SEC Filing | Apellis Pharmaceuticals, Inc.

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apls-10q_20200630.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 June 30, 2020

☐	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 July 27, 2020, the registrant had 75,603,991 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	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
PART II.	OTHER INFORMATION	33
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 6.	Exhibits	79
Signatures		80

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

APELLIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share amounts)

`	June 30,			December 31,
	2020			2019
Assets	(Unaudited)
Current assets:
Cash and cash equivalents	$	317,348		$	351,985
Marketable securities		515,476			—
Prepaid assets		17,925			19,802
Restricted cash		1,248			—
Other current assets		1,828			1,308
Total current assets		853,825			373,095
Non-current Assets:
Right-of-use assets		12,959			14,110
Property and equipment, net		2,416			1,655
Other assets		906			385
Total assets	$	870,106		$	389,245
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	9,927		$	8,361
Accrued expenses		45,399			54,783
Current portion of right of use liabilities		2,664			2,609
Total current liabilities		57,990			65,753
Long-term liabilities:
Convertible senior notes		348,842			142,567
Development derivative liability		220,475			134,839
Operating lease liabilities		10,735			11,857
Total liabilities		638,042			355,016
Stockholders' equity:
Preferred stock, $0.0001 par value; 10.0 million shares authorized, and zero shares issued and outstanding at June 30, 2020 and December 31, 2019		—			—
Common stock, $0.0001 par value; 200.0 million shares authorized at June 30, 2020 and December 31, 2019; 75.6 million shares issued and outstanding at June 30, 2020, and 63.9 million shares issued and outstanding at December 31, 2019		8			6
Additional paid-in capital		1,100,639			615,850
Accumulated other comprehensive income/(loss)		329			(154	)
Accumulated deficit		(868,912	)		(581,473	)
Total stockholders' equity		232,064			34,229
Total liabilities and stockholders' equity	$	870,106		$	389,245

See accompanying notes to unaudited condensed consolidated financial statements

APELLIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(Amounts in thousands, except per share amounts)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020			2019			2020			2019
Operating expenses:
Research and development	$	87,094		$	50,698		$	156,377		$	91,178
General and administrative		28,414			12,778			57,918			20,949
Operating loss		(115,508	)		(63,476	)		(214,295	)		(112,127	)
Loss on extinguishment of debt		—			—			—			(1,208	)
Gain/(loss) from remeasurement of development derivative liability		2,770			(9,104	)		(65,636	)		(9,840	)
Interest income		1,025			1,421			3,300			2,288
Interest expense		(6,909	)		(159	)		(10,828	)		(753	)
Other income/(expense), net		5			228			20			(25	)
Net loss		(118,617	)		(71,090	)		(287,439	)		(121,665	)
Other comprehensive gain/(loss):
Unrealized gain on marketable securities		(842	)		—			552			—
Foreign currency gain/(loss)		161			(1	)		(69	)		1
Total other comprehensive gain/(loss)		(681	)		(1	)		483			1
Comprehensive loss, net of tax	$	(119,298	)	$	(71,091	)	$	(286,956	)	$	(121,664	)
Net loss per common share, basic and diluted	$	(1.57	)	$	(1.12	)	$	(3.85	)	$	(2.01	)
Weighted-average number of common shares used in net loss per common share, basic and diluted		75,550			63,264			74,635			60,581

See accompanying notes to unaudited condensed consolidated financial statements

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/(Loss)			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
Deferred issuance costs		—			—		(35	)		—			—			(35	)
Issuance of common stock upon exercise of stock options		148			1		1,354			—			—			1,355
Share-based compensation expense		—			—		11,489			—			—			11,489
Unrealized loss on available-for-sale investments		—			—		—			(842	)		—			(842	)
Recognition of debt discount on convertible notes		—			—		122,147			—			—			122,147
Purchase of capped call transactions and associated costs		—			—		(43,112	)		—			—			(43,112	)
Issuance of common stock to employee stock purchase plan		20			—		521			—			—			521
Net loss		—			—		—			—			(118,617	)		(118,617	)
Foreign currency gain		—			—		—			161			—			161
Balance at June 30, 2020		75,590		$	8	$	1,100,639		$	329		$	(868,912	)	$	232,064

See accompanying notes to unaudited condensed consolidated financial statements

Apellis Pharmaceuticals, Inc.

CONDENSED Consolidated Statements of CHANGES IN STOCKHOLDERS’ EQUITY

CoNTINUED

(Unaudited)

(Amounts in thousands)

									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
Deferred issuance costs		—			—		(23	)		—			—			(23	)
Issuance of common stock upon exercise of stock options		454			—		1,262			—			—			1,262
Share-based compensation expense		—			—		4,183			—			—			4,183
Net loss		—			—		—			—			(71,090	)		(71,090	)
Foreign currency loss		—			—		—			(1	)		—			(1	)
Balance at June 30, 2019		63,672		$	6	$	557,632		$	(122	)	$	(398,430	)	$	159,086

See accompanying notes to unaudited condensed consolidated financial statements

Apellis Pharmaceuticals, Inc.

CONDENSED Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

	For the Six Months Ended June 30,
	2020			2019
Operating Activities
Net loss	$	(287,439	)	$	(121,665	)
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation expense		20,783			8,742
Loss on early extinguishment of debt		—			1,208
Loss from remeasurement of development derivative liability		65,636			9,840
Amortization of right-of-use assets		84			149
Depreciation expense		180			87
Amortization of debt discounts		—			38
Amortization of term loan facility discounts		—			104
Amortization of discounts for convertible notes, net of financing costs		5,548			—
Changes in operating assets and liabilities:
Prepaid assets		1,877			10,357
Other current assets		(824	)		(3,527	)
Other assets		(518	)		(91	)
Accounts payable		1,600			3,801
Accrued expenses		(9,570	)		15,399
Other liabilities		—			91
Net cash used in operating activities		(202,643	)		(75,467	)
Investing Activities
Purchase of property and equipment		(973	)		(1,067	)
Purchase of available-for-sale securities		(567,188	)		—
Proceeds from maturity of available-for-sale securities		52,500			—
Net cash used in investing activities		(515,661	)		(1,067	)
Financing Activities
Proceeds from issuance of common stock, net of issuance costs		381,423			109,629
Proceeds from development derivative liability		20,000			100,000
Payments for capped call transactions and associated costs		(43,112	)		—
Proceeds from issuance of convertible notes, net of issuance costs		323,074			—
Proceeds from exercise of stock options		3,029			1,454
Proceeds from issuance of common stock under employee share purchase plan		521			—
Repayment of term loan facility		—			(21,701	)
Net cash provided by financing activities		684,935			189,382
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(20	)		12
Net increase in cash, cash equivalents and restricted cash		(33,389	)		112,860
Cash, cash equivalents and restricted cash at beginning of period		351,985			176,268
Cash, cash equivalents and restricted cash at end of period	$	318,596		$	289,128
Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets:
Cash and cash equivalents	$	317,348		$	289,128
Restricted cash		1,248			—
Total cash, cash equivalents, and restricted cash	$	318,596		$	289,128
Supplemental Disclosure of Financing Activities
Cash paid for Interest	$	3,829		$	728

See accompanying notes to unaudited condensed consolidated financial statements

APELLIS PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 its business and operations, including on its ability to initiate, conduct and complete clinical trials.

Convertible Notes Offering

On May 12, 2020, the Company completed a private offering of $300.0 million aggregate principal amount of 3.5% convertible senior notes due 2026 (the “2020 Convertible Notes”). The aggregate purchase price of the 2020 Convertible Notes was $328.9 million, which amount includes accrued interest from March 15, 2020 to, but not including, May 12, 2020.

The net proceeds from the sale of the 2020 Convertible Notes were approximately $322.9 million after deducting the initial purchasers’ discounts and commissions and offering expenses payable by the Company. The Company used $43.1 million of the net proceeds from the offering to pay the cost of the capped call transactions described below.

The 2020 Convertible Notes form a single series with, and have the same terms as, the Company’s $220.0 million aggregate principal amount of 3.500% convertible senior notes due 2026 issued on September 16, 2019, (the “2019 Convertible Notes”, and together with the 2020 Convertible Notes, the “Convertible Notes”), but have a different issue date, issue price, CUSIP number and different restrictions on transfer. The 2020 Convertible Notes were issued as additional notes under the indenture (the “Indenture”), dated as of September 16, 2019, by and between the Company and U.S. Bank National Association, as trustee (the “Trustee”), under which the 2019 Convertible Notes were issued. The 2020 Convertible Notes rank equal in right of payment to the 2019 Convertible Notes.

The 2020 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 earlier converted, redeemed or repurchased in accordance with their terms. See Note 5 – Long-term Debt for additional information.

Capped Call Transactions

On May 6, 2020, concurrently with the pricing of the 2020 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 the 2020 Convertible Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted 2020 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 2020 Convertible Notes) and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of such 2020 Convertible Notes.

Follow-on Public Offerings

On January 13, 2020, the Company issued and sold 10,925,000 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 1,425,000 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 July 30, 2020, the date of issuance of these unaudited condensed consolidated financial statements, the Company believes that its cash and cash equivalents of $317.3 million and marketable securities of $515.5 million as of June 30, 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 fu