192.5 million in the aggregate (or $385 million if regulatory approval is granted by the FDA and the EMA) in six additional annual payments with the majority of the payments being made from the third anniversary to the sixth anniversary of regulatory approval. Such payments will be proportionately adjusted in the event that the actual funding from SFJ is lower or greater than $120 million (including as a result of the payment of the Additional SFJ Funding). Additionally, the Company granted a security interest in all of its assets, excluding intellectual property and license agreements to which it is a party. In connection with the grant of the security interest, the Company agreed to certain affirmative and negative covenants, including restrictions on its ability to pay dividends, incur additional debt or enter into licensing transactions with respect to its intellectual property, other than specified types of licenses.

The SFJ Agreement is presented as a derivative liability on the balance sheet as of March 31, 2019. The liability was initially recorded at the value of the aggregate cash received pursuant to the contractual terms, which was determined to have been fair value, and subsequently remeasured at the end of the fiscal quarter as a level 3 derivative, with the change in fair value of $736,000 recorded in loss from remeasurement of development derivative liability on the income statement.

 

The derivative is valued using a scenario-based discounted cash flow method, whereby each scenario makes assumptions about the probability and timing of cash flows, and such cash flows are present valued using a risk-adjusted discount rate. The analysis is calibrated such that the value of the derivative as of the date of the SFJ Agreement was consistent with an arm’s-length transaction. Key inputs to the level 3 fair value model include (i) the probability and timing of achieving stated development goals to receive the next tranche of funding, (ii) the probability and timing of achieving FDA and EMA approval, (iii) SFJ’s cost of borrowing (8.00%), and (iv) the Company’s cost of borrowing (16.16%).

SFJ’s implied cost of borrowing was 8.00% and the Company’s implied cost of borrowing was 16.16.% as of the reporting date. These implied costs of borrowing were determined assuming the SFJ Agreement was initially executed with arm’s-length terms. If the SFJ Agreement was instead not determined to be an arm’s-length transaction, then implied discount rates could differ.

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.

Results of Operations

Comparison of Three Months Ended March 31, 2018 and 2019

The following table summarizes our results of operations for the three months ended March 31, 2018 and 2019, together with the dollar increase or decrease and percentage change in those items:

 

 

 

For the Three Months Ended March 31,

 

 

Change

 

 

Change

 

 

 

2018

 

 

2019

 

 

$

 

 

%

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

17,402,890

 

 

$

40,479,899

 

 

$

23,077,009

 

 

 

132.6

%

General and administrative

 

 

4,035,255

 

 

 

8,170,671

 

 

 

4,135,416

 

 

 

102.5

 

Net operating loss

 

 

(21,438,145

)

 

 

(48,650,570

)

 

 

(27,212,425

)

 

 

126.9

 

Loss on extinguishment of debt

 

 

 

 

 

(1,208,132

)

 

 

(1,208,132

)

 

 

100.0

 

Loss from remeasurement of development

      derivative liability

 

 

 

 

 

(736,000

)

 

 

(736,000

)

 

 

100.0

 

Interest expense

 

 

(667,087

)

 

 

(593,505

)

 

 

73,582

 

 

 

(11.0

)

Interest income

 

 

400,401

 

 

 

867,017

 

 

 

466,616

 

 

 

116.5

 

Other expense, net

 

 

(31,473

)

 

 

(253,177

)

 

 

(221,704

)

 

 

704.4

 

Net loss

 

$

(21,736,304

)

 

$

(50,574,367

)

 

$

(28,838,063

)

 

 

132.7

 

 

16


 

Research and Development Expenses

The following table summarizes our research and development expenses incurred during the three months ended March 31, 2018 and 2019, together with the dollar increase or decrease and percentage change in those items:

 

 

 

For the Three Months Ended March 31,

 

 

Change

 

 

Change

 

 

 

2018

 

 

2019

 

 

$

 

 

%

 

Clinical trial costs

 

$

7,662,878

 

 

$

17,405,194

 

 

$

9,742,316

 

 

 

127.1

%

Contract manufacturing

 

 

5,644,047

 

 

 

13,746,046

 

 

 

8,101,999

 

 

 

143.5

 

Compensation and related personnel costs

 

 

2,137,074

 

 

 

6,059,362

 

 

 

3,922,288

 

 

 

183.5

 

Pre-clinical study expenses

 

 

502,301

 

 

 

1,218,651

 

 

 

716,350

 

 

 

142.6

 

Device development expenses

 

 

465,017

 

 

 

346,566

 

 

 

(118,451

)

 

 

(25.5

)

Other research and development costs

 

 

991,573

 

 

 

1,704,080

 

 

 

712,507

 

 

 

71.9

 

Total research and development expenses

 

$

17,402,890

 

 

$

40,479,899

 

 

$

23,077,009

 

 

 

132.6

 

 

Research and development expenses increased by $23.1 million to $40.5 million for the three months ended March 31, 2019 from $17.4 million for the three months ended March 31, 2018, an increase of 132.6%. The increase in research and development expenses was primarily attributable to an increase of $9.7 million in clinical trial costs, an increase of $8.1 million in manufacturing expenses, an increase of $3.9 million in employee related costs primarily due to the hiring of additional personnel, an increase of $0.7 million related to research and development supporting activities, and an increase of $0.7 million in pre-clinical study expenses, offset by a decrease of $0.1 million in device development expenses.

General and Administrative Expenses

General and administrative expenses increased by $4.1 million to $8.1 million for the three months ended March 31, 2019, from $4.0 for the three months ended March 31, 2018, an increase of 102.5%. The increase in general and administrative expenses was primarily attributable to an increase in employee related costs of $2.8 million due to the hiring of additional personnel, an increase in professional and consulting fees of $0.9 million, an increase in general office costs of $0.3 million and an increase of $0.1 million in insurance costs.

     Loss on Extinguishment of Debt

On March 26, 2019, we repaid all outstanding amounts due and owed, including applicable termination fees, under our term loan facility with Silicon Valley Bank. The final payment included the outstanding balance of the term loan as well as (i) a prepayment fee contractually owed of $0.1 million and other fees of $1,292, (ii) a final payment equal to 8% of the original principal amount of the term loan, or $1.6 million, and (iii) per diem interest of $0.1 million, for a total payment of $21.8 million, which resulted in a loss on extinguishment of debt of $1.2 million.  

     Loss from Remeasurement of Development Derivative Liability

Loss from remeasurement of development derivative liability was $736,000 for the three months ended March 31, 2019.  On February 28, 2019, we entered into the SFJ agreement under which SFJ agreed to provide funding to us to support the development of APL-2 for the treatment of patients with PNH.  The liability was initially recorded at the value of the aggregate cash received pursuant to the contractual terms, which was determined to have been fair value, and subsequently remeasured at the end of the fiscal quarter as a level 3 derivative.

Interest Expense

Interest expense was $0.6 million for the three months ended March 31, 2019, a decrease of $0.1 million, compared to $0.7 million for the three months ended March 31, 2018. The interest expense was primarily attributable to interest expense incurred on our long-term debt.

Interest Income

Interest income was $0.9 million for the three months ended March 31, 2019, an increase of $.5 million, compared to $0.4 million for the three months ended March 31, 2018. The increase in interest income earned during the three months ended March 31,

17


 

2019 was due to the interest earned on our cash and cash equivalents, which increased as a result of the completion of our follow-on offering in March 2019 and the initial payment to us under the SFJ agreement.

Other Expense, Net

Other expense, net during the three months ended March 31, 2019, increased $0.2 million compared to the three months ended March 31, 2018 due primarily to an increase in business-related taxes.

Liquidity and Capital Resources 

Sources of Liquidity

On November 13, 2017, we issued and sold 10,714,000 shares of common stock in our 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 offering at a public offering price of $25.50 per share. We received net proceeds of $131.3 million, after deducting underwriting discounts and commissions of $8.4 million and estimated offering expenses of $0.5 million.  

 

On March 11, 2019, we issued and sold 6,900,000 shares of our common stock in a follow-on offering at a public offering price of $17.00. We received net proceeds of $109.6 million after deducting underwriting discounts and commissions of $7.0 million and offering costs of $0.7 million.

Prior to our IPO, 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 GDP.

Development Derivative Liability

On February 28, 2019, we entered into the SFJ agreement, under which SFJ agreed to provide funding to us to support the development of APL-2 for the treatment of patients with PNH. Pursuant to the agreement, SFJ paid us $60.0 million following the signing of the agreement, and has agreed to pay us up to an additional $60.0 million in the aggregate in three equal installments upon the achievement of specified development milestones with respect to our Phase 3 program for APL-2 in PNH and subject to our having cash resources at the time sufficient to fund at least 10 months of our operations. We expect that those milestones will occur during 2019. In addition, upon the mutual agreement of us and SFJ, at any time after the earlier of the date that we have reviewed the primary endpoint data from its PEGASUS Phase 3 trial of APL-2 in patients with PNH and March 31, 2020, SFJ may fund an additional $50.0 million of our development costs.

 

Following regulatory approval by the U.S. Food and Drug Administration, or the FDA, or the European Medicines Agency, or the EMA, for the use of APL-2 as a treatment for PNH we will be obligated to pay SFJ an initial payment of $2.5 million (or a total of $5.0 million if regulatory approval is granted by the FDA and the EMA) and then an additional $192.5 million in the aggregate (or $385.0 million if regulatory approval is granted by the FDA and the EMA) in six additional annual payments with the majority of the payments being made from the third anniversary to the sixth anniversary of regulatory approval. Such payments will be proportionately adjusted in the event that the actual funding from SFJ is lower or greater than $120.0 million (including as a result of the payment of the Additional SFJ Funding). Additionally, we granted a security interest in all of our assets, excluding intellectual property and license agreements to which we are a party. In connection with the grant of the security interest, we agreed to certain affirmative and negative covenants, including restrictions on our ability to pay dividends, incur additional debt or enter into licensing transactions with respect to its intellectual property, other than specified types of licenses.

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.

18


 

Borrowings under the term loan facility accrued interest at a floating rate per annum equal to the WSJ prime rate plus 1.50%. Under the agreement, we were required to make monthly interest-only payments through November 1, 2019 and were 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 were to become due and payable.

On March 26, 2019, we repaid all outstanding amounts due and owed, including applicable termination fees, under the term loan facility. The final payment included the outstanding balance of the term loan as well as (i) a prepayment fee contractually owed of $0.1 million and other fees of $1,292, (ii) a final payment equal to 8% of the original principal amount of the term loan, or $1.6 million, and (iii) per diem interest of $0.1 million, for a total payment of $21.8 million, which resulted in a loss on extinguishment of debt  of $1.2 million.  

 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 accrues 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 our obligations to SFJ under the SFJ agreement.

In connection with the issuance and sale of the $7.0 million promissory note, we issued to GDP 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 three months ended March 31, 2019 and March 31, 2018:

 

 

 

For the Three Months Ended March 31,

 

 

 

2018

 

 

2019

 

 

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

$

(22,935,249

)

 

$

(35,560,484

)

Net cash used in investing activities

 

 

-

 

 

 

(875,111

)

Net cash provided by financing activities

 

 

222,697

 

 

 

148,418,251

 

Effect of exchange rate changes on cash and

  cash equivalents

 

 

 

 

 

 

(3,616

)

Net increase (decrease) in cash and cash equivalents

 

$

(22,712,552

)

 

$

111,979,040

 

Net Cash Used in Operating Activities 

Net cash used in operating activities was $35.6 million for the three months ended March 31, 2019 and consisted primarily of a net loss of $50.6 million adjusted for $6.8 million of non-cash items, including share-based compensation expense of $4.6 million, a loss on early extinguishment of debt of $1.2 million, and a loss from remeasurement of development derivative liability of $0.7 million, a net increase in accounts payable, accrued expenses and other liabilities of $4.7 million and a net decrease in operating assets of $3.5 million.  The net decrease in operating assets resulted primarily from a decrease in prepaid expenses of $3.8 million partially offset by an increase in refundable research and development credit of $0.3 million.

Net cash used in operating activities was $22.9 million for the three months ended March 31, 2018 and consisted primarily of a net loss of $21.7 million adjusted for non-cash items, including share-based compensation expense of $1.6 million, a net increase in accounts payable and accrued expenses of $0.7 million and a net increase in operating assets of $3.8 million.  The net increase in operating assets resulted from an increase in prepaid expenses of $3.1 million, an increase in other current assets of $0.2 million and an increase in refundable research and development credit of $0.5 million..

19


 

Net Cash Used in Investing Activities

Net cash used in investing activities during the three months ended March 31, 2019 was $0.9 million due to the purchase of fixed assets for our offices. There was no cash used in investing activities during the three months ended March 31, 2018.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $148.4 million during the three months ended March 31, 2019 and consisted primarily of proceeds from the issuance of common stock in our March follow-on offering of $110.3 million, the receipt of $60.0 million from the SFJ Agreement and $0.2 million upon the exercise of stock options, offset by $21.7 million for the repayment of our term loan facility and the payment of deferred issuance costs associated with our follow-on offering of $0.3 million. Net cash provided by financing activities was $0.2 million for the three months ended March 31, 2018 and consisted primarily of proceeds from stock option exercises.

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 will continue 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 March 31, 2019, which include the net proceeds of our March 2019 follow-on offering and the initial payment from the SFJ agreement, will enable us to fund our operating expenses and capital expenditure requirements at least into the second quarter of 2020. 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 March 31, 2019 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 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.

20


 

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 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 2018 Annual Report on Form 10-K. See Note 4 and 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.

 

On February 28, 2019, we entered into the SFJ agreement. Under the agreement, following regulatory approval by the FDA or the EMA of the use of APL-2 as a treatment for PNH, we will be obligated to pay SFJ an initial payment of $2.5 million (or a total of $5.0 million if regulatory approval is granted by the FDA and the EMA) and then an additional $192.5 million in the aggregate (or $385.0 million if regulatory approval is granted by the FDA and the EMA) in six additional annual payments with the majority of the payments being made from the third anniversary to the sixth anniversary of regulatory approval. Such payments will be proportionately adjusted in the event that the actual funding from SFJ is lower or greater than $120.0 million (including as a result of the payment of the Additional SFJ Funding). The timing and likelihood of such payments are not currently known.

Other than the SFJ agreement, during the three months ended March 31, 2019, there were no material changes to our contractual obligations and commitments as of December 31, 2018 as described under Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2018 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 March 31, 2019 we had cash and cash equivalents of $288.2 million, 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.

21


 

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 of 1934 as amended, or 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.

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). 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 March 31, 2019.

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 March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

22


 

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 $50.6 million for the three months ended March 31, 2019 and $127.5 million for the year ended December 31, 2018. As of March 31, 2019, we had an accumulated deficit of $327.3 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 subsequent follow-on offerings, private placements of our preferred stock, our development funding agreement with SFJ, borrowings under a term loan facility and the issuance and sale of a promissory note to GDP. 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

23


 

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. 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, Phase 2 and Phase 3 clinical trials for our product candidates. However, 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 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 three months ended March 31, 2019 and the years ended December 31, 2016, 2017 and 2018, we used net cash of $35.2 million, $26.0 million, $46.6 million and $131.2 million respectively, in our operating activities substantially all of which related to research and development activities. As of March 31, 2019, our cash and cash equivalents were $288.2 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 incur significant 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 March 31, 2019, 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.

We believe that our cash and cash equivalents as of March 31, 2019, which include the net proceeds from our March 2019 follow-on offering and the initial payment from the SFJ agreement, will enable us to fund our operating expenses and capital expenditure requirements at least into the second quarter of 2020. Our estimate as to how long we expect our cash and cash

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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.

The report of our independent registered public accounting firm included a “going concern” explanatory paragraph. 

The report of Ernst & Young, LLP on our financial statements as of and for the fiscal year ended December 31, 2018 included an explanatory paragraph that there was substantial doubt about our ability to continue as a going concern. See Note 1 to the consolidated financial statements included in our 2018 Annual Report on Form 10-K for additional information. Given our planned expenditures, our independent registered public accounting firm may conclude, in connection with the audit of our financial statements for the year ended December 31, 2019 or any other subsequent period, that there is substantial doubt regarding our ability to continue as a going concern. If we are unable to continue as a going concern, we might have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. The inclusion of a going concern explanatory paragraph by our independent registered public accounting firm may materially and adversely affect our share price and our ability to raise new capital or to enter into critical contractual relations with third parties.

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 development funding agreement with SFJ, we agreed that following regulatory approval by the FDA or EMA for the use of APL-2 as a treatment for PNH we will pay to SFJ an initial payment of $2.5 million (or a total of $5 million if regulatory approval is granted by the FDA and the EMA) and then an additional $192.5 million in the aggregate (or $385 million if regulatory approval is granted by the FDA and the EMA) in six additional annual payments with the majority of the payments being made from the third anniversary to the sixth anniversary of regulatory approval. Such payments will be proportionately adjusted in the event that the actual funding from SFJ is lower or greater than $120 million (including as a result of the payment of the Additional SFJ Funding). Additionally, we granted a security interest in all of our assets, excluding our intellectual

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property and license agreements to which we are a party. In connection with the grant of the security interest, we agreed to certain affirmative and negative covenants, including restrictions on our ability to pay dividends, incur additional debt or enter into licensing transactions with respect to our intellectual property other than specified types of licenses.

Future debt securities or other financing arrangements could contain similar or more restrictive negative covenants.  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 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.

 

If we receive regulatory approval for the use of APL-2 as a treatment for PNH or if our agreement with SFJ is terminated

prior to receiving such approval in specified circumstances, we will be required to make substantial payments to SFJ pursuant

to our development funding agreement. If we do not have sufficient funding or cash flow from our business to meet our

payment obligations under the development funding agreement, SFJ could exercise its remedies as a holder of a first priority

security interest in our assets and our business could be materially harmed.

 

If we receive regulatory approval for the use of APL-2 as a treatment for PNH, we will be required to make substantial

payments to SFJ pursuant to our development funding agreement. In addition, if the agreement is terminated prior to obtaining

regulatory approval for the treatment of PNH, under specified circumstances, we also will be required to make substantial payments

to SFJ. Our ability to make these required payments depends on our future performance, which is subject to economic, financial,

competitive and other factors beyond our control. Our business may generate cash flow from operations in the future sufficient to

meet our obligations under the development funding agreement. If we are unable to generate such cash flow or to obtain additional

funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources on

acceptable terms or at all, we could default on our payment obligations to SFJ. We have granted SFJ a first priority security interest

in all of our assets other than our intellectual property and the license agreements to which we are a party. If we are unable to meet

our payment obligations to SFJ, SFJ may exercise its remedies as a holder of a first priority security interest, which would result in a loss of our assets and our business would be materially harmed.

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.

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

 

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

 

initiation and successful recruitment of patients, 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 and otherwise design our clinical trials such that the FDA, 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 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;

 

the performance of our future collaborators, if any;

 

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;

 

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

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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 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 also voluntarily implemented a pause in our 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 our 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 all eight patients has completely resolved. We have reviewed these events with the data safety monitoring board for the ophthalmology program, conducted a series of non-human studies and introduced improvements to the manufacturing process. Based on these efforts, we believe that the likely source of inflammation resided in an impurity in the active pharmaceutical ingredient that was introduced by the scale-up of the manufacturing process to produce commercial lot sizes. We modified our manufacturing process in order to eliminate the impurity and have manufactured sufficient supply of APL-2 utilizing the modified manufacturing process to conduct the Phase 3 GA program. In March 2019, we announced that, with the agreement of the independent safety monitoring committee for our Phase 3 clinical program for APL-2 in patients with GA, we restarted enrollment of our Phase 3 clinical program in GA and expect to have fully enrolled both trials in the GA program by the end of the first quarter of 2020, within the originally planned timeline for completion. 

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 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.

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Adverse events or undesirable side effects caused by, or other unexpected properties of, any of our product candidates may be identified during