apls-10q_20190630.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, 2019

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

For the transition period from to

Commission File Number: 001-38276

APELLIS PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	27–1537290
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

6400 Westwind Way, Suite A Crestwood, KY	40014
(Address of principal executive offices)	(Zip Code)

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

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


C
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	APLS	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Small reporting company	☐

		Emerging growth Company	☐

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

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

As of July 24, 2019, the registrant had 63,695,517 shares of common stock, $0.0001 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations and Comprehensive Loss	2
	Condensed Consolidated Statements of Changes in Stockholders’ Equity	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
PART II.	OTHER INFORMATION	26
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 6.	Exhibits	66
Signatures		67

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

APELLIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31,			June 30,
	2018			2019
Assets				(Unaudited)
Current assets:
Cash and cash equivalents	$	176,267,666		$	289,128,569
Refundable research and development credit		1,473,591			1,950,938
Prepaid assets		24,333,851			13,977,215
Other current assets		364,113			3,355,995
Total current assets		202,439,221			308,412,717
Non-current Assets:
Right-of-use assets		—			6,644,312
Property and equipment, net		977,918			1,439,108
Other assets		116,420			207,873
Total assets	$	203,533,559		$	316,704,010
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	10,254,938		$	13,811,730
Accrued expenses		5,103,002			20,229,694
Current portion of long-term debt		1,666,667			—
Current portion of right of use liabilities		—			1,549,649
Total current liabilities		17,024,607			35,591,073
Long-term liabilities:
Development derivative liability		—			109,840,000
Term loan facility		18,722,321			—
Promissory note		6,655,193			6,693,408
Right-of-use liabilities		—			5,243,491
Other liabilities		158,783			250,000
Total liabilities		42,560,904			157,617,972
Stockholders' equity:
Preferred stock, $0.0001 par value; 10,000,000 shares authorized, and zero shares issued and outstanding at December 31, 2018 and June 30, 2019		—			—
Common stock, $0.0001 par value; 200,000,000 shares authorized at December 31, 2018 and June 30, 2019 and 56,279,307 shares issued and outstanding at December 31, 2018 and 63,672,430 shares issued and outstanding at June 30, 2019		5,628			6,367
Additional paid in capital		437,855,681			557,632,026
Accumulated other comprehensive loss		(122,807	)		(121,977	)
Accumulated deficit		(276,765,847	)		(398,430,378	)
Total stockholders' equity		160,972,655			159,086,038
Total liabilities and stockholders' equity	$	203,533,559		$	316,704,010

See accompanying notes to unaudited condensed consolidated financial statements

APELLIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2018			2019			2018			2019
Operating expenses:
Research and development	$	27,537,619		$	50,698,427		$	44,940,509		$	91,178,326
General and administrative		5,947,823			12,778,011			9,983,079			20,948,682
Operating loss		(33,485,442	)		(63,476,438	)		(54,923,588	)		(112,127,008	)
Loss on extinguishment of debt		—			—			—			(1,208,132	)
Loss from remeasurement of development derivative liability		—			(9,104,000	)		—			(9,840,000	)
Interest expense		(603,656	)		(159,497	)		(1,270,743	)		(753,002	)
Interest income		787,665			1,421,485			1,188,066			2,288,503
Other (expense)/income, net		(32,869	)		228,286			(64,341	)		(24,892	)
Net loss		(33,334,302	)		(71,090,164	)		(55,070,606	)		(121,664,531	)
Other comprehensive gain:
Foreign currency gain/ (loss)		—			(1,332	)		—			830
Total other comprehensive gain/ (loss)		—			(1,332	)		—			830
Comprehensive loss, net of tax	$	(33,334,302	)	$	(71,091,496	)	$	(55,070,606	)	$	(121,663,701	)
Net loss per common share, basic and diluted	$	(0.61	)	$	(1.12	)	$	(1.05	)	$	(2.01	)
Weighted-average number of common shares used in net loss per common share, basic and diluted		54,691,833			63,263,901			52,534,806			60,580,646

See accompanying notes to unaudited condensed consolidated financial statements

Apellis Pharmaceuticals, Inc.

CONDENSED Consolidated Statements of CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

									Accumulated
	Common Stock					Additional			Other						Total
	Outstanding					Paid-In			Comprehensive			Accumulated			Stockholders'
	Shares		Amount			Capital			Loss			Deficit			Equity
Balance at January 1, 2018		50,334,152		$	5,033	$	298,201,480		$	—		$	(149,263,653	)	$	148,942,860
Issuance of common stock upon exercise of stock options		94,868			9		225,352			—			—			225,361
Share-based compensation expense		—			—		1,610,188			—			—			1,610,188
Net loss		—			—		—			—			(21,736,304	)		(21,736,304	)
Balance at March 31, 2018		50,429,020			5,042		300,037,020			—			(170,999,957	)		129,042,105
Issuance of common stock in follow-on offering, net of offering costs		5,500,000			550		131,324,477			—			—			131,325,027
Issuance of common stock upon exercise of stock options		225,418			23		275,726			—			—			275,749
Share-based compensation expense		—			—		2,243,527			—			—			2,243,527
Net loss		—			—		—			—			(33,334,302	)		(33,334,302	)
Balance at June 30, 2018		56,154,438		$	5,615	$	433,880,750		$	—		$	(204,334,259	)	$	229,552,106

									Accumulated
	Common Stock					Additional			Other						Total
	Outstanding					Paid-In			Comprehensive			Accumulated			Stockholders'
	Shares		Amount			Capital			Loss			Deficit			Equity
Balance at January 1, 2019		56,279,307		$	5,628	$	437,855,681		$	(122,807	)	$	(276,765,847	)	$	160,972,655
Issuance of common stock in follow-on offering, net of offering costs		6,900,000			690		109,603,159			—			—			109,603,849
Issuance of common stock upon exercise of stock options		39,169			4		192,001			—			—			192,005
Share-based compensation expense		—			—		4,558,588			—			—			4,558,588
Net loss		—			—		—			—			(50,574,367	)		(50,574,367	)
Foreign currency gain		—			—		—			2,162			—			2,162
Balance at March 31, 2019		63,218,476			6,322		552,209,429			(120,645	)		(327,340,214	)		224,754,892
Deferred issuance costs		—			—		(22,741	)		—			—			(22,741	)
Issuance of common stock upon exercise of stock options		453,954			45		1,262,117			—			—			1,262,162
Share-based compensation expense		—			—		4,183,221			—			—			4,183,221
Net loss		—			—		—			—			(71,090,164	)		(71,090,164	)
Foreign currency gain		—			—		—			(1,332	)		—			(1,332	)
Balance at June 30, 2019		63,672,430		$	6,367	$	557,632,026		$	(121,977	)	$	(398,430,378	)	$	159,086,038

See accompanying notes to unaudited condensed consolidated financial statements

Apellis Pharmaceuticals, Inc.

CONDENSED Consolidated Statements of Cash Flows

	For the Six Months Ended June 30,
	2018			2019
Operating Activities
Net loss	$	(55,070,606	)	$	(121,664,531	)
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation expense		3,853,715			8,741,809
Loss on early extinguishment of debt		—			1,208,132
Loss from remeasurement of development derivative liability		—			9,840,000
Amortization of right-of-use assets		—			148,828
Depreciation expense		—			87,421
Accretion of discounts for promissory note		34,748			38,215
Accretion of discounts for term loan facility		336,273			104,172
Changes in operating assets and liabilities:
Refundable research and development credit		(699,635	)		(487,240	)
Prepaid assets		(5,797,694	)		10,356,500
Other current assets		7,128			(3,040,061	)
Other assets		—			(91,066	)
Accounts payable		1,469,764			3,800,907
Accrued expenses		2,230,473			15,399,575
Other liabilities		5,708			91,217
Net cash used in operating activities		(53,630,126	)		(75,466,122	)
Investing Activities
Purchase of property and equipment		—			(1,067,489	)
Net cash used in investing activities		—			(1,067,489	)
Financing Activities
Proceeds from issuance of common stock, net of issuance costs		131,325,027			110,239,260
Deferred issuance costs		—			(609,971	)
Proceeds from development derivative liability		—			100,000,000
Proceeds from exercise of stock options		501,110			1,454,167
Repayment of term loan facility		—			(21,701,292	)
Net cash provided by financing activities		131,826,137			189,382,164
Effect of exchange rate changes on cash and cash equivalents		—			12,350
Net (decrease) increase in cash and cash equivalents		78,196,011			112,860,903
Cash and cash equivalents at beginning of period		175,643,529			176,267,666
Cash and cash equivalents at end of period	$	253,839,540		$	289,128,569
Supplemental Disclosure of Financing Activities
Cash paid for Interest	$	1,008,278		$	728,473

See accompanying notes to unaudited condensed consolidated financial statements

APELLIS PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 AND 2019

1. Nature of Organization and Operations

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

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

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

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

Development Derivative Liability

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

On June 7, 2019, the Company and SFJ amended the development funding agreement (the “SFJ Agreement”). Under the SFJ Amendment, SFJ agreed to make an additional $20.0 million funding payment to the Company to support the development of APL-2 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.

The Company expects that the remaining development milestones under the SFJ Agreement will be achieved and the balance of the $60.0 million will be paid during 2019.

Follow-on Public Offerings

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

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

Liquidity and Financial Condition

The accompanying unaudited condensed consolidated financial statements have been prepared on the basis of the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. As of July 31, 2019, the date of issuance of these unaudited condensed consolidated financial statements, the Company believes that its cash and cash equivalents as of June 30, 2019 of $289.1 million will be sufficient to fund its operations for at least the next twelve months from the issuance of the unaudited interim consolidated financial statements. The future viability beyond that point is dependent on its ability to raise additional capital to finance its operations.

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

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

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Apellis Australia Pty Ltd, Apellis Ireland Ltd and Apellis Switzerland GmbH. All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and following the requirements of the Securities and Exchange Commission (the “SEC”), for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted and, accordingly, the balance sheet as of December 31, 2018 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements. These financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of the Company’s financial information. The results of operations for the six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other interim period or for any other future year.

The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2019.

Fair Value of Financial Instruments

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

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

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

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

The Company’s financial instruments, in addition to those presented in Note 5, Long-Term Debt, and Note 7, 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 cash and cash equivalents, the Australian research and development credit, accounts payable and accrued expenses approximate the fair value due to the short-term nature of those instruments.

Cash and Cash Equivalents

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

Foreign Currency

Due to the growing volume of research contracts and intercompany loans that are now being exclusively denominated in local currency, effective August 1, 2018, the functional currency of the Company’s Australian subsidiary was changed from the U.S. dollar to the Australian dollar. The impact of the change in functional currency was not material to the audited consolidated financial statements for the year ended December 31, 2018.

As a result of the change in functional currency, the financial position and results of operations of the Company's Australian subsidiary are measured using the foreign subsidiary's local currency. Revenues and expenses of the Australian subsidiary have been translated into U.S. dollars at average exchange rates prevailing during the period from January 1, through June 30, 2019. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of stockholders’ equity.

Reclassifications

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

3. Accrued Expenses

Accrued expenses are as follows:

	December 31,		June 30,
	2018		2019
Accrued research and development	$	3,481,570	$	13,147,445
Accrued payroll liabilities		269,046		6,126,120
Other		1,352,386		956,129
Total	$	5,103,002	$	20,229,694

4. Development Derivative Liability

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

The Company expects that the remaining development milestones under the SFJ Agreement will be achieved and the balance of the $60 million will be paid during 2019.

Under the SFJ agreement following regulatory approval by the FDA or EMA for the use of APL-2 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 lower or greater than $120 million (including as a result of the payment of the Additional SFJ Funding but excluding the $20 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 as of June 30, 2019. 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 $736,000 recorded for the three months ended March 31, 2019 in loss from remeasurement of development derivative liability on the income statement. The Company received an additional $40.0 million in June 2019 and the derivative liability under the SFJ Agreement (as amended) was subsequently remeasured at June 30, 2019 as a level 3 derivative, with the change in fair value of $9,104,000 recorded for the three months ended June 30, 2019 in loss from remeasurement of development derivative liability on the income statement.

The derivative is valued using a scenario-based discounted cash flow method, whereby each scenario makes assumptions about the probability and timing of cash flows, and such cash flows are present valued using a risk-adjusted discount rate. The analysis is calibrated such that the value of the derivative as of the date of the SFJ Agreement was consistent with an arm’s-length transaction. Key inputs to the level 3 fair value model include (i) the probability and timing of achieving stated development 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 (8.00%), and (iv) the Company’s cost of borrowing (15.82%).

SFJ’s implied cost of borrowing was 8.00% and the Company’s implied cost of borrowing was 15.82% as of the reporting date. These implied costs of borrowing were determined assuming the SFJ Agreement was initially executed with arm’s-length terms. If the SFJ Agreement was instead not determined to be an arm’s-length transaction, then implied discount rates could differ.

5. Long-term Debt

Term Loan Facility

On October 20, 2017, the Company entered into a loan and security agreement with Silicon Valley Bank (“SVB”) to provide for a $20.0 million term loan facility (the “term loan facility”). Borrowings under the term loan facility accrued interest at a floating rate per annum equal to the WSJ prime rate plus 1.50%. Under the agreement, the Company was required to make monthly interest-only payments through November 1, 2019 and was required to make 24 equal monthly payments of principal, plus accrued interest, from November 1, 2019 through October 1, 2021, when all unpaid principal and interest became due and payable.

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

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

or the expiration of the warrant, SVB may require the Company to repurchase the warrant for a total aggregate purchase price of $250,000.

Related Party Promissory Note

On October 19, 2017, the Company issued and sold an unsecured promissory note in the principal amount of $7.0 million to Golda Darty Partners S.A. (“GDP”), an affiliate of one of the Company’s stockholders. The promissory note accrues interest at a rate per annum of 8.0%, and is due and payable quarterly in arrears on the 19th day of each April, July, October and January. The promissory note has a maturity date of October 19, 2022 when the $7,000,000 is due and payable in its entirety. The promissory note is contractually subordinated to the Company’s obligations to SFJ under the SFJ Agreement.

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

6. Leases

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

As a practical expedient permitted under Topic 842, the Company has elected to account for the lease and non-lease components as a single lease component for all leases of which it is the lessee. Lease payments, which may include lease and non-lease components, are included in the measurement of the Company’s lease liabilities to the extent that such payments are either fixed amounts or variable amounts that depend on a rate or index as stipulated in the lease contract. When the Company cannot readily determine the rate implicit in the lease, the Company determines its incremental borrowing rate by using the rate of interest that it would have to pay to borrow on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment.

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

As of June 30, 2019, all leases were classified as operating lease assets and liabilities. Operating lease assets were $6.6 million and operating lease liabilities were $6.8 million at June 30, 2019. At June 30, 2019, the weighted average remaining lease term of operating leases was 4.93 years and the weighted average discount rate used to measure the outstanding operating lease liabilities leases was 8.50%.

For the three and six months ended June 30, 2019, the total lease cost for operating lease expense was: $482,834 and $886,376, respectively.

Supplemental cash flow information related to operating leases for the six months ended June 30, 2019 is as follows:

Operating cash flows from operating leases

713,338

Right of use assets obtained in exchange for

lease obligations

7,286,707

The maturity of the Company’s operating lease liabilities as of June 30, 2019 are as follows:

2019	$	952,604
2020		1,874,641
2021		1,322,750
2022		1,353,133
2023 and thereafter		2,829,649
Total future minimum lease payments		8,332,777
Less imputed interest		(1,539,637)
Total operating lease liabilities	$	6,793,140

Comparative disclosures under ASC 840:

Rental expense under operating leases totaled $142,117 and $278,332 for the three and six months ended June 30, 2018, respectively.

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

2019	$	1,251,720
2020		1,292,025
2021		975,750
2022		998,350
2023 and thereafter		2,341,219
	$	6,859,064

7. Fair Value Measurements

The fair value of the following financial instruments are based on level 2 inputs. As of December 31, 2018 and June 30, 2019, the fair value of the Company's promissory note was approximately $7.4 million, based on discounted cash flows, market-based expectations for interest rates, credit risk and the contractual terms of the debt instrument. The term loan facility paid interest at a variable interest rate and accordingly the carrying amount approximated fair value at December 31, 2018.

The fair value of the SFJ Agreement is presented as a derivative liability based on level 3 inputs. The derivative is valued using a scenario-based discounted cash flow method, whereby each scenario makes assumptions about the probability and timing of cash flows, and such cash flows are present valued using a risk-adjusted discount rate. The analysis is calibrated such that the value of the derivative as of the date of the SFJ Agreement was consistent with an arm’s-length transaction. Key inputs to the level 3 fair value model include (i) the probability and timing of achieving stated development milestones to receive the next tranche[s] of funding, (ii) the probability and timing of achieving FDA and EMA approval, (iii) SFJ’s cost of borrowing (8.00%), and (iv) the Company’s cost of borrowing (15.82%).

8. Refundable Research and Development Credit and Income Taxes

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

The Company’s income tax provision is computed based on the federal statutory rate and the average state statutory rates, net of the related federal benefit. For the three months ended June 30, 2019 and 2018, there were no current or deferred income tax expenses or benefits due to the Company’s net losses, research and development credits and increases in its deferred tax asset valuation allowance during those periods.

The Company’s estimate of the realizability of the deferred tax asset is dependent on estimates of projected future levels of taxable income. In analyzing future taxable income levels, the Company considered all evidence currently available, both positive and negative. Based on this analysis, the Company has recorded a valuation allowance for all deferred tax assets as of June 30, 2019.

9. Commitments and Contingencies

The Company contracts to conduct research and development activities with third parties. The scope of the services under the research and development contracts can be modified and the contracts cancelled by the Company upon written notice. In some instances, the contracts may be cancelled by the third party upon written notice. If the Company were to cancel these contracts as of June 30, 2019, the Company would be required to pay certain termination costs and other fees of approximately $1,626,000 that would be incurred in future periods.

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

10. Net Loss per Share

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2018		2019		2018		2019
Common stock options		7,293,336		9,094,586		7,293,336		9,094,586
Common stock warrants		14,064		14,064		14,064		14,064
Total		7,307,400		9,108,650		7,307,400		9,108,650

11. Related Party Transaction

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

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

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and related notes for the year ended December 31, 2018 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2019, which we refer to as the 2018 Annual Report on Form 10-K.

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

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

Overview

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

We have the most advanced clinical program targeting C3 with Phase 3 clinical trials of our lead product candidate, APL-2, in multiple indications. We believe that APL-2 has the potential to be a best-in-class treatment that may address the limitations of existing treatment options or provide a treatment option where there currently is none. APL-2 has already shown activity that we believe is clinically meaningful in clinical trials for four distinct medical conditions — geographic atrophy in age-related macular degeneration, or GA; paroxysmal nocturnal hemoglobinuria, or PNH; cold agglutinin disease, or CAD; and warm antibody autoimmune hemolytic anemia, or w/AIHA. In additional to trials for these indications, we have also initiated an exploratory clinical trial of APL-2 in patients with glomerular diseases with complement involvement.

We initiated a Phase 3 clinical program consisting of two Phase 3 clinical trials evaluating APL-2 in patients with GA in September 2018. In our Phase 2 clinical trial of APL-2 in patients with GA, treatment with APL-2 resulted in a significant reduction in the rate of GA lesion growth over 12 months. In June 2018, we also initiated a Phase 3 clinical trial evaluating APL-2 in patients with PNH who are anemic (defined as a hemoglobin level of less than 10.5 g/dL) while being treated with eculizumab, an approved therapy for PNH that is marketed as Soliris, and we completed enrollment in this trial in June 2019. We plan to initiate a second Phase 3 clinical trial in patients with PNH who have not been treated with eculizumab in the third quarter of 2019. In our ongoing Phase 1b trials in PNH, APL-2 has achieved improvements in transfusion dependency, hemoglobin levels and other hematological indicators that we believe are clinically meaningful. In our ongoing Phase 2 clinical trials of APL-2 in patients with CAD and wAIHA, patients with CAD and with wAIHA have achieved reduced extravascular hemolysis, measured by increased hemoglobin levels, reduced reticulocytes and bilirubin levels, and reduced intravascular hemolysis, measured by reduced lactate dehydrogenase. We plan to initiate a Phase 3 clinical trial of APL-2 in patients with CAD in the first half of 2020. We are also conducting clinicals trials of APL-2 for glomerular diseases with complement involvement. We are also developing novel compounds targeting C3 and plan to conduct clinical trials of these compounds in additional complement-dependent diseases. We plan to develop APL-9 for the prevention of complement immune system activation coincident with adeno-associated virus (AAV) vector administration for gene therapies. APL-9 is a second generation C3 modulator and is designed to be intravenously administered for acute use. We hold worldwide commercialization rights to APL-2, APL-9 and those other novel compounds targeting C3.

In our clinical trials of APL-2 for the treatment of PNH, we are currently using an off-the-shelf, FDA-cleared device that allows patients to self-administer APL-2 through subcutaneous infusion. In addition, we are developing, with a third-party manufacturer, a custom, on-body drug delivery system that is expected to further improve the ease of self-administration of APL-2. Initial clinical testing in a Phase 1 trial with healthy volunteers indicates that the pharmacokinetic (PK) profile of APL-2 administered

subcutaneously at 2x weekly at a dose of 1,080 mg, both with the 510(k) approved device used in the PEGASUS Phase 3 trial and with the custom delivery system, is comparable to that of APL-2 administered once daily at a dose between 270 mg and 360 mg.

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

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

On June 7, 2019, we amended the development funding agreement, which we refer to as the SFJ Amendment. Under the amendment, SFJ agreed to make an additional $20.0 million funding payment to us to support the development of APL-2 for the treatment of patients with PNH. This additional $20.0 million is in addition to and not part of the Additional SFJ Funding.

On June 27, 2019, we 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. We expect that the remaining development milestones under the SFJ Agreement will be achieved and the balance of the $60.0 million will be paid during 2019.

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

To date, we have financed our operations primarily through $391.5 million in net proceeds from public offerings of our common stock, including our initial public offering, or IPO, $112.6 million in proceeds from the private placement of shares of our convertible preferred stock, $100.0 million from the SFJ agreement, $20.0 million in proceeds from borrowings under a term loan facility with Silicon Valley Bank, and $7.0 million in proceeds from our issuance and sale of a promissory note to Golda Darty Partners, S.A., or GDP.

We have not generated any revenue from product sales. We have incurred significant annual net operating losses in each year since our inception and expect to continue to incur net operating losses for the foreseeable future. Our net losses were $121.7 million and $55.1 million for the six months ended June 30, 2019 and June 30, 2018, respectively. As of June 30, 2019, we had an accumulated deficit of $398.4 million. We expect to continue to incur significant expenses and increasing operating losses for the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase significantly if and as we continue to develop and conduct clinical trials in our current and new indications with APL-2, including the Phase 3 clinical trials in GA and the ongoing and planned Phase 3 clinical trials in PNH; initiate and continue research and preclinical and clinical development efforts for any future product candidates, such as APL-9; seek to identify and develop additional product candidates for complement-dependent diseases; seek regulatory and marketing approvals for our product candidates that successfully complete clinical trials, if any; establish sales, marketing, distribution and other commercial infrastructure in the future to commercialize any products for which we may obtain marketing approval; require the manufacture of larger quantities of product candidates for clinical development and, potentially, commercialization; maintain, expand and protect our intellectual property portfolio; hire and retain additional personnel, such as clinical, quality control and scientific personnel; add operational, financial and management information systems and personnel, including personnel to support our product development and help us comply with our obligations as a public company; and add equipment and physical infrastructure to support our research and development programs.

As of June 30, 2019, we had cash and cash equivalents of $289.1 million. We believe that our cash and cash equivalents as of June 30, 2019, will be sufficient to fund our operating expenses and capital expenditures into the third quarter of 2020.

Financial Operations Overview

Revenue

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

Research and Development Expenses

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

•

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

•

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

•

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

•

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

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

The following summarizes our most advanced research and development programs:

•

GA. We are developing APL-2 as monotherapy for GA, administered by intravitreal injections. In our Phase 2 clinical trial of APL-2 in patients with GA, treatment with APL-2 resulted in a significant reduction in the rate of GA lesion growth at 12 months compared to sham. In October 2018, we voluntarily implemented a pause in dosing in our Phase 3 clinical program in patients with GA due to observed cases of non-infectious inflammation in patients treated from a single manufacturing lot of APL-2 intravitreal drug product. In March 2019, we restarted enrollment of our Phase 3 clinical program in GA and expect to have fully enrolled both trials in the GA program by the end of the first quarter of 2020, within the originally planned timeline for completion.

•

PNH. We are developing APL-2 as monotherapy for patients with PNH, administered by subcutaneous injection. In our ongoing Phase 1b clinical trials of APL-2 in patients being treated with eculizumab and in treatment-naïve patients, APL-2 treatment has been associated with improvements in transfusion dependency, hemoglobin levels and other hematological indicators that we believe are clinically meaningful. We initiated a Phase 3 clinical trial in patients with PNH in June 2018 and completed enrollment in this trial in June 2019. This Phase 3 clinical trial, which we refer to as our PEGASUS trial, is an 80 patient randomized head-to-head study comparing APL-2 monotherapy to eculizumab monotherapy in patients with PNH currently on treatment with eculizumab. The PEGASUS trial reached full enrollment in June and we expect to announce top line results of this trial in the fourth quarter of 2019. We also plan to initiate a 48 patient Phase 3 clinical trial in treatment-naïve patients in the third quarter of 2019.

•

CAD. We are developing APL-2 for patients with CAD, administered by subcutaneous injection. We initiated a Phase 2 clinical trial of APL-2 in patients with wAIHA, including CAD in the first quarter of 2018, reported interim data in December 2018 and provided additional data in June 2019. We plan to initiate a Phase 3 clinical trial in patients with CAD in the first half of 2020.

•

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

•

Glomerular Diseases. We are conducting a Phase 2 clinical trial of APL-2 in patients with glomerular diseases with complement involvement, which we began in the first quarter of 2018. We plan to announce data for this trial in the second half of 2019.

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