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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, 2020

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.)

 

 

100 Fifth Avenue ,  

Waltham , MA

02451

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (617)   977-5700

 

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

APLS

Nasdaq Global Select Market

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Small reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

 

As of April 24, 2020, the registrant had 75,513,064 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

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

Item 4.

Controls and Procedures

26

PART II.

OTHER INFORMATION

28

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 6.

Exhibits

74

Signatures

 

75

 

i


 

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

APELLIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share amounts)

 

`

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Assets

 

(Unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

417,881

 

 

$

351,985

 

Marketable securities

 

 

228,813

 

 

 

 

Prepaid assets

 

 

22,806

 

 

 

19,802

 

Restricted cash

 

 

1,016

 

 

 

 

Other current assets

 

 

1,891

 

 

 

1,308

 

Total current assets

 

 

672,407

 

 

 

373,095

 

Non-current Assets:

 

 

 

 

 

 

 

 

Right-of-use assets

 

 

13,715

 

 

 

14,110

 

Property and equipment, net

 

 

1,972

 

 

 

1,655

 

Other assets

 

 

845

 

 

 

385

 

Total assets

 

$

688,939

 

 

$

389,245

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,078

 

 

$

8,361

 

Accrued expenses

 

 

44,930

 

 

 

54,783

 

Current portion of right of use liabilities

 

 

2,732

 

 

 

2,609

 

Total current liabilities

 

 

50,740

 

 

 

65,753

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Convertible senior notes

 

 

144,561

 

 

 

142,567

 

Development derivative liability

 

 

223,245

 

 

 

134,839

 

Operating lease liabilities

 

 

11,396

 

 

 

11,857

 

Total liabilities

 

 

429,942

 

 

 

355,016

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $ 0.0001 par value; 10.0 million shares authorized, and zero

   shares issued and outstanding at March 31, 2020 and December 31, 2019

 

 

 

 

 

 

Common stock, $ 0.0001 par value; 200.0 million shares authorized

   at March 31, 2020 and December 31, 2019; 75.4 million shares

   issued and outstanding at March 31, 2020, and 63.9 million shares

   issued and outstanding at December 31, 2019

 

 

7

 

 

 

6

 

Additional paid in capital

 

 

1,008,275

 

 

 

615,850

 

Accumulated other comprehensive income/(loss)

 

 

1,010

 

 

 

( 154

)

Accumulated deficit

 

 

( 750,295

)

 

 

( 581,473

)

Total stockholders' equity

 

 

258,997

 

 

 

34,229

 

Total liabilities and stockholders' equity

 

$

688,939

 

 

$

389,245

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

1


 

APELLIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(Amounts in thousands, except per share amounts)

 

 

For the Three Months Ended March 31,

 

 

2020

 

 

2019

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

$

69,282

 

 

$

40,480

 

General and administrative

 

29,504

 

 

 

8,171

 

Operating loss

 

( 98,786

)

 

 

( 48,651

)

Loss on extinguishment of debt

 

 

 

 

( 1,208

)

Loss from remeasurement of development

     derivative liability

 

( 68,406

)

 

 

( 736

)

Interest income

 

2,275

 

 

 

867

 

Interest expense

 

( 3,919

)

 

 

( 593

)

Other income/(expense), net

 

14

 

 

 

( 253

)

Net loss

 

( 168,822

)

 

 

( 50,574

)

Other comprehensive gain:

 

 

 

 

 

 

 

    Unrealized gain on marketable securities

 

1,394

 

 

 

 

    Foreign currency gain/ (loss)

 

( 230

)

 

 

2

 

Total other comprehensive gain/ (loss)

 

1,164

 

 

 

2

 

Comprehensive loss, net of tax

$

( 167,658

)

 

$

( 50,572

)

Net loss per common share, basic and diluted

$

( 2.29

)

 

$

( 0.87

)

Weighted-average number of common shares used in net

   loss per common share, basic and diluted

 

73,720

 

 

 

57,897

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

2


 

Apellis Pharmaceuticals, Inc.

CONDENSED Consolidated Statements of CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Outstanding

 

 

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Equity

 

Balance at January 1, 2020

 

 

63,938

 

 

$

6

 

 

$

615,850

 

 

$

( 154

)

 

$

( 581,473

)

 

$

34,229

 

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

 

 

10,925

 

 

 

1

 

 

 

381,457

 

 

 

 

 

 

 

 

 

381,458

 

Issuance of common stock upon exercise of stock options

 

 

559

 

 

 

 

 

 

1,674

 

 

 

 

 

 

 

 

 

1,674

 

Share-based compensation expense

 

 

 

 

 

 

 

 

9,294

 

 

 

 

 

 

 

 

 

9,294

 

Unrealized gain on available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

1,394

 

 

 

 

 

 

1,394

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

( 168,822

)

 

 

( 168,822

)

Foreign currency loss

 

 

 

 

 

 

 

 

 

 

 

( 230

)

 

 

 

 

 

( 230

)

Balance at March 31, 2020

 

 

75,422

 

 

$

7

 

 

$

1,008,275

 

 

$

1,010

 

 

$

( 750,295

)

 

$

258,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Outstanding

 

 

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance at January 1, 2019

 

 

56,279

 

 

$

5

 

 

$

437,856

 

 

$

( 123

)

 

$

( 276,766

)

 

$

160,972

 

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

 

 

6,900

 

 

 

1

 

 

 

109,603

 

 

 

 

 

 

 

 

 

109,604

 

Issuance of common stock upon exercise of stock options

 

 

39

 

 

 

 

 

 

192

 

 

 

 

 

 

 

 

 

192

 

Share-based compensation expense

 

 

 

 

 

 

 

 

4,559

 

 

 

 

 

 

 

 

 

4,559

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

( 50,574

)

 

 

( 50,574

)

Foreign currency gain

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

2

 

Balance at March 31, 2019

 

 

63,218

 

 

$

6

 

 

$

552,210

 

 

$

( 121

)

 

$

( 327,340

)

 

$

224,755

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements


 

3


 

Apellis Pharmaceuticals, Inc.

CONDENSED Consolidated Statements of Cash Flows

(Amounts in thousands)

 

 

 

For the Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

( 168,822

)

 

$

( 50,574

)

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

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

9,294

 

 

 

4,559

 

Loss on early extinguishment of debt

 

 

 

 

 

1,208

 

Loss from remeasurement of development derivative liability

 

 

68,406

 

 

 

736

 

Amortization of right-of-use assets

 

 

57

 

 

 

73

 

Depreciation expense

 

 

85

 

 

 

41

 

Amortization of debt discounts

 

 

 

 

 

19

 

Amortization of term loan facility discounts

 

 

 

 

 

104

 

Amortization of discounts for convertible notes, net of financing costs

 

 

1,994

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid assets

 

 

( 3,004

)

 

 

3,824

 

Other current assets

 

 

( 671

)

 

 

( 250

)

Other assets

 

 

( 460

)

 

 

( 46

)

Accounts payable

 

 

( 5,237

)

 

 

1,906

 

Accrued expenses

 

 

( 9,991

)

 

 

2,764

 

Other liabilities

 

 

 

 

 

76

 

Net cash used in operating activities

 

 

( 108,349

)

 

 

( 35,560

)

Investing Activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

( 435

)

 

 

( 875

)

Purchase of available-for-sale securities

 

 

( 227,419

)

 

 

 

Net cash used in investing activities

 

 

( 227,854

)

 

 

( 875

)

Financing Activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

381,593

 

 

 

109,927

 

Proceeds from development derivative liability

 

 

20,000

 

 

 

60,000

 

Proceeds from exercise of stock options

 

 

1,674

 

 

 

192

 

Repayment of term loan facility

 

 

 

 

 

( 21,701

)

Net cash provided by financing activities

 

 

403,267

 

 

 

148,418

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

( 152

)

 

 

( 4

)

Net increase in cash, cash equivalents and restricted cash

 

 

66,912

 

 

 

111,979

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

351,985

 

 

 

176,268

 

Cash, cash equivalents and restricted cash at end of period

 

$

418,897

 

 

$

288,247

 

Reconciliation of cash, cash equivalents and restricted cash to the

     consolidated balance sheets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

417,881

 

 

$

288,247

 

Restricted cash

 

 

1,016

 

 

 

 

Total cash, cash equivalents, and restricted cash

 

$

418,897

 

 

$

288,247

 

Supplemental Disclosure of Financing Activities

 

 

 

 

 

 

 

 

Cash paid for Interest

 

$

3,829

 

 

$

588

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

4


 

APELLIS PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020 and 2019

(unaudited)

(Amounts in thousands, except per share amounts)

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 Waltham, Massachusetts.

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”). Additionally, the Company is subject to risks arising from the Coronavirus Disease 2019 (COVID-19) pandemic, which could have adverse effects upon our business and operations, including on our ability to initiate, conduct and complete clinical trials.

Follow-on Public Offerings

On January 13, 2020, the Company issued and sold 10,925 shares of its common stock at a price per share to the public of $ 37.00 in a follow-on public offering including an additional 1,425 shares of its common stock that were sold at the follow-on public offering price of $ 37.00 per share pursuant to the underwriters’ in full exercise of their option to purchase additional shares of common stock. The Company received net proceeds of $ 381.5 million after deducting underwriting discounts and commissions of $ 22.2 million and offering costs of $ 0.5 million for these transactions.

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 April 29, 2020, the date of issuance of these unaudited condensed consolidated financial statements, the Company believes that its cash and cash equivalents of $ 417.9 million and marketable securities of $ 228.8 million as of March 31, 2020 will be sufficient to fund its operations and capital expenditure requirements for at least the next twelve months from the date of issuance of the unaudited interim consolidated financial statements. The future viability of the Company beyond that point is dependent on its ability to raise additional capital to finance its operations.

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

There are uncertainties associated with the Company’s ability to (1) obtain additional debt or equity financing on terms that are favorable to the Company (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 funding for its operations, 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.

5


 

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, Apellis Switzerland GmbH and Apellis MA Securities Corp. 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, 2019 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, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 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, 2019 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2020.

 

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, Note 7, Marketable Securities, and Note 9, Fair Value Measurements, include cash and cash equivalents, the Australian research and development credit, accounts payable and accrued liabilities. Management believes that the carrying amounts of certain 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 certain cash and cash equivalents are valued at cost, which approximates their fair value. See Note 9, Fair Value Measurements, for additional information.

 

 

Restricted Cash

The Company is contingently liable under unused letters of credit with a bank, related to the Company’s customs import bond and facility lease agreements of $ 1.0 million as of March 31, 2020.  The Company records as restricted cash the collateral used to secure these letters of credit.  The Company did not have restricted cash as of December 31, 2019.  

Foreign Currency

The financial position and results of operations of the Company's Australian, Swiss and Irish subsidiaries are measured using the foreign subsidiary's local currency. Revenues and expenses of the subsidiaries have been translated into U.S. dollars at average exchange rates prevailing during the respective periods. 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 .   

6


 

3. Accrued Expenses

Accrued expenses are as follows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Accrued research and development

 

$

30,030

 

 

$

36,449

 

Accrued payroll liabilities

 

 

7,898

 

 

 

11,443

 

Other

 

 

7,002

 

 

 

6,891

 

Total

 

$

44,930

 

 

$

54,783

 

 

4. Development Derivative Liability

 

On February 28, 2019, the Company 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 the Company to support the development of pegcetacoplan 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 pegcetacoplan 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. 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 pegcetacoplan in patients with PNH and March 31, 2020, SFJ may fund an additional $ 50.0  million of the Company’s development costs which we refer to as the Additional SFJ Funding.

 

On June 7, 2019, the Company and SFJ amended the development funding agreement, which we refer to as the SFJ Amendment. Under the SFJ Amendment, SFJ agreed to make an additional $ 20.0 million funding payment to the Company to support the development of pegcetacoplan for the treatment of patients with PNH. This additional $20.0 million payment is in addition to and not part of the Additional SFJ Funding.

 

On June 27, 2019, the Company received $ 40.0 million from SFJ, consisting of $ 20.0 million as the first installment of the additional $ 60.0 million upon the achievement of a milestone and the $ 20.0 million payable under the SFJ Amendment.

On September 23, 2019, the Company received $ 20.0 million from SFJ as the second installment of the additional $60.0 million upon the achievement of a milestone.

The Company met the remaining development milestone under the SFJ Agreement upon the Company’s announcement of the primary endpoint data from its PEGASUS Phase 3 trial on January 7, 2020 and the final installment of $ 20.0 million of the additional $ 60.0 million was paid on January 29, 2020.

Under the SFJ Agreement following regulatory approval by the FDA or EMA for the use of pegcetacoplan as a treatment for PNH the Company will be obligated to pay SFJ an initial payment of up to $ 5.0 million (or a total of $ 10.0 million if regulatory approval is granted by the FDA and the EMA) and then up to an additional $ 226.0 million in the aggregate (or up to $ 452.0 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 greater than $ 120.0 million (including as a result of the payment of the Additional SFJ Funding but excluding the $ 20.0 million funding payment made under the SFJ Amendment). 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. The liability was initially recorded at the value of the $ 60.0 million aggregate cash received pursuant to the contractual terms, which was determined to have been fair value, and subsequently remeasured at March 31, 2019 as a level 3 derivative, with the change in fair value of $ 0.7 million recorded for the three months ended March 31, 2019 in loss from remeasurement of development derivative liability on the statement of operations. During 2019, the Company received an additional $ 60.0 million under the SFJ Agreement and the Company met additional milestones in the agreement. The remeasurement of the development derivative liability at December 31, 2019 resulted in a remeasured fair value of

7


 

$ 134.8 million on the consolidated balance sheet a t December 31, 2019 . The Company received an additional $ 20.0 million in January 2020 and the derivative liability under the SFJ Agreement (as amended) , was subsequently remeasured at March 31, 2020 as a level 3 derivative, with the change in fair value of $ 68.4 million recorded for the three months ended March 31 , 20 20 in the loss from remeasurement of development derivative liability on the income statement , with a remeasured fair value of $ 223.2 million on the consolidated balance sheet at March 31, 2020 .   

 

The following table presents a rollforward of the development derivative liability:

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Balance at fair market value, January 1,

 

$

134,839

 

 

$

 

Amounts received under the SFJ agreement and SFJ amendment

 

20,000

 

 

 

60,000

 

Loss recorded in loss from remeasurement of development

    derivative liability

 

68,406

 

 

 

736

 

Balance at fair market value, March 31,

$

223,245

 

 

$

60,736

 

 

 

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 milestones to receive the next tranches of funding, (ii) the probability and timing of achieving FDA and EMA approval, (iii) SFJ’s cost of borrowing ( 8.0 %), and (iv) the Company’s cost of borrowing ( 13.47 %).

SFJ’s implied cost of borrowing was 8.0 % and the Company’s implied cost of borrowing was 13.47 % 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

Convertible Senior Notes

On September 16, 2019, the Company completed a private offering of Convertible Notes with an aggregate principal amount of $ 220.0 million which were issued pursuant to an indenture (the “Indenture”) with U.S. Bank National Association, as trustee.

 

The net proceeds from the sale of the Convertible Notes were approximately $ 212.9 million after deducting the initial purchasers’ discounts and commissions of $ 6.6 million and offering expenses of $ 0.5 million by the Company. The Company used $ 28.4 million of the net proceeds from the sale to pay the cost of the capped call transactions described below.

 

The Convertible Notes are senior unsecured obligations of the Company and bear interest at a rate of 3.5 % per year payable semiannually in arrears on March 15 and September 15 of each year, beginning on March 15, 2020. The Convertible Notes will mature on September 15, 2026 , unless converted earlier, redeemed or repurchased in accordance with their terms.

 

The Convertible Notes are convertible into shares of the Company’s common stock at an initial conversion rate of 25.3405 shares per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $ 39.46 per share of common stock). The conversion rate is subject to customary anti-dilution adjustments. In addition, following certain events that occur prior to the maturity date or if the Company deliver a notice of redemption, the Company will increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such corporate event or a notice of redemption, as the case may be, in certain circumstances as provided in the indenture.

 

Prior to March 15, 2026, the Convertible Notes are convertible only upon the occurrence of certain events. On or after March 15, 2026 until the close of business on the second scheduled trading day immediately preceding the maturity date of the Convertible Notes, holders may convert the Convertible Notes at any time. Upon conversion of the Convertible Notes, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election.

8


 

Prior to September 20, 2023, the Company may not redeem the Convertible Notes. The Company may redeem for cash all or a portion of the Convertible Notes, at its option, on or after September 20, 2023 if the last reported sale price of the Company’s common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides a notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. The redemption price will be equal to 100 % of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

If the Company undergoes a “fundamental change,” as defined in the Indenture, prior to maturity, subject to certain conditions, holders may require the Company to repurchase for cash all or any portion of their Convertible Notes at a fundamental change repurchase price equal to 100 % of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

T he Company used an effective interest rate of 10.5 % to determine the liability component of the Convertible Notes. This resulted in the recognition of $ 145.1 million as the liability component of the Convertible Notes and the recognition of the residual amount of $ 74.9 million as the debt discount with a corresponding increase to additional paid in capital for the equity component of the Convertible Notes. Aggregate debt issuance costs of $ 7.1 million was allocated to the liability and equity components in the amounts of $ 4.7 million and $ 2.4 million, respectively.  

Interest expense for the Convertible Notes was $ 3.9 million for the three months ended March 31, 2020 which included the amortization of the discount on the Convertible Notes of $ 1.9 million, accrued semi-annual coupon payable of $ 1.9 million and amortization of debt issuance costs of $ 0.1 million. As of March 31, 2020, $ 0.7 million of debt issuance costs was recorded on the consolidated balance sheet as a reduction to the carrying amount of the Convertible Notes.

 

The aggregate balance of the Convertible Notes, net of unamortized debt issuance costs, as of March 31, 2020 and December 31, 2019 was $ 144.6 million and $ 142.6 million respectively.

Capped Call Transactions

On September 11, 2019, concurrently with the pricing of the Convertible Notes, the Company entered into capped call transactions with two counterparties. The capped call transactions are expected generally to reduce the potential dilution to the Company’s common stock upon any conversion of Convertible Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Convertible Notes, as the case may be, in the event that the market price per share of the Company’s common stock, as measured under the terms of the capped call transactions, is greater than the strike price of the capped call transactions, which is initially $ 39.4625 (the conversion price of the Convertible Notes) and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of such Convertible Notes. If, however, the market price per share of the Company’s common stock, as measured under the terms of the capped call transactions, exceeds the cap price of the capped call transactions, which is initially $ 63.14 per share, representing a premium of 100% above the last reported sale price of $ 31.57 per share of its common stock on The Nasdaq Global Select Market on September 11, 2019, there would nevertheless be dilution and/or there would not be an offset of such potential cash payments, in each case, to the extent that such market price exceeds the cap price of the capped call transactions.

Pursuant to ASC 815-40 Derivatives and Hedging , the Company determined that the capped call transactions should be classified as equity instruments and the capped call premium paid in the amount of $ 28.4 million was recorded as a reduction to additional paid-in capital as of September 30, 2019.

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 $ 21.8 million totaled per diem interest of $ 0.1 million and $ 21.7 million 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

9


 

o f $ 1.6 million , and ( i i) a prepayment fee contractually owed of $ 0.1 million plus other fees which resulted in a total loss on extinguishment of debt of $ 1.2 million .

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 included 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 could have required the Company to repurchase the warrant for a total aggregate purchase price of $ 250 . The warrants were exercised in November 2019.

Promissory Note

On October 19, 2017, the Company issued and sold an unsecured promissory note in the principal amount of $ 7.0 million to Golda Darty Partners S.A. (“GDP”). The promissory note accrued interest at a rate per annum of 8.0 %, and was due and payable quarterly in arrears on the 19th day of each April, July, October and January. The promissory note had a maturity date of October 19, 2022 when the $ 7.0 million would be due and payable in its entirety. The promissory note was contractually subordinated to the Company’s obligations to SFJ under the SFJ Agreement.

On September 16, 2019, the Company voluntarily repaid all outstanding amounts due and owed under the promissory note, except for a small amount of interest subsequently repaid. The payment of $ 7.1 million totaled per diem interest of $ 0.1 million and $ 7.0 million for the outstanding principal balance of the promissory note.

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 $ 0.4 million as a discount to the promissory note. This amount was being accreted as additional interest expense over the term of the promissory note. Upon the repayment of the promissory note, the Company recorded a loss on extinguishment of debt of $ 0.3 million due to the remaining discount.

The contractual maturities of the Company’s long-term debt obligations due subsequent to March 31, 2020 consist of the $ 220.0 million Convertible Senior Notes which mature in September 2026.

 

 

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. During 2019, the Company leased additional office space resulting in an initial recognition value of $ 9.8 million of lease assets and liabilities.

As a practical expedient permitted under Topic 842, the Company 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 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 five years . Many leases also include options to terminate the leases within one 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, 2020 and December 31, 2019, all leases were classified as operating lease assets and liabilities. Additional information related to the operating lease assets and liabilities is as follows:

 

10


 

 

 

March 31,