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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, 2021

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 23, 2021, the registrant had 80,496,771 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 Income/(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

19

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 2.

Unregistered Sales of Equity Securities and Use of Proceeds

78

Item 6.

Exhibits

79

Signatures

 

80

 

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,

 

 

 

2021

 

 

2020

 

Assets

 

(Unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

265,435

 

 

$

565,779

 

Marketable securities

 

 

458,237

 

 

 

311,869

 

Prepaid assets

 

 

17,203

 

 

 

11,400

 

Restricted cash

 

 

1,552

 

 

 

1,266

 

Other current assets

 

 

31,198

 

 

 

26,878

 

Total current assets

 

 

773,625

 

 

 

917,192

 

Non-current Assets:

 

 

 

 

 

 

 

 

Right-of-use assets

 

 

22,518

 

 

 

17,719

 

Property and equipment, net

 

 

7,077

 

 

 

6,803

 

Other assets

 

 

6,909

 

 

 

18,855

 

Total assets

 

$

810,129

 

 

$

960,569

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,158

 

 

$

8,477

 

Accrued expenses

 

 

69,398

 

 

 

111,935

 

Current portion of development derivative liability

 

 

6,212

 

 

 

4,230

 

Current portion of right of use liabilities

 

 

3,902

 

 

 

3,685

 

Total current liabilities

 

 

83,670

 

 

 

128,327

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Convertible senior notes

 

 

386,152

 

 

 

358,830

 

Development derivative liability

 

 

268,740

 

 

 

253,638

 

Operating lease liabilities

 

 

19,909

 

 

 

15,217

 

Total liabilities

 

 

758,471

 

 

 

756,012

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

   shares issued and outstanding at March 31, 2021 and December 31, 2020

 

 

 

 

 

 

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

   at March 31, 2021 and December 31, 2020; 80,438 shares

   issued and outstanding at March 31, 2021, and 76,130 shares

   issued and outstanding at December 31, 2020

 

 

8

 

 

 

8

 

Additional paid-in capital

 

 

1,147,263

 

 

 

1,131,013

 

Accumulated other comprehensive loss

 

 

(1,620

)

 

 

(117

)

Accumulated deficit

 

 

(1,093,993

)

 

 

(926,347

)

Total stockholders' equity

 

 

51,658

 

 

 

204,557

 

Total liabilities and stockholders' equity

 

$

810,129

 

 

$

960,569

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

1


 

 

APELLIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)

(Unaudited)

(Amounts in thousands, except per share amounts)

 

 

For the Three Months Ended March 31,

 

 

2021

 

 

2020

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

$

84,012

 

 

$

69,282

 

General and administrative

 

40,579

 

 

 

29,504

 

Net operating loss

 

(124,591

)

 

 

(98,786

)

Loss on conversion of debt

 

(39,487

)

 

 

 

Loss from remeasurement of development derivative liability

 

(17,084

)

 

 

(68,406

)

Interest income

 

134

 

 

 

2,275

 

Interest expense

 

(4,175

)

 

 

(3,919

)

Other income, net

 

1,544

 

 

 

14

 

Net loss

 

(183,659

)

 

 

(168,822

)

Other comprehensive loss:

 

 

 

 

 

 

 

    Unrealized gain on marketable securities

 

79

 

 

 

1,394

 

    Foreign currency loss

 

(1,582

)

 

 

(230

)

Total other comprehensive gain/ loss

 

(1,503

)

 

 

1,164

 

Comprehensive loss, net of tax

$

(185,162

)

 

$

(167,658

)

Net loss per common share, basic and diluted

$

(2.32

)

 

$

(2.29

)

Weighted-average number of common shares used in net

   loss per common share, basic and diluted

 

79,219

 

 

 

73,720

 

 

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/(Loss)

 

 

Deficit

 

 

Equity

 

Balance at January 1, 2021

 

 

76,130

 

 

$

8

 

 

$

1,131,013

 

 

$

(117

)

 

$

(926,347

)

 

$

204,557

 

Impact of adoption of ASU 2020-06

 

 

 

 

 

 

 

 

(165,747

)

 

 

 

 

 

16,013

 

 

 

(149,734

)

Issuance of shares in exchange of 2019 Convertible Notes, including issuance costs

 

 

3,976

 

 

 

 

 

 

162,258

 

 

 

 

 

 

 

 

 

162,258

 

Forfeiture of accrued interest in exchange of 2019 Convertible Notes

 

 

 

 

 

 

 

 

1,668

 

 

 

 

 

 

 

 

 

1,668

 

Issuance of common stock upon exercise of stock options

 

 

285

 

 

 

 

 

 

2,588

 

 

 

 

 

 

 

 

 

2,588

 

Vesting of restricted stock units, net of shares withheld for taxes

 

 

47

 

 

 

 

 

 

(956

)

 

 

 

 

 

 

 

 

(956

)

Share-based compensation expense

 

 

 

 

 

 

 

 

16,439

 

 

 

 

 

 

 

 

 

16,439

 

Unrealized gain on available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

79

 

 

 

 

 

 

79

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(183,659

)

 

 

(183,659

)

Foreign currency loss

 

 

 

 

 

 

 

 

 

 

 

(1,582

)

 

 

 

 

 

(1,582

)

Balance at March 31, 2021

 

 

80,438

 

 

$

8

 

 

$

1,147,263

 

 

$

(1,620

)

 

$

(1,093,993

)

 

$

51,658

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Outstanding

 

 

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

Amount

 

 

Capital

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 


 

3


 

 

Apellis Pharmaceuticals, Inc.

CONDENSED Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

 

 

For the Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(183,659

)

 

$

(168,822

)

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

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

16,439

 

 

 

9,294

 

Loss on conversion of debt

 

 

39,487

 

 

 

 

Loss from remeasurement of development derivative liability

 

 

17,084

 

 

 

68,406

 

Forfeiture of accrued interest in exchange of convertible notes

 

 

1,668

 

 

 

 

Amortization of right-of-use assets

 

 

112

 

 

 

57

 

Depreciation expense

 

 

282

 

 

 

85

 

Amortization of debt discounts

 

 

360

 

 

 

 

Amortization of discounts for convertible notes, net of financing costs

 

 

 

 

 

1,994

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid assets

 

 

(5,819

)

 

 

(3,004

)

Other current assets

 

 

(4,242

)

 

 

(671

)

Other assets

 

 

11,946

 

 

 

(460

)

Accounts payable

 

 

(4,170

)

 

 

(5,237

)

Accrued expenses

 

 

(42,802

)

 

 

(9,991

)

Net cash used in operating activities

 

 

(153,314

)

 

 

(108,349

)

Investing Activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(484

)

 

 

(435

)

Purchase of available-for-sale securities

 

 

(171,281

)

 

 

(227,419

)

Proceeds from maturity of available-for-sale securities

 

 

25,000

 

 

 

 

Net cash used in investing activities

 

 

(146,765

)

 

 

(227,854

)

Financing Activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

 

 

 

381,593

 

Proceeds from development derivative liability

 

 

 

 

 

20,000

 

Proceeds from exercise of stock options

 

 

2,588

 

 

 

1,674

 

Payments of employee tax withholding related to equity-based compensation

 

 

(956

)

 

 

 

Net cash provided by financing activities

 

 

1,632

 

 

 

403,267

 

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

 

 

(1,611

)

 

 

(152

)

Net increase in cash, cash equivalents and restricted cash

 

 

(300,058

)

 

 

66,912

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

567,045

 

 

 

351,985

 

Cash, cash equivalents and restricted cash at end of period

 

$

266,987

 

 

$

418,897

 

Reconciliation of cash, cash equivalents and restricted cash to the

     consolidated balance sheets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

265,435

 

 

$

417,881

 

Restricted cash

 

 

1,552

 

 

 

1,016

 

Total cash, cash equivalents, and restricted cash

 

$

266,987

 

 

$

418,897

 

Supplemental Disclosure of Financing Activities

 

 

 

 

 

 

 

 

Cash paid for Interest

 

$

6,893

 

 

$

3,829

 

2019 Convertible Notes exchanged for common stock

 

$

126,129

 

 

$

 

 

See accompanying notes to unaudited condensed consolidated financial statements  

4


 

APELLIS PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020

(unaudited)

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, delay the initiation of planned and future clinical trials and could disrupt regulatory activities.

Adoption of ASU 2020-06 Debt – Debt with Conversion and Other Options (Subtopic 470-20)

Effective January 1, 2021, the Company early adopted ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) which reduces complexity in applying GAAP to certain financial instruments with characteristics of liability and equity. The ASU removes the guidance that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock. The ASU further revises the guidance to require entities to calculate diluted earnings per share for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted earnings per share when an instrument may be settled in cash or shares. The impact of the adoption of the statement increased net debt outstanding and decreased net equity by $149.7 million as of January 1, 2021. Of the $149.7 million decrease to net equity, $16.0 million was recorded to retained earnings. See Note 5, Long Term Debt for additional information.

Convertible Notes Exchange

 

In January 2021, the Company entered into separate, privately negotiated exchange agreements to modify the conversion terms with certain holders of its convertible notes issued in September 2019 (the “2019 Convertible Notes”). Under the terms of these exchange agreements, the holders exchanged approximately $126.1 million in aggregate principal amount of 2019 Convertible Notes held by them for an aggregate of 3,906,869 shares of common stock issued by the Company. The Company also issued 69,491 shares for settlement of issuance costs paid to the Company’s advisor. The Company recognized a total loss on conversion of debt in the unaudited condensed consolidated statement of operations of $39.5 million. As of March 31, 2021, the Company held as treasury Convertible Notes the $126.1 million principal amount of exchanged notes and such notes have not been cancelled. See Note 5, Long Term Debt for additional information.

 

Liquidity and Going Concern

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 28, 2021, the date of issuance of these unaudited condensed consolidated financial statements, the Company believes that its cash and cash equivalents of $265.4 million and marketable securities of $458.2 million as of March 31, 2021 will be sufficient to fund its operations and capital expenditure requirements for at least the next twelve months from the date of issuance of these unaudited condensed consolidated

5


 

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. The Company’s plans 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 to obtain funding, 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 funding on a timely basis 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 Bermuda Limited, Apellis Germany GmbH, Apellis Ireland Ltd, Apellis Netherlands B.V., Apellis Switzerland GmbH, Apellis UK Limited, APL DEL Holdings LLC, APL Sales Corp I, LLC, APL PRG I, Corp. 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 consolidated balance sheet as of December 31, 2020 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, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021 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, 2020 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 25, 2021.

Licensing and Collaboration Revenue

The Company analyzes license and collaboration arrangements pursuant to FASB ASC Topic 808, Collaborative Arrangement Guidance and Considerations, (“ASC 808”) to assess whether such arrangements, or transactions between arrangement participants, involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities or are more akin to a vendor-customer relationship. In making this evaluation, the Company considers whether the activities of the collaboration are considered to be distinct and deemed to be within the scope of the collaborative arrangement guidance or if they are more reflective of a vendor-customer relationship and, therefore, within the scope of FASB ASC Topic 606, Revenue from Contracts with Customer, (“ASC 606”). This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement.

For elements of collaboration arrangements that are not accounted for pursuant to guidance in ASC 606, an appropriate recognition method is determined and applied consistently, generally by analogy to the revenue from contracts with customers guidance. Amounts related to transactions with a counterparty in a collaborative arrangement that is not a customer are presented as collaboration revenue and in a separate line item from revenue recognized from contracts with customers, if any, in the Company’s consolidated statements of operations.

Pursuant to ASC 606, for arrangements or transactions between arrangement participants determined to be within the scope of the contracts with customers guidance, the Company performs the following steps to determine the appropriate amount of revenue to

6


 

be recognized as the Company fulfills its obligations: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

The Company evaluates the performance obligations promised in the contract that are based on goods and services that will be transferred to the customer and determine whether those obligations are both (i) capable of being distinct and (ii) distinct in the context of the contract. Goods or services that meet these criteria are considered distinct performance obligations. The Company estimates the transaction price based on the amount expected to be received for transferring the promised goods or services in the contract. The consideration may include fixed consideration or variable consideration. At the inception of each arrangement that includes variable consideration, the Company evaluates the amount of potential transaction price and the likelihood that the transaction price will be received. The Company utilizes either the most likely amount method or expected value method to estimate the amount expected to be received based on which method best predicts the amount expected to be received. The amount of variable consideration that is included in the transaction price may be constrained and is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options. The Company assesses if these options provide a material right to the customer and, if so, these options are considered performance obligations. The Company has not currently identified any such material rights.

Revenue is recognized when, or as, the Company satisfies a performance obligation by transferring a promised good or service to a customer. An asset is transferred when, or as, the customer obtains control of that asset. For performance obligations that are satisfied over time, the Company recognizes revenue using an input or output measure of progress that best depicts the satisfaction of the relevant performance obligation.

After contract inception, the transaction price is reassessed at every period end and updated for changes such as resolution of uncertain events. Any change in the overall transaction price is allocated to the performance obligations on the same methodology as at contract inception.

See Note 11, License and Collaboration Agreements, for further discussion related to the Collaboration and License Agreement with Swedish Orphan Biovitrum AB (Publ) (“Sobi”).

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, other receivables, accounts payable and accrued liabilities. Management believes that the carrying amounts of certain cash and cash equivalents, other receivables, 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 condensed 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.

 

7


 

 

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 $1.6 million and $1.3 million as of March 31, 2021 and December 31, 2020, respectively. The Company records as restricted cash the collateral used to secure these letters of credit.

 

Foreign Currency

The financial position and results of operations of the Company's Australian, Irish and German 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. The financial position and results of operations of the Company’s Swiss subsidiary are measured and reported in U.S. dollars and transactions are translated to U.S. dollars at the end of the period.

3. Prepaid Assets and Accrued Expenses

Prepaid assets include $14.1 million and $8.0 million of prepaid research and development costs as of March 31, 2021 and December 31, 2020, respectively.

Accrued expenses are as follows (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Accrued research and development

 

$

32,586

 

 

$

47,879

 

Accrued license fee

 

 

 

 

 

25,050

 

Accrued payroll liabilities

 

 

11,857

 

 

 

22,896

 

Other

 

 

24,955

 

 

 

16,110

 

Total

 

$

69,398

 

 

$

111,935

 

         

4. Development Derivative Liability

On February 28, 2019, the Company entered into a development funding agreement, (the “SFJ Agreement”), with SFJ Pharmaceuticals Group (“SFJ”), under which SFJ agreed to provide funding to the Company to support the development of pegcetacoplan for the treatment of patients with PNH. 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.  

On June 7, 2019, the Company and SFJ amended the development funding agreement, (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.

As of March 31, 2021, the Company has received a total of $140.0 million from SFJ as the Company met milestones as identified in the agreement. The Company did not receive any funds under the SFJ agreement in 2021. In the three months ended March 31, 2020, the Company received $20.0 million, from SFJ.

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. Additionally, the Company granted a security interest

8


 

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 condensed consolidated balance sheet and is considered a level three derivative, and, as such, is recorded at fair value and remeasured each quarter. The change in fair value due to the remeasurement of the development derivative liability resulted in a $17.1 million loss and a $68.4 million loss for the three months ended March 31, 2021 and 2020, respectively, recorded on the unaudited condensed consolidated statement of operations. The development derivative liability has a remeasured fair value of $275.0 million on the consolidated balance sheet at March 31, 2021. At March 31, 2021, $6.2 million of the $275.0 million of the development derivative liability fair market value is included in current liabilities.

The following table presents a rollforward of the development derivative liability (in thousands):

 

 

 

For the Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Balance at fair market value, January 1,

$

257,868

 

 

$

134,839

 

Amounts received under the SFJ Agreement and SFJ Amendment

 

 

 

 

20,000

 

Loss recorded in loss from remeasurement of development

    derivative liability

 

17,084

 

 

 

68,406

 

Balance at fair market value, March 31,

$

274,952

 

 

$

223,245

 

 

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 (11.76%).

SFJ’s implied cost of borrowing was 8.0% and the Company’s implied cost of borrowing was 11.76% 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 the 2019 Convertible Notes with an aggregate principal amount of $220.0 million issued pursuant to an indenture (the “Indenture”) with U.S. Bank National Association, as trustee.

The net proceeds from the sale of the 2019 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 of the 2019 Convertible Notes to pay the cost of the capped call transactions in September 2019 described below.

On May 12, 2020, the Company issued the 2020 Convertible Notes with an aggregate principal amount of $300.0 million. The net proceeds from the sale of the 2020 Convertible Notes were approximately $322.9 million after deducting the purchasers’ discounts and commission of $5.7 million and offering expenses of $0.3 million. The Company used $43.1 million of the net proceeds from the sale to pay the cost of the additional capped call transactions in May 2020 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.

9


 

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 $39.4625 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.

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.

Prior to the adoption of ASU 2020-06 effective January 1, 2021, the Company used an effective interest rate of 10.5% to determine the liability component of the 2019 and 2020 Convertible Notes. This resulted in the recognition of $145.1 million and $204.5 million as the liability component of the 2019 and 2020 Convertible Notes, respectively and the recognition of the residual amount of $74.9 million and $95.5 million as the debt discount with a corresponding increase to additional paid in capital for the equity component of the 2019 and 2020 Convertible Notes, respectively. The 2020 Convertible Notes aggregate debt issuance costs of $6.0 million were allocated to the liability and equity components in the amounts of $3.7 and $2.3 million, respectively. The 2019 Convertible Notes aggregate debt issuance costs of $7.1 million were allocated to the liability and equity components in the amounts of $4.7 million and $2.4 million, respectively.  

Effective January 1, 2021, the Company adopted ASU 2020-06 using the modified retrospective method. Upon adoption, the Company increased net debt and reduced net equity by $149.7 million. The $149.7 million consisted of several items. The first item is the reclassification from equity to debt of the residual amounts originally identified as the equity components of the 2019 and 2020 Convertible Notes of $74.9 million and $95.5 million, respectively. The equity component reclassification was offset by the adjustment to retained earnings for the reversal of previous non-cash interest expense recorded for the amortization of the equity components of $17.1 million. The second item is the reclassification from equity to debt of the debt issuance costs originally allocated to equity for the 2019 and 2020 Convertible Notes of $2.4 million and $2.3 million, respectively. The debt issuance costs reclassification was offset by the adjustment to retained earnings for previous amortization of the debt issuance costs recorded of $1.1 million.  

In January 2021, the Company entered into separate, privately negotiated exchange agreements to modify the conversion terms with certain holders of its 2019 Convertible Notes. Under the terms of these exchange agreements, the holders exchanged approximately $126.1 million in aggregate principal amount of 2019 Convertible Notes held by them for an aggregate of 3,906,869 shares of common stock issued by the Company. In accordance with ASC topic 470-20, “Debt,– Debt with Conversion and Other Options,” the Company accounted for the exchange as an induced conversion based on the short period of time the conversion offer was open and the substantive conversion feature offer. The Company accounted for the conversion of the debt as an inducement by expensing the fair value of the shares that were issued in excess of the original terms of the Convertible Notes. The Company reduced net debt outstanding and increased net equity on the consolidated balance sheet by $122.8 million, consisting of the par value of the 2019 Convertible Notes exchanged of $126.1 million less the $3.3 million of remaining debt issuance costs associated with the exchanged notes. The Company also increased shares outstanding by 3,906,869 shares consisting of 3,196,172 shares issued at the initial conversion rate in the Indenture of 25.3405 plus an additional 710,697 shares. Additionally, the Company issued 69,491 shares as settlement of debt issuance costs paid to the Company’s advisor in connection with the conversion transaction. The Company recorded a loss on conversion of debt of $39.5 million comprised of $36.4 million related to the value of the shares issued in excess of the original conversion terms at the fair market value and $3.1 million for the value of the 69,491 shares issued in payment of issuance

10


 

costs. Upon exchange of the 2019 Convertible Notes, the holders forfeited accrued interest through the date of the exchange of $1.7 million, which the Company charged to interest expense and to equity. As of March 31, 2021, the Company held as treasury Convertible Notes the $126.1 million principal amounts of exchanged notes and such notes had not been cancelled.  

Interest expense for the Convertible Notes was $4.2 million and $3.9 million for the three months ended March 31, 2021 and 2020, respectively. For the three months ended March 31, 2021, interest expense included accrued semi-annual coupon payable of $3.8 million and amortization of debt issuance costs of $0.4 million. For the three months ended March 31, 2020 interest expense included the amortization of the discount on the Convertible Notes of $1.9 million, an accrued semi-annual coupon payable of $1.9 million and amortization of debt issuance costs of $0.1 million. As of March 31, 2021, $7.7 million of debt issuance costs was recorded on the unaudited condensed consolidated balance sheet as a reduction to the carrying amount of the Convertible Notes.

The aggregate principal balance of the Convertible Notes, net of unamortized debt issuance costs, as of March 31, 2021 and December 31, 2020 was $386.2 million and $358.8 million respectively.

Capped Call Transactions

On September 11, 2019, and May 6, 2020 concurrently with the pricing of the 2019 Convertible Notes and the 2020 Convertible Notes, respectively, 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, 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 and $43.1 million were recorded as reductions to additional paid-in capital at March 31, 2021 for the 2019 and 2020 Convertible Notes, respectively.

 

6. Leases

On January 1, 2019, the Company adopted ASU 2016-02 Leases (Topic 842) using a modified retrospective method. 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 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 of these 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, 2021 and December 31, 2020, all leases were classified as operating lease assets and liabilities. Additional information related to the operating lease assets and liabilities is as follows (in thousands):

 

11


 

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Operating Lease Assets

 

$

22,518

 

 

$

17,719

 

Operating Lease Liabilities

 

$

23,811

 

 

$

18,902

 

Weighted Average Remaining Term in years

 

 

5.35

 

 

4.66

 

Weighted Average discount rate used to measure

    outstanding lease liabilities

 

 

7.76

%

 

 

7.74

%

 

For the three months ended March 31, 2021 and 2020, the total lease cost for operating lease expense was $1.3 million and $1.0 million, respectively.

Supplemental cash flow information related to operating leases for the three months ended March 31 is as follows (in thousands):

 

 

 

2021

 

 

2020

 

Operating cash flows for operating leases

 

$

1,588

 

 

$

968

 

Operating lease assets obtained in exchange for lease obligations

 

$

5,675

 

 

$

334

 

 

The maturities of the Company’s operating lease liabilities as of March 31, 2021 are as follows (in thousands):

 

2021

 

 

 

$

4,204

 

2022

 

 

 

 

5,415

 

2023

 

 

 

 

5,480

 

2024

 

 

 

 

4,811

 

2025 and thereafter

 

 

 

 

9,267

 

Total future minimum lease payments less

 

 

 

 

29,177

 

     Imputed interest

 

 

 

 

(5,366

)

Total operating lease liabilities

 

 

 

$

23,811

 

 

7. Marketable Securities

The amortized cost, gross unrealized holding losses and fair value of available-for-sale debt securities by type of security as of March 31, 2021 and December 31, 2020 were as follows (in thousands):

 

 

 

As of March 31, 2021

 

 

 

Amortized Cost

 

 

Gross Unrealized Holding Gains

 

 

Gross Unrealized Holding Losses

 

 

Fair Value

 

U.S. Government-related obligations

 

$

458,158

 

 

$

79

 

 

$

 

 

$

458,237