Dova Pharmaceuticals Inc. - FORM 10-Q - November 8, 2018

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EX-32.1 - EXHIBIT 32.1 - Dova Pharmaceuticals Inc.dovaq32018ex321.htm
EX-31.2 - EXHIBIT 31.2 - Dova Pharmaceuticals Inc.dovaq32018ex312.htm
EX-31.1 - EXHIBIT 31.1 - Dova Pharmaceuticals Inc.dovaq32018ex311.htm
EX-10.3 - EXHIBIT 10.3 - Dova Pharmaceuticals Inc.dovaq32018ex103amendedtsa.htm
EX-10.2 - EXHIBIT 10.2 - Dova Pharmaceuticals Inc.dovaq32018ex102co-promotio.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
 
(Mark one)
ý    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2018
 
OR
 
o       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 001-38135
 
 

DOVA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
81-3858961
(State or other jurisdiction of incorporation or organization)
 
(I.R.S.  Employer Identification No.)
 
240 Leigh Farm Road, Suite 245
Durham, North Carolina 27707
(Address of principal executive offices and zip code)
 
(919) 748-5975
(Registrant’s telephone number, including area code)
 
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   ý   NO   o
 
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   ý   NO   o
 
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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer
o
 
Accelerated Filer  
ý
Non-accelerated Filer
o
 
Smaller Reporting Company  
ý
Emerging growth company
ý
 
 
 
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.   ý
 
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o  NO ý
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
Class of Common Stock
 
Outstanding Shares as of November 5, 2018
Common Stock, $0.001 par value
 
28,204,098





Part I. Financial Information

Item 1. Financial Statements (unaudited)

Dova Pharmaceuticals, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
 
 
 
September 30,
 
December 31,
 
 
2018
 
2017
 
 
(unaudited)
 
 
ASSETS
 
 

 
 

Current assets
 
 

 
 

Cash and equivalents
 
$
122,027

 
$
94,846

Accounts receivable, net
 
2,962

 
—

Inventory, net
 
1,781

 
—

Prepaid expenses and other current assets
 
3,041

 
1,471

Total current assets
 
129,811

 
96,317

Furniture and equipment, net
 
278

 
62

Total assets
 
$
130,089

 
$
96,379

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Current liabilities
 
 

 
 

Accounts payable
 
$
68

 
$
1,263

Accrued expenses
 
12,997

 
2,520

Accrued interest
 
75

 
1,005

Due to related party
 
—

 
97

Early exercise liability, related party
 
—

 
100

Note payable, short-term
 
—

 
30,212

Current portion of long-term debt
 
4,166

 
—

Total current liabilities
 
17,306

 
35,197

Deferred revenue
 
2,373

 
—

Long-term debt
 
16,212

 
—

Total liabilities
 
35,891

 
35,197

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Stockholders’ equity
 
 

 
 

Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
 
—

 
—

Common stock, $0.001 par value; 100,000,000 shares authorized; 28,204,098 and 25,652,457 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
 
28

 
26

Additional paid-in capital
 
204,264

 
118,301

Accumulated deficit
 
(110,094
)
 
(57,145
)
Total stockholders’ equity
 
94,198

 
61,182

Total liabilities and stockholders’ equity
 
$
130,089

 
$
96,379


The accompanying notes are an integral part of these condensed consolidated financial statements.


1

Dova Pharmaceuticals, Inc.
Consolidated Statements of Operations
(in thousands, except share and per share amounts)
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Revenue
 
 

 
 

 
 

 
 

Product sales, net
 
$
2,929

 
$
—

 
$
4,886

 
$
—

Other revenue
 
—

 
—

 
2,627

 
—

Total revenue, net
 
2,929

 
—

 
7,513

 
—

Operating expenses:
 
 

 
 

 
 

 
 

Cost of product sales
 
370

 
—

 
889

 
—

Research and development
 
4,847

 
5,426

 
12,771

 
12,995

Selling, general and administrative
 
17,031

 
4,185

 
45,856

 
7,045

Total operating expenses
 
22,248

 
9,611

 
59,516

 
20,040

Loss from operations
 
(19,319
)
 
(9,611
)
 
(52,003
)
 
(20,040
)
 
 
 
 
 
 
 
 
 
Interest income and other income (expense), net
 
342

 
224

 
369

 
243

Interest expense
 
(546
)
 
(336
)
 
(1,315
)
 
(857
)
Total other expenses, net
 
(204
)
 
(112
)
 
(946
)
 
(614
)
Net loss
 
$
(19,523
)
 
$
(9,723
)
 
$
(52,949
)
 
$
(20,654
)
 
 
 
 
 
 
 
 
 
Net loss per share, basic and diluted
 
$
(0.69
)
 
$
(0.38
)
 
$
(1.91
)
 
$
(1.03
)
Weighted average common shares outstanding, basic and diluted
 
28,203,222

 
25,290,709

 
27,668,066

 
20,014,226


The accompanying notes are an integral part of these condensed consolidated financial statements.


2

Dova Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
(in thousands)
 
 
 
Nine months ended September 30,
 
 
2018
 
2017
Cash flows from operating activities
 
 

 
 

Net loss
 
$
(52,949
)
 
$
(20,654
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Non-cash research and development expenses
 
—

 
9,663

Research and development - licenses acquired, expensed
 
—

 
1,000

Depreciation
 
19

 
—

Loss on disposal of furniture and equipment
 
35

 
—

Amortization of debt discount and debt issuance costs
 
416

 
—

Stock-based compensation
 
11,043

 
2,761

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
(2,962
)
 
—

Inventory
 
(1,781
)
 
—

Prepaid expenses
 
(1,570
)
 
(961
)
Accounts payable
 
(1,195
)
 
428

Accrued expenses
 
11,341

 
1,060

Accrued interest
 
(930
)
 
480

Due to related party
 
(97
)
 
(35
)
Deferred revenue
 
2,373

 
—

Net cash used in operating activities
 
(36,257
)
 
(6,258
)
 
 
 
 
 
Cash flows from investing activities
 
 
 
 
Purchases of furniture and equipment
 
(269
)
 
(35
)
Net cash used in investing activities
 
(269
)
 
(35
)
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
Payment of note payable
 
(31,077
)
 
—

Debt issuance costs
 
(38
)
 
—

Proceeds from the issuance of debt
 
20,000

 
—

Payment of offering costs in connection with issuance of Series A preferred stock
 
—

 
(711
)
Proceeds from exercise of stock options
 
92

 
—

Proceeds from the issuance of common stock
 
80,000

 
86,313

Payment of offering cost in connection with issuance of common stock
 
(5,270
)
 
(7,604
)
Net cash provided by financing activities
 
63,707

 
77,998

 
 
 
 
 
Net increase in cash and equivalents
 
27,181

 
71,705

Cash and equivalents at the beginning of the period
 
94,846

 
28,709

Cash and equivalents at the end of the period
 
$
122,027

 
$
100,414

 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid for interest
 
$
1,830

 
$
377

 
 
 
 
 
Supplemental disclosure of noncash investing and financing activities:
 
 
 
 
Change in note payable
 
$
—

 
$
13,479

Shares issued from the early exercise of options
 
$
100

 
$
—


The accompanying notes are an integral part of these condensed consolidated financial statements.


3

Dova Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
Note 1—Organization and description of business operations
 
Dova Pharmaceuticals, Inc. (“Dova”) was originally formed as PBM AKX Holdings, LLC, a limited liability company formed under the laws of the State of Delaware on March 24, 2016 (“Inception”). PBM AKX Holdings, LLC changed its name to Dova Pharmaceuticals, LLC by filing a Certificate of Amendment to its Certificate of Formation with the State of Delaware on June 15, 2016. Dova converted from a limited liability company to a corporation on September 15, 2016.
 
Dova is a pharmaceutical company focused on acquiring, developing and commercializing drug candidates for diseases that are treated by specialist physicians, with an initial focus on addressing thrombocytopenia, a disorder characterized by a low blood platelet count. On May 21, 2018, the U.S. Food and Drug Administration (“FDA”) approved DOPTELET (avatrombopag), which is an orally administered thrombopoietin receptor agonist for the treatment of thrombocytopenia in adult patients with chronic liver disease (“CLD”) scheduled to undergo a procedure.
 
The unaudited condensed consolidated financial statements of Dova and its wholly owned subsidiaries AkaRx, Inc. (“AkaRx”) and Dova Pharmaceuticals Ireland Limited (together, the “Company”) include the results of operations for the three and nine months ended September 30, 2018 and September 30, 2017.
 
Note 2—Significant accounting policies
 
Basis of presentation and principles of consolidation
 
The Company’s unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results for the full year or the results for any future periods and should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2017 in the Company’s Annual Report on Form 10-K.
 
Liquidity and capital resources
 
The Company has incurred substantial operating losses since inception and expects to continue to incur significant operating losses for the foreseeable future and may never become profitable. As of September 30, 2018, the Company had an accumulated deficit of $110.1 million.
 
Since inception, the Company has financed its operations through the issuance of equity and debt with net aggregate proceeds of $238.0 million.  Although the Company began generating revenue from product sales of DOPTELET in June 2018, the Company does not expect product revenue to be sufficient to satisfy its operating needs for several years, if ever.  As of September 30, 2018, the Company had $122.0 million in cash and equivalents. Based on the Company’s forecast of future cash flows, the Company believes that it has adequate cash and equivalents to continue to fund operations in the normal course of business for at least the next 12 months.
 
Use of estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the reporting period. The most significant estimates in the Company’s condensed consolidated financial statements relate to the determination of variable consideration for product sales, share-based compensation and some of its research and development expenses. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results may differ materially and adversely from these estimates, which could affect the Company’s future results of operations.
 

4
Dova Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Segments
 
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one operating segment.
 
Cash and equivalents
 
The Company considers all highly liquid investments purchased with original maturities of 90 days or less at acquisition to be cash equivalents. Cash and equivalents include cash held in banks and money market mutual funds.  The carrying amount of the Company’s cash equivalents approximates its fair value.
 
Inventory
 
Inventory acquired prior to receipt of the FDA approval for DOPTELET was expensed as research and development expense as incurred. The Company began capitalizing inventory upon receipt of FDA approval on May 21, 2018. The Company reduces its inventory to net realizable value for potentially excess, dated or obsolete inventory based on an analysis of forecasted demand compared to quantities on hand and any firm purchase orders, as well as product shelf life. At September 30, 2018, the Company determined that no write downs to inventory for potentially excess, dated or obsolete inventory were required.  The Company’s inventory consists of finished goods only.
 
Research and development prepaid and accrued expenses
 
As part of the process of preparing financial statements, the Company is required to estimate its expenses resulting from its obligation under contracts with vendors and consultants and clinical site agreements in connection with its research and development efforts. The financial terms of these contracts are subject to negotiations which vary contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to the Company under such contracts.  The Company’s objective is to reflect the appropriate clinical trial expenses in its financial statements by matching those expenses with the period in which services and efforts are expended. The Company accounts for these expenses according to the progress of the trial as measured by patient progression and the timing of various aspects of the trial. The Company determines prepaid and accrual estimates through discussion with applicable personnel and outside service providers as to the progress or state of communication of clinical trials, or other services completed. During the course of a clinical trial, the Company adjusts its rate of clinical trial expense recognition if actual results differ from its estimates. The Company makes estimates of its prepaid and accrued expenses as of each balance sheet date in its financial statements based on facts and circumstances known at that time. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of status and timing of services performed relative to the actual status and timing of services performed may vary and may result in the Company reporting amounts that are too high or too low for any particular period. The Company’s clinical trial prepaid and accrual expense is dependent upon the timely and accurate reporting of fee billings and pass-through expenses from contract research organizations and other third-party vendors as well as the timely processing of any change orders from the contract research organizations.
 
Concentrations of credit risk and off-balance sheet risk
 
Cash and equivalents are financial instruments that are potentially subject to concentrations of credit risk. The Company’s cash and equivalents are deposited in accounts at large financial institutions, and amounts may exceed federally insured limits. The majority of the Company’s cash equivalents is in money market mutual funds invested solely in U.S. Government securities. The Company believes it is not exposed to significant credit risk due to the financial strength of the depository institutions in which the cash and equivalents are held. The Company has no financial instruments with off-balance sheet risk of loss.
 
Research and development costs
 
Research and development (“R&D”) expenses for the three and nine months ended September 30, 2018 include direct and indirect R&D costs. Direct R&D costs consist principally of external costs, such as fees paid to investigators, consultants, central laboratories and clinical research organizations, including costs incurred in connection with clinical trials, and related clinical trial fees and all employee-related expenses for those employees working in R&D functions, including stock-based compensation for R&D personnel. Indirect R&D costs include insurance or other indirect costs related to the Company’s R&D

5
Dova Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

function to specific product candidates.  The Company expenses pre-approval inventory as R&D until regulatory approval is received.
 
Revenue recognition
 
Effective January 1, 2018, the Company adopted the provisions of Accounting Standard Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. The guidance provides a unified model to determine how revenue is recognized.
 
Product sales
 
The Company is currently approved to sell DOPTELET in the United States market.  The product is distributed through an exclusive distribution model with Integrated Commercialization Solutions (“ICS”).  ICS sells DOPTELET to a limited number of specialty pharmacies (“customers”), who have agreements in place with the Company.  Patients and healthcare providers purchase the product from the specialty pharmacy providers.  (See Note 7 “Significant agreements and contracts” for more information on the Company’s agreement with ICS).
 
The Company recognizes revenue on product sales when the control of the Company’s product passes to its customers, which occurs at a point in time, upon delivery to the customers, or over time depending on the nature of the contract. The Company has determined that the delivery of its product to its customers constitutes a single performance obligation as there are no other promises to deliver goods or services. Shipping and handling activities are considered to be fulfillment activities and are not considered to be a separate performance obligation. The Company has assessed the existence of a significant financing component in the agreements with its customers. The trade payment terms with its customers do not exceed one year and therefore the Company has elected to apply the practical expedient and no amount of consideration has been allocated as a financing component.
 
Revenue from product sales is recorded at the net sales price, which includes estimates of variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, product returns, government chargebacks, discounts and rebates, and other incentives, such as voluntary patient assistance, and other fee for service amounts that are detailed within contracts between the Company and its customers relating to the Company’s sale of its products. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable or a current liability. These reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts.
 
Revenue from product sales is recorded after considering the impact of the following variable consideration amounts at the time of revenue recognition:
 
Trade discounts and distribution fees: Trade discounts relate to prompt settlement discounts provided to ICS and the customers.  Distribution fees include fees paid to ICS for the distribution of the product (which is based on a percentage of sales).  In addition, the Company compensates its customers for data and other activities. The Company has determined that such services received to date are not distinct from its sale of products and may not reasonably represent fair value for these services.  Therefore, estimates of these payments are recorded as a reduction of revenue based on contractual terms.
 
Product returns: Consistent with industry practice, the Company generally offers customers a limited right of return for product that has been purchased from the Company based on the product’s expiration date. The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized, as well as within accrued expenses on the condensed consolidated balance sheets. The Company currently estimates product return liabilities using available industry data and its own sales information, including its visibility into the inventory remaining in the distribution channel. The Company has not received any returns to date.
 
Government rebates and chargebacks: The Company contracts with Medicaid, Medicare, U.S Department of Veterans Affairs, 340b entities and other government agencies (“Government Payors”) so that DOPTELET will be eligible for purchase by, or partial or full reimbursement from, such Government Payors. The Company estimates the rebates, chargebacks and discounts it will provide to Government Payors and deducts these estimated amounts from its gross product revenue at the time the revenue is recognized. The Company estimates these reserves based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability, which is included in accrued expenses and other current liabilities

6
Dova Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

on the condensed consolidated balance sheets. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program. The Company estimates the rebates, chargebacks and discounts that it will provide to Government Payors based upon (i) the government-mandated discounts applicable to government-funded programs, (ii) information obtained from its customers and (iii) information obtained from other third parties regarding the payor mix for DOPTELET. The Company’s liability for these rebates consists of estimates of claims for the current quarter and estimated future claims that will be made for product shipments that have been recognized as revenue but remain in the distribution channel inventories at the end of each reporting period.
 
Other incentives: Other incentives which the Company offers include voluntary patient assistance and assurance programs, such as a co-pay assistance program, which are intended to provide financial assistance to qualified commercially-insured patients with prescription drug co-payments required by payers. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that the Company expects to receive associated with product that has been recognized as revenue but remains in the distribution channel inventories at the end of each reporting period. The adjustments are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included as a component of accrued expenses and other current liabilities on the condensed consolidated balance sheets.
 
Strategic agreements
 
The Company’s other revenue consists of revenue from the Company’s strategic agreements for the development and commercialization of DOPTELET. The terms of the agreements typically include non-refundable upfront fees, payments based upon achievement of milestones and eventually revenue from the commercialized product. These agreements usually have both fixed and variable consideration. Non-refundable upfront fees are considered fixed, while milestone payments and revenue from the commercialized product are identified as variable consideration.
 
In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under these agreements, the Company performs the following steps: (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.
 
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. The Company’s performance obligations include intellectual property rights, development services, and services associated with regulatory submission and approval processes. Significant management judgment is required to determine the level of effort required under an arrangement and the period over which the Company expects to complete its performance obligations under the arrangement. If the Company cannot reasonably estimate when its performance obligations either are completed or become inconsequential, then revenue recognition is deferred until the Company can reasonably make such estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method.
 
As part of the accounting for these arrangements, the Company develops assumptions that require judgment to determine the estimated selling price of each performance obligation identified in the contract. The Company uses key assumptions to determine the selling price on a standalone basis, which may include forecasted revenue, development timelines, and probabilities of regulatory success.
 
The Company allocates the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised goods or service underlying each performance obligation.
 
If the right to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from non-refundable, upfront fees allocated to the right when the right is transferred to the customer, and the customer can use and benefit from the right. For rights that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, upfront fees. The Company evaluates the

7
Dova Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
 
At the inception of the arrangement, the Company evaluates whether the development milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. Milestone payments that are not within the control of the Company, such as approvals from regulators, are not considered probable of being achieved until those approvals are received.
 
Stock-based compensation
 
The Company expenses stock-based compensation to employees, consultants and Board members over the requisite service period based on the estimated grant-date fair value of the awards. Stock-based awards with graded-vesting schedules are recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. The Company records the expense for stock-based compensation awards subject to performance-based milestone vesting over the remaining service period when management determines that achievement of the milestone is probable. Management evaluates when the achievement of a performance-based milestone is probable based on the expected satisfaction of the performance conditions at each reporting date. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model, and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. All stock-based compensation costs are recorded in cost of goods sold, general and administrative or research and development expenses in the consolidated statements of operations based upon the underlying individual’s role at the Company.
 
Income taxes
 
Income taxes are recorded in accordance with ASC 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
 
The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances.
 
Net loss per share
 
Net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period assuming the retrospective conversion of member units described above. Since the Company had a net loss in each of the periods presented, basic and diluted net loss per common share are the same. The computations of diluted net loss per common share for the three and nine months ended September 30, 2018 excluded options to purchase 2,689,828 and 2,514,503 shares of common stock, respectively, as the inclusion of these securities would have been antidilutive.
 
Recent accounting pronouncements
 
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-2, Leases (Topic 842), which supersedes FASB ASC Topic 840, Leases (Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the estimated term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The Company expects to adopt ASU 2016-2 in the first quarter of 2019. Although the Company is in the process of evaluating the impact of adoption of the ASU on

8
Dova Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

its consolidated financial statements, the Company currently believes the most significant change will be related to the recognition of right-of-use assets and lease liabilities on the Company’s balance sheet for real estate operating leases.
 
In May 2017, the FASB issued ASU 2017-9, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions.  The Company adopted ASU 2017-9 as of January 1, 2018.  The adoption of this standard did not impact the Company’s consolidated financial statements and disclosures.
 
In June 2018, the FASB issued ASU 2018-7, “Improvements to Nonemployee Share-Based Payment Accounting”, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The changes take effect for public companies for fiscal years starting after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company expects that the adoption of this ASU would not have a material impact on the Company’s consolidated financial statements.
 
Note 3—The purchase agreement with Eisai and related transactions
 
Purchase agreement with Eisai
 
Dova entered into a purchase agreement dated March 29, 2016 (the “Purchase Agreement”) with Eisai, Inc. (“Eisai”) for all of the issued and outstanding shares of the capital stock of AkaRx. The terms of the Purchase Agreement included (i) an upfront payment of $5.0 million that was paid at closing, (ii) milestone payments up to $135.0 million in the aggregate based on annual net sales of DOPTELET, and (iii) a commitment to negotiate in good faith to secure a long-term supply agreement with Eisai to govern manufacturing support and the purchase of DOPTELET from Eisai until the later of March 30, 2021 or the third anniversary of the commercialization of DOPTELET.
 
The transaction was accounted for as an asset acquisition pursuant to ASU 2017-1, Business Combinations (Topic 805), Clarifying the Definition of a Business, as the majority of the fair value of the assets acquired was concentrated in a group of similar assets, and the acquired assets did not have outputs or employees. The assets acquired under the Purchase Agreement included a license to DOPTELET, other associated intellectual property, inventory, documentation and records, and related materials. Because DOPTELET had not yet received regulatory approval, the $5.0 million purchase price paid to date for these assets was expensed in the Company’s statement of operations for the period from Inception to December 31, 2016. In addition, the potential milestone payments based on annual net sales are not yet considered probable, and no milestone payments have been accrued at September 30, 2018.
 
Long-term supply agreement with Eisai
 
In June 2017, the Company entered into a supply agreement with Eisai, pursuant to which the Company agreed to purchase finished drug product of DOPTELET from Eisai and Eisai agreed to supply finished drug product of DOPTELET. The initial term of the agreement will terminate on the later of March 30, 2021 and the third anniversary of the Company’s first commercial sale of DOPTELET. After the initial term, the supply agreement may be renewed by mutual agreement of the parties. During the initial term, Eisai is the Company’s exclusive supplier of finished drug product of DOPTELET, except that the Company has the right to terminate the exclusivity early by payment to Eisai of a fee calculated based on the Company’s forecasted purchases of DOPTELET during the remainder of the initial term. In addition, in the event that Eisai fails to deliver substantially all of the finished drug product due to the Company under the agreement, the Company may elect to seek alternative supply arrangements so long as such failure remains uncured, subject to certain exceptions. The aggregate payments to Eisai under the supply agreement for finished drug product will be the greater of a fixed payment per tablet or a payment calculated in the mid-single digit percentages of net sales of DOPTELET.
 




9
Dova Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Amended and Restated Transition Services Agreement with Eisai and an Additional Work Order

On October 1, 2018, the Company and Eisai entered into an Amended and Restated Transition Services Agreement (the “Amended TSA”) and an Additional Work Order (“Work Order”) pursuant to which Eisai has agreed to provide services to the Company after the expiration of the original Transition Services Agreement by and between Eisai and the Company, dated March 30, 2016 (the "TSA"), on March 31, 2018.
 
Under the Work Order, Eisai has agreed to provide certain regulatory, CMC, nonclinical, clinical pharmacology, and statistical services to the Company in order to support the Company's new drug application and marketing authorization application to the European Medicines Agency for the period from April 1, 2018 through June 30, 2019. Pursuant to the Amended TSA, the Company is obligated to pay Eisai for services provided by Eisai personnel based on a fixed payment schedule. To the extent that service fees and out-of-pocket costs payable by the Company to Eisai under the Amended TSA exceed $51.0 million, the Company's obligation to pay milestone payments under the Eisai Purchase Agreement will be reduced. To date, the Company has incurred $31.1 million under the TSA and the Amended TSA. Pursuant to the Amended TSA, payments due were financed under the Eisai note described below. The Company may terminate the services provided under the Amended TSA on a service-by-service basis or the agreement in its entirety upon 60-days’ written notice. The Amended TSA may also be terminated (i) by mutual consent, (ii) by either party upon 60-days’ written notice if the other party materially breaches the agreement, (iii) by either party in the event of the other party’s bankruptcy, insolvency or certain similar occurrences and (iv) by either party in the event that such party is unable to perform its obligations under the agreement as a result of events outside of its reasonable control.

Eisai note and security agreement
 
On March 30, 2016, the Company issued a Note to Eisai, which had an interest rate of 5% per annum, and enabled the Company to finance payments due to Eisai under the TSA for all costs incurred through December 31, 2017. The principal amount of the Note was increased on a quarterly basis by the amount of unpaid service fees and out-of-pocket expenses due and owed to Eisai under the TSA. The total aggregate spend through this Note was $31.1 million and on March 16, 2018, this principal balance along with accumulated interest of $1.3 million was repaid in full.
 
License agreement with Astellas Pharma Inc.
 
The primary intellectual property related to DOPTELET is licensed from Astellas Pharma Inc. (“Astellas”) on an exclusive, worldwide basis under the terms of a license agreement that the Company acquired from Eisai under the Purchase Agreement. Under the terms of the license agreement, the Company is required to make payments upon the achievement of certain milestones. On September 21, 2017, upon the filing of the NDA, the Company became obligated to make a milestone payment of $1.0 million, which was expensed and included in Research and development — licenses acquired.  The Company will be required to make additional aggregate milestone payments of up to $4.0 million to Astellas if certain other regulatory milestones are achieved.  No amounts have been accrued for any potential milestone payments as the payments were not deemed probable.  In addition, the Company is required to pay Astellas tiered royalties ranging from the mid to high single digits on net sales of DOPTELET, which are recorded in cost of product sales. Unless earlier terminated, this license agreement with Astellas will expire on a country-by-country and product-by-product basis upon the latest of (i) the expiration of the last-to-expire claim of the licensed patents, (ii) the expiration of any government-granted marketing exclusivity period for DOPTELET, and (iii) 10 years after the last date of launch of DOPTELET to have occurred in any country. Thereafter, the term of the license agreement may be extended for successive one-year terms if the Company notifies Astellas in writing of its desire to extend such term at least three months before it is otherwise set to expire.
 
Note 4—Related party agreements
 
Dova and AkaRx management services agreements
 
On April 1, 2016, Dova and AkaRx each entered into a services agreement (each, a “SA”) with PBM Capital Group, LLC. Pursuant to the terms of each of the SAs, which have terms of twelve months each (and are automatically renewable for successive one-year periods), PBM Capital Group, LLC will render advisory and consulting services to Dova and AkaRx. Services provided under the SAs may include certain scientific and technical, accounting, operations and back office support services. In consideration for these services, Dova and AkaRx are each obligated to pay PBM Capital Group, LLC a monthly management fee of $25,000.  On March 30, 2018, the SA agreement between AkaRx and PBM Capital Group, LLC was

10

terminated.  Effective April 1, 2018, the monthly management fee for the SA between Dova and PBM Capital Group, LLC was reduced to $17,400.
 
For the three months and nine months ended September 30, 2018, the Company incurred expenses under the SAs of $52,200 and $254,400, respectively, which were included in selling, general and administrative expenses.
 
For the three months and nine months ended September 30, 2017, the Company incurred expenses under the SAs of $150,000 and $450,000, respectively, which were included in selling, general and administrative expenses. 

Note 5—Stockholders’ equity
 
Series A preferred stock
 
Between September 19, 2016 and November 18, 2016, the Company closed on the sale of an aggregate of 982,714 shares of Series A preferred stock for gross proceeds of $29.0 million. The Series A preferred stock was entitled to non-cumulative, non-compounding dividends at 8.0% per annum (based on the original issue price), when, and if any dividends are declared by the Board.
 
Each share of Series A preferred stock was convertible, at the option of the holder and at any time, into a number of fully paid and non-assessable shares of common stock determined by dividing the Series A Original Issue Price by the Series A Conversion Price in effect at the time of conversion. The Series A preferred stock was mandatorily convertible under certain conditions (i) when the Company issued shares of common stock in a public offering generating gross proceeds of at least $60.0 million to the Company, at a price per share of at least $17.88, or (ii) by majority vote of the then outstanding shares of Series A preferred stock. The Series A Conversion Price was $8.94 and was subject to adjustment based on events including the issuance of additional equity securities, certain dividends and distributions, mergers and reorganizations, and stock splits and combinations.
 
The Series A preferred stock was not mandatorily redeemable and did not embody an unconditional obligation to settle in a variable number of equity shares. As such, the Series A preferred stock is classified as permanent equity on the condensed consolidated balance sheet. The holders’ contingent redemption right in the event of certain deemed liquidation events did not preclude permanent equity classification.
 
Further, the Series A preferred stock is considered an equity-like host for purposes of assessing embedded derivative features for potential bifurcation. The embedded conversion feature is considered to be clearly and closely related to the associated preferred stock host instrument and therefore was not bifurcated from the equity host. The contingent put right upon certain deemed liquidation events was not clearly and closely related to the associated preferred stock host instrument but did not meet the definition of a derivative and therefore was not bifurcated from the equity host.
 
Upon the closing of the Company’s initial public offering (“IPO”) on July 5, 2017, all outstanding shares of the Company’s Series A convertible preferred stock were automatically converted into 3,242,950 shares of the Company’s common stock.
 
Common stock
 
On July 5, 2017, the Company closed its IPO, which resulted in the issuance and sale of 5,077,250 shares of its common stock at a public offering price of $17.00 per share, generating net proceeds of approximately $78.7 million after deducting underwriting discounts and commissions and other offering costs.

On February 27, 2018, the Company completed an underwritten public offering of 2,500,000 shares of its common stock at an offering price of $32.00 per share. Net proceeds raised by the Company from the offering were approximately $74.7 million, after deducting underwriting discounts and commissions and other offering expenses.
 

11
Dova Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 6—Stock-based compensation
 
Options
 
The Company maintains the Amended and Restated 2017 Equity Incentive Plan (“2017 Equity Incentive Plan”).  The 2017 Equity Incentive Plan provides for the grant of incentive stock options to employees, and for the grant of nonstatutory options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance-based stock awards and other forms of stock awards to employees, including officers, consultants and directors. The 2017 Equity Incentive Plan also provides for the grant of performance-based cash awards to employees, including officers, consultants and directors.  The Company’s stock options generally vest as follows: 25% after 12 months of continuous services and the remaining 75% on a ratable basis over a 36-month period from 12 months after the grant date. Stock options granted during the three and nine months ended September 30, 2018 have a maximum contractual term of 10 years.
 
The Company initially reserved 4,285,250 shares of common stock for issuance under the 2017 Equity Incentive Plan.  The number of shares of common stock reserved for issuance under the 2017 Equity Incentive Plan automatically increases on January 1 each year, for a period of ten years, from January 1, 2018 through January 1, 2027, by 4% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by the Board.   As of September 30, 2018, 2,615,129 shares were reserved for grant under the 2017 Equity Incentive Plan.
 
Stock option valuation
 
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company historically has been a private company and lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on its historical volatility as well as the historical volatility of a publicly traded set of peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. Due to the lack of historical exercise history, the expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The expected term of stock options granted to nonemployees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future. Prior to the IPO, the fair values of the shares of common stock underlying the Company options were estimated on each grant date by the Company. In order to determine the fair value, the Company considered, among other things, contemporaneous valuations of the Company’s common stock and preferred stock, the Company’s business, financial condition and results of operations, including related industry trends affecting its operations; the likelihood of achieving a liquidity event, such as an IPO, or sale, given prevailing market conditions; the lack of marketability of the Company’s common stock; the market performance of comparable publicly traded companies; and U.S. and global economic and capital market conditions. Since the IPO, the fair value of the common stock underlying the Company’s options has been based upon the closing price of the Company’s common stock on the grant date.
 
Option awards
 
The fair value of the Company’s option awards was estimated using the assumptions below:
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Exercise price
 
$22.29
 
$23.90-$24.28
 
$22.29-$33.47
 
$3.73-$24.28
Risk-free rate of interest
 
2.84%-2.92%
 
1.86%-2.16%
 
2.41%-3.02%
 
1.71%-2.16%
Expected term (years)
 
5.4-6.9
 
5.5-7.0
 
5.0-7.0
 
5.2-7.1
Expected stock price volatility
 
64%-65%
 
87%-89%
 
64%-88%
 
87%-89%
 
The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2018:

12
Dova Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

 
 
Number of Options
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Contractual Term
 
Aggregate
Intrinsic
Value
Outstanding - December 31, 2017
 
2,128,641

 
7.90

 
9.4
 
$
44,481,000

Granted
 
843,150

 
29.17

 
9.2
 


Exercised
 
(51,641
)
 
4.62

 
 
 
 
Forfeited
 
(274,500
)
 
8.57

 
 
 
 
Outstanding - September 30, 2018
 
2,645,650

 
14.68

 
8.8
 
$
24,784,000

Options vested and exercisable - September 30, 2018
 
636,392

 
6.68

 
8.4
 
$
9,455,000

 
The aggregate intrinsic value in the above table is calculated as the difference between fair value of the Company’s closing common stock price on September 28, 2018, or $20.97 per share, and the exercise price of the stock options that had strike prices below $20.97 per share. The weighted average grant date fair value per share of options granted during the nine months ended September 30, 2018 was $20.12.
 
As of September 30, 2018, there was approximately $15.7 million of total unrecognized compensation expense, related to the unvested stock options shown in the table above, which is expected to be recognized over a weighted average period of 1.0 year.
 
Stock-based compensation expense has been reported in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2018 as follows (in thousands):
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018

2017
Cost of product sales
 
$
—

 
$
—

 
$
292

 
$
—

Selling, general and administrative
 
3,446

 
1,690

 
9,149

 
2,179

Research and development
 
590

 
452

 
1,602

 
582

Total stock-based compensation
 
$
4,036

 
$
2,142

 
$
11,043

 
$
2,761

 
Note 7 — Significant agreements and contracts
 
Distribution Agreement with Fosun
 
On March 16, 2018, the Company, through its wholly-owned subsidiary, AkaRx entered into an agreement by which it granted Shanghai Fosun Pharmaceutical Industrial Development Co., Ltd., a wholly owned subsidiary of Shanghai Fosun Pharmaceutical (Group) Co., Ltd., (collectively, “Fosun”) the exclusive development and distribution rights of DOPTELET in mainland China and Hong Kong (“territory”). Under the terms of the agreement, Fosun will have the right to exclusively commercialize and to assist the Company with the registration of DOPTELET in the territory.  Fosun is solely responsible for commercialization activities in the territory and associated expenses. The Company is responsible for supplying product at a fixed price to Fosun for the distribution of product upon approval.
 
The agreement between Fosun and the Company is governed by a joint steering committee comprised of equal representation by the Company and Fosun and operated on a consensus basis. In the event that the parties do not agree, the Company will have deciding authority, except with respect to matters that solely affect the territory.
 
Under the agreement, the Company received a non-refundable upfront payment of $4.5 million during the second quarter of 2018, which consisted of an upfront payment of $5.0 million, less $0.5 million that was withheld in accordance with tax withholding requirements in China and recorded as an expense during the nine months ended September 30, 2018.  The Company is also eligible to receive additional future payments upon the achievement of certain regulatory milestones. The Company assessed this arrangement in accordance with ASC Topic 606 and concluded that the contract counterparty, Fosun, is a customer.  The Company determined the distinct, material performance obligations within this agreement consist of (1) the exclusive right to develop and commercialize DOPTELET for multiple indications in the territory, (2) the delivery of certain indication specific information, and (3) manufacture and supply of commercial product.
 

13
Dova Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The transaction price includes the $5.0 million up-front consideration. None of the regulatory milestones have been included in the transaction price, as all milestone amounts were fully constrained. As part of its evaluation of the constraint, the Company considered numerous factors, including that receipt of the milestones is outside the control of the Company and contingent upon success in future clinical trials and Fosun’s efforts.
 
During the nine months ended September 30, 2018, the Company recognized $2.6 million related to the up-front payment as other revenue in connection with the Fosun agreement. The amount of revenue recognized in connection with this agreement is commensurate with the deliverables provided by the Company to Fosun in achieving the performance obligation. The remaining transaction price of $2.4 million is recorded in deferred revenue as of September 30, 2018, on the condensed consolidated balance sheet and will be recognized upon the delivery of certain information packages for indications which are currently in development. The relative fair value of deliverables was calculated using a combination of discounted cash flow and cost avoidance models (Level 3 inputs), under which estimated cash flows were discounted using a risk-adjusted rate that aligns with publicly available information of Fosun's cost structure. Estimated cash flows were determined based on management's best estimate of the performance of DOPTELET for each indication in the territory.
 
Commercial Outsourcing Agreement with Integrated Commercial Solutions, LLC (“ICS”)
 
On March 1, 2018, the Company entered into a Commercial Outsourcing Master Services Agreement with ICS, a division of AmerisourceBergen Specialty Group, a subsidiary of AmerisourceBergen, pursuant to which ICS is the exclusive provider of various third-party logistics services to support the Company’s distribution of DOPTELET in the United States. The key services provided by ICS include logistics, warehousing, returns and inventory management, contract administration and chargebacks processing and accounts receivable management.
 
Effective March 1, 2018, the Company also entered into a first amendment to the Commercial Outsourcing Master Services Agreement in order for ICS to purchase and sell DOPTELET to the Company’s customers in the United States.  Pursuant to the amendment, ICS will only make shipments to customers who have an executed contract with the Company.  Under this arrangement, ICS places orders with the Company to maintain an appropriate level of inventory.  ICS assumes all inventory risk and has sole responsibility for determining the prices at which it sells these products, subject to specified limitations in the amendment. The agreement will terminate on a date that is mutually agreed upon, in good faith, between ICS and the Company.  If the Company does not attain all regulatory approvals and licenses to sell and distribute DOPTELET within one calendar year from the effective date, ICS may terminate the agreement upon 30 days written notice.  Upon termination of this arrangement, ICS will be allowed to return one hundred percent of all inventory and revert to be the Company’s third-party logistics provider.
 
Co-Promotion Agreement with Valeant Pharmaceuticals North America LLC

On September 26, 2018, the Company entered into a Co-Promotion Agreement (the "Co-Promotion Agreement") with the Salix division of Valeant Pharmaceuticals North America LLC (“Salix”), a subsidiary of Bausch Health Companies Inc., pursuant to which the Company granted Salix the exclusive right to co-promote DOPTELET to specified medical professionals in the Gastroenterology, Colorectal Surgery and Proctology field (the “Specialty”) in the United States.

Pursuant to the Co-Promotion Agreement, the Company will pay Salix a fee based on the quarterly Net Sales (as defined in the Co-Promotion Agreement) of DOPTELET to specified medical professionals in the Specialty in the United States at specified tiered percentages, ranging from Salix receiving a mid-twenties to mid-thirties percent of Net Sales in a calendar year, subject to specified adjustments. In addition, the Company has agreed to pay Salix a milestone payment of $2.5 million upon the achievement of an aggregate Net Sales amount to the Specialty. The Co-Promotion Agreement specifies that the Company will grant Salix a royalty-free right to use trademarks and copyrights relating to DOPTELET in connection with the promotion of DOPTELET in the United States. The Co-Promotion Agreement also contains provisions regarding payment terms, confidentiality and indemnification, as well as other customary provisions.

The co-promotion of DOPTELET in the United States pursuant to the terms of the Co-Promotion Agreement will be supervised by a joint steering committee composed of an equal number of representatives from the Company and Salix. Under the terms of the Agreement, the Company remains responsible for the costs of maintaining regulatory approval of, manufacturing, supplying and distributing DOPTELET. Salix has also agreed to maintain at least one hundred Salix sales representatives (subject to certain adjustments) that will have the responsibility to promote DOPTELET in the Specialty in the United States.


14
Dova Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The Company did not make any milestone or royalty payments under the Co-Promotion Agreement for the three and nine months ended September 30, 2018.



Note 8 — Debt
 
On April 17, 2018, the Company and its wholly owned subsidiary, AkaRx (collectively “Co-Borrowers”), entered into a Loan and Security Agreement with Silicon Valley Bank (“Term Loan”) pursuant to which the Co-Borrowers borrowed $20.0 million.  The loan matures on April 17, 2021 unless the Company achieves a specified revenue milestone in which case the maturity date will be extended to April 17, 2022. The Co-Borrowers are only required to make monthly interest payments until April 30, 2019 unless the Company achieves the specified revenue milestone in which case the interest-only period will be extended until October 31, 2019.  Following the interest-only period, the Co-Borrowers will be required to also make equal monthly payments of principal and interest for the remainder of the term. The Co-Borrowers will also be required to pay an additional final payment at maturity equal to $2.0 million if the term loan is repaid after the interest-only period or a final payment of $0.6 million if the term loan is repaid during the interest-only period.  The final payment amount of $2.0 million has been recorded as a debt discount and is being accreted to the carrying value of the debt using the effective interest method.  In addition, at its option, the Co-Borrowers may prepay all amounts owed under the Loan and Security Agreement (including all accrued and unpaid interest), subject to a prepayment charge if the loan has been outstanding for less than one year, which prepayment charge of 4% of the outstanding principal amount on the date the loan is prepaid. All obligations under this agreement are guaranteed by all the assets of the Co-Borrowers, except for intellectual property and certain other assets. The agreement bears interest at the WSJ prime rate plus 1.25% per annum.  In connection with the Loan and Security Agreement, the Company incurred debt issuance costs totaling approximately $38,000. These costs are being amortized over the estimated term of the debt using the effective interest method. The Company deducted the debt issuance costs from the carrying amount of the debt as of September 30, 2018. As of September 30, 2018, the carrying value of the term loan was approximately $20.4 million, of which $4.2 million was due within 12 months and $16.2 million was due in greater than 12 months. The debt balance has been categorized within Level 2 of the fair value hierarchy. The carrying amount of the debt approximates its fair value based on prevailing interest rates as of the balance sheet date.
 
The Term Loan also provides for standard indemnification of Silicon Valley Bank and contains representations, warranties and certain covenants of the Co-Borrowers. While any amounts are outstanding under the Loan and Security Agreement, the Co-Borrowers are subject to a number of affirmative and negative covenants, including covenants regarding dispositions of property, business combinations or acquisitions, incurrence of additional indebtedness and transactions with affiliates, among other customary covenants. The Co-Borrowers are also restricted from paying dividends or making other distributions or payments on their capital stock, subject to limited exceptions.
 
As of September 30, 2018, annual principal payments due under the Term Loan are as follows:
 
Aggregate
Minimum
Payments
Year
(in thousands)
2019
$
6,667

2020
10,000

2021
5,333

Total
22,000

Less unamortized debt issuance costs and final payment
(1,622
)
Total
$
20,378

 

15
Dova Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 9—Commitments and contingencies
 
Office lease
 
On May 22, 2018, the Company entered into an Office Lease Agreement (the “Lease”) with Pine Forest 240 TT, LLC, a Delaware limited liability company (the “Landlord”), under which the Company will lease 21,745 square feet of space for its corporate headquarters located at 240 Leigh Farm Road, Durham, North Carolina. Pursuant to the Lease, the Company will effectively renew the Company’s lease of its existing 14,378 square feet of office space (the “Existing Office Space”) that the Company currently subleases from Paidian Research, Inc. pursuant to a sublease agreement, which is scheduled to expire on April 30, 2020, effective May 1, 2020. The Company also leases an additional 1,961 square feet of office space (“Suite 200”), which the Landlord delivered on October 12, 2018, and will lease an additional 5,406 square feet of office space (“Suite 215”), which the Landlord has agreed to use commercially reasonable efforts to deliver on or before August 1, 2019.
 
Under the Lease, subject to specified exceptions, the Company will pay an initial annual base rent of (i) $51,476, or $4,290 per month, for Suite 200, subject to an increase of approximately 2.7% per year, (ii) $145,800, or $12,150 per month, for Suite 215, subject to an increase of approximately 2.7% per year and (iii) $387,774, or $32,315 per month, for the Existing Office Space, subject to an increase of approximately 2.7% per year. In addition, the Company will pay its proportionate share of the Landlord’s annual operating expenses associated with the premises.
 
The term of the Lease will continue until September 30, 2023. The Company has an option to renew the Lease for one additional term of five years. If exercised, rent during the renewal term will be at the fair market rental rate as defined in the Lease.
 
The lease provides for a tenant improvement allowance of approximately $264,090. As of September 30, 2018, none of the allowance was utilized.
 
The Company incurred rent expense of $71,565 and $248,567 for the three and nine months ended September 30, 2018.  There was $54,698 and $75,184 rent expense for the three and nine months ended September 30, 2017.
 
Current future minimum lease payments under the Company’s current lease obligations are $101,316, $309,892 and $78,216 for the remainder of 2018, 2019 and 2020, respectively.

Purchase commitments
 
As noted in Note 3, the Company has an agreement with Eisai for the commercial supply of DOPTELET. Under the terms of the agreement, the Company will supply Eisai with non-cancelable firm commitment purchase orders. Future minimum purchase obligations are $1.7 million for the remainder of 2018.
 
The Company has also entered into other agreements with certain vendors for the provision of services, including services related to data access and packaging, under which the Company is contractually obligated to make certain payments to the vendors. The Company enters into contracts in the normal course of business that include, among others, arrangements with clinical research organizations for clinical trials, vendors for preclinical research, and vendors for manufacturing. These contracts generally provide for termination upon notice, and therefore the Company believes that its obligations under these agreements are not material.
 
Litigation
 
The Company is not a party to any material legal proceedings and is not aware of any pending or threatened claims. From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business activities.
 

16

Note 10—Income taxes
 
The Company estimates an annual effective tax rate of 0% for the year ending December 31, 2018 as the Company incurred losses for the three and nine months ended September 30, 2018 and is forecasting additional losses through the fourth quarter of 2018, resulting in an estimated net loss for both financial statement and tax purposes for the year ending December 31, 2018. Therefore, no federal or state income taxes are expected, and none have been recorded at this time. Income taxes have been accounted for using the liability method in accordance with ASC 740.
 
Due to the Company’s history of losses since inception, the Company has determined, based upon available evidence, that it is more likely than not that the net deferred tax asset will not be realized and, accordingly, has provided a full valuation allowance against its net deferred tax asset.
 
At September 30, 2018, the Company had no unrecognized tax benefits that would reduce the Company’s effective tax rate if recognized.
 
Note 11—Employee benefit plan
 
The Company maintains a defined contribution 401(k) plan, under which employee contributions are voluntary and are determined on an individual basis, limited by the maximum amounts allowable under federal tax regulations. The Company provides an automatic matching contribution of $0.50 per $1.00 of employee contribution into the plan up to a maximum deferral per employee of 4% of the employee’s salary. The Company’s matching contributions totaled approximately $70,163 and $179,003 during the three and nine months ended September 30, 2018, respectively.  There were $5,113 and $6,447 of such contributions for the three and nine month ended September 30, 2017, respectively.


17


 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with (1) the unaudited interim condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) the audited consolidated financial statements and notes thereto for the year ended December 31, 2017 and the related management’s discussion and analysis of financial condition and results of operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2017.
 
Forward-looking statements
 
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are often identified by the use of words such as “expect,” “anticipate,” “estimate,” “may,” “will,” “should,” “intend,” “believe,” and similar expressions, although not all forward-looking statements contain these identifying words. Although we believe the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to significant risks and uncertainties and we can give no assurances that our expectations will prove to be correct. Actual results could differ materially from those described in this report because of numerous factors, many of which are beyond our control. These factors include, without limitation, those described in our Annual Report on Form 10-K for the year ended December 31, 2017 under Part I - Item 1A “Risk Factors” filed with the Securities and Exchange Commission on February 16, 2018, in this Quarterly Report under Part II - Item 1A “Risk Factors,” and in our other filings with the SEC. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes.
 
Overview
 
We are a pharmaceutical company focused on acquiring, developing and commercializing drug candidates for diseases that are treated by specialist physicians, with an initial focus on addressing thrombocytopenia, a disorder characterized by a low blood platelet count. On May 21, 2018, the U.S. Food and Drug Administration (“FDA”) approved DOPTELET (avatrombopag), which is an orally administered thrombopoietin receptor agonist for the treatment of thrombocytopenia in adult patients with chronic liver disease (“CLD”) who are scheduled to undergo a procedure.  On April 27, 2018, we also submitted a marketing authorization application ("MAA") with the European Medicines Agency ("EMA") for this same indication. Furthermore, on August 30, 2018, we submitted a supplemental New Drug Application ("sNDA") to the FDA for DOPTELET, seeking approval for the treatment of thrombocytopenia in adult patients with chronic immune thrombocytopenia ("ITP") who have had an insufficient response to a previous treatment. On November 5, 2018 the FDA accepted the sNDA for review with a Prescription Drug User Fee Act goal date of June 30, 2019.
 
We are also evaluating the use of DOPTELET in patients with thrombocytopenia regardless of disease etiology undergoing surgery, or pre-surgery trial (“PST”) and initiated an open-label Phase 3 clinical trial during the first quarter of 2018.  In addition, we also initiated a Phase 3 clinical trial in the second quarter of 2018 to evaluate DOPTELET for the treatment of patients who have developed chemotherapy-induced thrombocytopenia (“CIT”).
 
We have a limited operating history as we were formed on March 24, 2016. Since our inception, our operations have focused on acquiring rights to DOPTELET, organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio, conducting clinical trials, preparing for and submitting a new drug application ("NDA") and sNDA for DOPTELET and building a sales organization. We have funded our operations primarily through the sale of preferred and common stock and the incurrence of debt. On July 5, 2017, we closed our IPO of common stock, which resulted in the issuance and sale of 5,077,250 shares of common stock at a public offering price of $17.00 per share, resulting in net proceeds of approximately $78.7 million after deducting underwriting discounts and commissions and other offering costs. Upon the closing of the IPO, all outstanding shares of our Series A convertible preferred stock were automatically converted into 3,242,950 shares of common stock.   In addition, on February 27, 2018, we completed an underwritten public offering of 2,500,000 shares of our common stock. The shares were sold to the public at an offering price of $32.00 per share. Net proceeds raised from the offering were approximately $74.7 million, after deducting underwriting discounts and commissions and other offering expenses.  On April 17, 2018, we, along with our wholly owned subsidiary, AkaRx, (collectively the “Co-Borrowers”), entered in to a Loan and Security Agreement with Silicon Valley Bank, pursuant to which we borrowed $20.0 million (“term loan”) maturing up to 48 months from the closing.   We believe that our existing cash and equivalents, will enable us to fund our operating expenses, debt service obligations and capital expenditure requirements for at least the next 12 months.

18


Since inception, we have incurred significant operating losses. For the nine months ended September 30, 2018 and for the year ended December 31, 2017, our net loss was $52.9 million and $30.0 million, respectively. As of September 30, 2018, we had an accumulated deficit of $110.1 million. We expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will increase significantly in connection with our ongoing activities, as we:
 
•
continue to invest in the preclinical and clinical development of DOPTELET for the treatment of other thrombocytopenia indications;
•
continue the commercialization of DOPTELET;
•
manufacture DOPTELET under our supply agreement with Eisai;
•
maintain, expand and protect our intellectual property portfolio;
•
evaluate opportunities for development of additional drug candidates; and
•
incur additional costs associated with operating as a public company.
 
DOPTLET Key Short-Term Launch Metrics
 
•
From launch through September 30, 2018, a total of 335 health care professionals have prescribed DOPTELET to their patients with an increasing number using DOPTELET for multiple patients within their practice. Gastroenterologists represented 41.6% of these health care professionals.
•
During the third quarter for prescriptions that completed the adjudication process with payers, we have seen 81% of those prescriptions approved by the payer with an average approval time of 7.9 days.
•
We have made significant progress in our outreach efforts having reached 67% of our target prescribers an average of 2.8 times since launch through September 30, 2018.
•
Inventory held by specialty pharmacies increased by approximately 65% from July 1, 2018 to September 30, 2018 as certain specialty pharmacies increased their inventory levels and stocking locations based on increased patient shipments.
 
Stock purchase agreement with Eisai
 
In March 2016, we entered into the stock purchase agreement with Eisai, (the “Eisai stock purchase agreement”), pursuant to which we acquired the worldwide rights to DOPTELET. The terms of the Eisai stock purchase agreement included (i) an upfront payment of $5.0 million, (ii) milestone payments up to $135.0 million in the aggregate based on annual net sales of DOPTELET and (iii) a commitment to negotiate in good faith to secure a long-term supply agreement with Eisai to purchase supplies of DOPTELET from Eisai. See Note 3 “The purchase agreement and related transactions” in the accompanying notes to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.

 
Amended and restated transition services agreement and an additional work order

On October 1, 2018, we entered into an Amended and Restated Transition Services Agreement (the “Amended TSA”) and an Additional Work Order (“Work Order”) with Eisai, pursuant to which Eisai has agreed to provide services to us after the expiration of the original Transition Services Agreement, dated March 30, 2016 (the "TSA"), on March 31, 2018.
 
Under the Work Order, Eisai has agreed to provide certain regulatory, CMC, nonclinical, clinical pharmacology, and statistical services to us in order to support our NDA to the FDA and MAA to the EMA for the period from April 1, 2018 through June 30, 2019. Pursuant to the Amended TSA, we are obligated to pay Eisai for services provided by Eisai personnel based on a fixed payment schedule. To the extent that service fees and out-of-pocket costs payable by us to Eisai under the Amended TSA exceed $51.0 million, our obligation to pay milestone payments under the Eisai stock purchase agreement will be reduced. We may terminate the services provided under the Amended TSA on a service-by-service basis or the agreement in its entirety upon 60-days’ written notice. The Amended TSA may also be terminated (i) by mutual consent, (ii) by either party upon 60-days’ written notice if the other party materially breaches the agreement, (iii) by either party in the event of the other party’s bankruptcy, insolvency or certain similar occurrences and (iv) by either party in the event that such party is unable to perform its obligations under the agreement as a result of events outside of its reasonable control.


Supply agreement with Eisai
 
In June 2017, we entered into a supply agreement with Eisai, pursuant to which we agreed to purchase finished drug product of DOPTELET from Eisai and Eisai agreed to supply finished drug product of DOPTELET to us. The initial term of the

19

agreement will terminate on the later of March 30, 2021 or the third anniversary of our first commercial sale of DOPTELET. After the initial term, the supply agreement may be renewed by mutual agreement of the parties. During the initial term, Eisai is our exclusive supplier of finished drug product of DOPTELET except that we have the right to terminate the exclusivity early by payment to Eisai of a fee calculated based on our forecasted purchases of DOPTELET during the remainder of the initial term. In addition, in the event that Eisai fails to deliver substantially all of the finished drug product due to us under the agreement, we may elect to seek alternative supply arrangements so long as such failure remains uncured, subject to certain exceptions. The aggregate payments to Eisai under the supply agreement for finished drug product will be the greater of a fixed payment per tablet or a payment calculated in the mid-single digit percentages of net sales of DOPTELET.
 
Eisai note and security agreement
 
On March 30, 2016, we issued a secured promissory note to Eisai (“Note”), which had an interest rate of 5% per annum, and enabled us to finance payments due to Eisai under the TSA for all costs incurred through December 31, 2017. The principal amount of the Note was increased on a quarterly basis by the amount of unpaid service fees and out-of-pocket expenses due and owed to Eisai under the TSA. The total aggregate spend through this Note was $31.1 million and on March 16, 2018, we repaid in full this principal balance along with accumulated interest of $1.3 million.

License agreement with Astellas
 
The primary intellectual property related to DOPTELET is licensed to us from Astellas on an exclusive, worldwide basis under the terms of a license agreement we acquired from Eisai in connection with our acquisition of the rights to DOPTELET from Eisai. Under the terms of the license agreement, we are required to make payments upon the achievement of certain milestones. On September 21, 2017, upon the filing of the NDA, we became obligated to make a milestone payment of $1.0 million.  We will be required to make additional aggregate milestone payments of up to $4.0 million to Astellas if certain other regulatory milestones are achieved. In addition, we will be required to pay Astellas tiered royalties in the mid to high single-digit percentages on net sales of DOPTELET. No amounts have been accrued for any potential future milestone payments as such payments have not been deemed probable. See Note 3 “The purchase agreement and related transactions” in the accompanying notes to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.
 
Services agreements with PBM Capital Group, LLC
 
On April 1, 2016, Dova and AkaRx each entered into a services agreement (each, a “SA”) with PBM Capital Group, LLC. Pursuant to the terms of each of the SAs, which have terms of twelve months each (and are automatically renewable for successive one-year periods), PBM Capital Group, LLC has rendered advisory and consulting services to Dova and AkaRx. Services provided under the SAs include certain scientific and technical, accounting, operations and back office support services. In consideration for these services, Dova and AkaRx were each obligated to pay PBM Capital Group, LLC a monthly management fee of $25,000.  On March 30, 2018, the SA agreement between AkaRx and PBM Capital Group, LLC was terminated.  Effective April 1, 2018, the monthly management fee for the SA between Dova and PBM Capital Group, LLC was reduced to $17,400.
 
Commercial outsourcing agreement
 
On March 1, 2018, we entered into a Commercial Outsourcing Master Services Agreement with Integrated Commercial Solutions, LLC (“ICS”), a division of AmerisourceBergen Specialty Group, a subsidiary of AmerisourceBergen, pursuant to which ICS is the exclusive provider of various third-party logistics services to support our distribution of DOPTELET in the United States. The key services provided by ICS include logistics, warehousing, returns and inventory management, contract administration and chargebacks processing and accounts receivable management.
 
Effective March 1, 2018, we also entered into a first amendment to the Commercial Outsourcing Master Services Agreement to in order for ICS to purchase and sell DOPTELET to our customers in the United States.  ICS will only make shipments to customers who have an executed contract with us.  Under this amendment, ICS places orders with us to maintain an appropriate level of inventory.  ICS assumes all inventory risk and has sole responsibility for determining the prices at which it sells these products, subject to specified limitations in the amendment.  The agreement will terminate on a date that is mutually agreed upon, in good faith, between ICS and us.  If we do not attain all regulatory approvals and licenses to sell and distribute DOPTELET within one calendar year from the effective date, ICS may terminate the agreement within 30 days written notice.  Upon termination of this arrangement, ICS will be allowed to return one hundred percent of all inventory and revert to be our third-party logistics provider.


20

Co-Promotion agreement

On September 26, 2018, we entered into a Co-Promotion Agreement (the "Co-Promotion Agreement") with the Salix division of Valeant Pharmaceuticals North America LLC (“Salix”), a subsidiary of Bausch Health Companies Inc., pursuant to which we granted Salix the exclusive right to co-promote DOPTELET to specified medical professionals in the Gastroenterology, Colorectal Surgery and Proctology field (the “Specialty”) in the United States.

Pursuant to the Co-Promotion Agreement, we will pay Salix a fee based on the quarterly Net Sales (as defined in the Co- Promotion Agreement) of DOPTELET to specified medical professionals in the Specialty in the United States at specified tiered percentages, ranging from Salix receiving a mid-twenties to mid-thirties percent of Net Sales in a calendar year, subject to specified adjustments. In addition, we have agreed to pay Salix a milestone payment of $2.5 million upon the achievement of an aggregate Net Sales amount to the Specialty. The Co-Promotion Agreement specifies that we will grant Salix a royalty-free right to use trademarks and copyrights relating to DOPTELET in connection with the promotion of DOPTELET in the United States. The Co-Promotion Agreement also contains provisions regarding payment terms, confidentiality and indemnification, as well as other customary provisions.

The co-promotion of DOPTELET in the United States pursuant to the terms of the Co-Promotion Agreement will be supervised by a joint steering committee composed of an equal number of representatives from us and Salix. Under the terms of the agreement, the we remain responsible for the costs of maintaining regulatory approval of, manufacturing, supplying and distributing DOPTELET. Salix has also agreed to maintain at least one hundred Salix sales representatives (subject to certain adjustments) that will have the responsibility to promote DOPTELET in the Specialty in the United States.

We did not make any milestone or royalty payments under the Co-Promotion Agreement for the three and nine months ended September 30, 2018.
 
Critical accounting policies and significant judgments and estimates
 
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, (“U.S. GAAP”). The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amounts of expenses during the reporting periods. In accordance with U.S. GAAP, we evaluate our estimates and judgments on an ongoing basis.
 
Significant estimates include assumptions used in the determination of net revenue generated from product sales, revenue recognized upon the satisfaction of performance obligations under our strategic agreements, of share-based compensation and some of our research and development expenses. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
We discussed accounting policies and assumptions that involve a higher degree of judgment and complexity in Note 2 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 16, 2018. There have been no material changes during the three months ended September 30, 2018 to our critical accounting policies, significant judgments and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017, except for the addition of a revenue recognition policy as discussed in Note 2 of our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
 
Components of results of operations
 
Revenue
 
Product sales, net consist of sales of DOPTELET, which was approved by the FDA on May 21, 2018.
 
In addition, during the nine months ended September 30, 2018, we recognized $2.6 million of the upfront payment received from our development and distribution agreement with Shanghai Fosun Pharmaceutical Industrial Development Co., Ltd., a wholly owned subsidiary of Shanghai Fosun Pharmaceutical (Group) Co., Ltd., (collectively, “Fosun”).
 


21


Cost of product sales
 
Cost of product sales consist primarily of direct and indirect costs related to the manufacturing of DOPTELET sold, including third-party manufacturing costs, packaging services, freight, royalty payments to Astellas in addition to inventory adjustment charges. We began capitalizing commercial inventory manufactured upon FDA approval of DOPTELET.
 
Research and development expense
 
Research and development expense consists of costs incurred in connection with our research activities, most of which to-date have been incurred under the TSA and the Amended TSA and includes costs associated with clinical trials, consultants, clinical trial materials, regulatory filings, facilities, laboratory expenses and other supplies.
 
Research and development costs are expensed as incurred. Costs for certain activities, such as manufacturing and preclinical studies and clinical trials, are generally recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and collaborators.
 
We expect our research and development expense will increase for the foreseeable future as we pursue additional indications for DOPTELET. Drug candidates in later stages of clinical development, such as DOPTELET, generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. Additionally, we are hiring internal resources to lead and take over development work that has historically been handled by Eisai personnel under the TSA and the Amended TSA.
 
The duration, costs and timing of additional clinical trials for DOPTELET and any other drug candidates will depend on a variety of factors that include, but are not limited to, the following:
 
•
number of trials required for approval;
•
delays in reaching, or failing to reach, agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites or prospective contract research organizations, the terms of which can be subject to extensive negotiation and may vary significantly among different contract research organizations and trial sites;
•
clinical trials of our drug candidates producing negative or inconclusive results, including failure to demonstrate statistical significance;
•
per patient trial costs, including based on number of doses that patients receive;
•
the number of patients that participate in the trials and then drop-out or discontinuation rates of patients;
•
the number of sites included in the trials;
•
the countries in which the trial is conducted;
•
the length of time required to enroll eligible patients;
•
potential additional safety monitoring or other studies requested by regulatory agencies;
•
undesirable side effects or other unexpected characteristics, causing us or our investigators, regulators or institutional review boards to suspend or terminate the trials;
•
the duration of patient follow-up;
•
timing and receipt of regulatory approvals;
•
the efficacy and safety profile of the drug candidate;
•
third-party contractors failing to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;
•
whether and how many post-approval trials are required;
•
regulators or institutional review boards requiring that we or our investigators suspend or terminate clinical development for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks; and
•
the insufficiency or inadequacy of the supply or quality of our drug candidates or other materials necessary to conduct clinical trials of our drug candidates.
 
At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of DOPTELET. We are also unable to predict when, if ever, material net cash inflows will commence from sales of DOPTELET. This is due to the numerous risks and uncertainties associated with developing and commercializing DOPTELET, including the uncertainty of:
 
•
achieving successful enrollment and completion of additional clinical trials and achieving regulatory approval of DOPTELET for the treatment of thrombocytopenia beyond its initial indication;

22

•
establishing an appropriate safety profile;
•
establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers that provide for commercial quantities of DOPTELET manufactured at acceptable cost levels and quality standards;
•
whether any indication approved by regulatory authorities is narrower than we expect;
•
compliance with ongoing regulatory review by the FDA, EMA, or any comparable foreign regulatory authorities;
•
the efficacy and safety of DOPTELET and potential advantages compared to alternative treatments, notwithstanding success in meeting or exceeding clinical trial endpoints;
•
the size of the markets for approved indications in territories in which we receive regulatory approval, if any;
•
the ability to set an acceptable price for DOPTELET and obtain coverage and adequate reimbursement from third-party payors and develop and implement viable patient assistance programs;
•
the acceptance by the prescribing community of DOPTELET;
•
the degree of competition we face from competitive therapies;
•
the ability to add operational, financial, management and information systems personnel, including personnel to support our clinical, manufacturing and planned future commercialization efforts and operations as a public company;
•
retention of key research and development personnel;
•
the ability to continue to build out and retain an experienced management and advisory team;
•
the ability to maintain, expand and protect our intellectual property portfolio, including any licensing arrangements with respect to our intellectual property; and
•
the ability to avoid and defend against third-party infringement and other intellectual property related claims.
 
A change in the outcome of any of these variables with respect to the development of our drug candidate would significantly change the costs, timing and viability associated with the development of that drug candidate.
 
Selling, general and administrative expense
 
Selling, general and administrative expense consists primarily of salaries and other related costs, stock compensation expense, recruiting fees, professional fees for accounting and legal services, as well as increasingly the costs associated with supporting the commercialization of DOPTELET.
 
We expect our selling, general and administrative expense will increase for the foreseeable future to support the commercialization of DOPTELET for its initial indication and other indications, if these other indications gain marketing approval, and increased costs of operating as a public company. These increases will likely include increased costs related to the hiring of additional personnel and fees related to the Co-Promotion Agreement with Salix, outside consultants, lawyers and accountants, among other expenses. Additionally, we have begun to incur increased costs associated with maintaining compliance with Nasdaq listing rules and SEC requirements, insurance and investor relations costs. In addition, we expect to incur, at an increased rate compared to prior periods, significantly higher expenses associated with building and maintaining
a sales and marketing team in connection with the commercialization of DOPTELET. As a result, we expect to report significantly higher general and administrative expenses over the next several fiscal quarters compared to prior periods.
 

Results of operations for the three months ended September 30, 2018 and 2017
 
The following table sets forth our selected statements of operations data for the three months ended September 30, 2018 and 2017 (in thousands):

23



Three months ended September 30,


2018

2017
Revenue

 

 
Product sales, net

$
2,929


$
—

Total revenue, net

2,929


—

Operating expenses:

 

 
Cost of product sales

370


—

Research and development

4,847


5,426

Selling, general and administrative

17,031


4,185

Total operating expenses

22,248


9,611

Loss from operations

(19,319
)

(9,611
)





Interest income and other income (expense), net

342


224

Interest expense

(546
)

(336
)
Total other expenses, net

(204
)

(112
)
Net loss

$
(19,523
)

$
(9,723
)
 
Revenue
 
During the three months ended September 30, 2018, product sales, net consist of sales of DOPTELET, which we commercially launched on June 4, 2018.  We did not recognize any revenue during the three months ended September 30, 2017.
 
Cost of product sales
 
Cost of product sales of $0.4 million for the three months ended September 30, 2018 consists of the cost of inventory, royalty payments to Astellas and certain distribution and overhead costs. 
 
Research and development expense
 
Research and development expenses decreased by $0.6 million, from $5.4 million for the three months ended September 30, 2017 to $4.8 million for the three months ended September 30, 2018, primarily driven by the $1.0 million milestone payment that we became obligated to pay Astellas on September 21, 2017 upon the submission of the NDA for DOPTELET and the completion of the clinical trials in 2017 of DOPTELET for the treatment of thrombocytopenia in patients with CLD, scheduled to undergo a procedure, partially offset by the initiation of clinical trials to evaluate DOPTELET for the treatment of PST and CIT.

For the three months ended September 30, 2018, we recorded approximately $3.2 million of product development expenses, $1.0 million of payroll-related expenses, and $0.6 million of stock-based compensation expense.

For the three months ended September 30, 2017, research and development expenses included $3.2 million of expenses under the TSA, $0.3 million of consulting fees associated with the preparation and submission of the NDA and planning for additional clinical development of avatrombopag, $0.4 million of payroll-related expenses and $0.5 million of stock-based compensation expense, as well as a $1.0 million milestone payment that we became obligated to pay Astellas on September 21, 2017 upon the submission of the NDA.
 
Selling, general and administrative expense
 
For the three months ended September 30, 2018, selling, general and administrative expenses increased by $12.8 million, which was primarily driven by the increased level of headcount and sales and marketing activities to support the commercial launch of DOPTELET, increased corporate infrastructure and additional costs associated with operating as a public entity.
 
For the three months ended September 30, 2018, selling, general and administrative expenses consisted of $3.0 million of commercial related expenses $7.7 million of payroll-related expenses, $3.4 million of stock-based compensation expenses, $0.7 million of office operations-related expenses, $1.7 million in professional and consulting fees, and $0.5 million in educational sponsorship and grants.
 

24

For the three months ended September 30, 2017, general and administrative expenses were $4.2 million, and were primarily attributable to $1.7 million of stock-based compensation expenses, $0.6 million of payroll-related expenses, $1.0 million of consulting fees, $0.3 million of recruiting fees, $0.3 million of office operations-related expenses and $0.2 million of fees under the SAs with PBM Capital Group, LLC.
 
Other expenses, net
 
Other expenses, net for the three months ended September 30, 2018 consisted primarily of $0.5 million of interest expense and amortization of debt issuance costs and accretion expense for the final payment related to our loan with Silicon Valley Bank, and $0.2 million of charitable contributions, partially offset by $0.5 million of income on our money market accounts.
 
Other expense, net for the three months ended September 30, 2017 consisted primarily of $0.3 million of interest expense related to the Eisai Note, partially offset by $0.2 million of income on our money market mutual funds. 

 
Results of operations for the nine months ended September 30, 2018 and 2017
 
The following table sets forth our selected statements of operations data for the nine months ended September 30, 2018 and 2017 (in thousands):
 
 
Nine months ended September 30,
 
 
2018
 
2017
Revenue
 
 
 
 
Product sales, net
 
$
4,886

 
$
—

Other revenue
 
2,627

 
—

Total revenue, net
 
7,513

 
—

Operating expenses:
 
 
 
 
Cost of product sales
 
889

 
—

Research and development
 
12,771

 
12,995

Selling, general and administrative
 
45,856

 
7,045

Total operating expenses
 
59,516

 
20,040

Loss from operations
 
(52,003
)
 
(20,040
)
 
 
 
 
 
Interest income and other income (expense), net
 
369

 
243

Interest expense
 
(1,315
)
 
(857
)
Total other expenses, net
 
(946
)
 
(614
)
Net loss
 
$
(52,949
)
 
$
(20,654
)

Revenue
 
During the nine months ended September 30, 2018, product sales, net consist of sales of DOPTELET. In addition, we recognized the $2.6 million of the upfront payment received from our development and distribution agreement with Fosun. We did not recognize any revenue during the nine months ended September 30, 2017.
 
Cost of product sales
 
Cost of product sales of $0.9 million for the nine months ended September 30, 2018, consists of the cost of inventory that was purchased from Eisai that was sold after FDA approval, royalty payments to Astellas and certain distribution and overhead costs.  In addition, for the nine months ended September 30, 2018, cost of product sales included $0.3 million related to a one-time stock-based compensation charge.
 
Research and development expense
 
Research and development expenses decreased by $0.2 million, from $13.0 million for the nine months ended September 30, 2017 to $12.8 million for the nine months ended September 30, 2018, primarily driven by the $1.0 million milestone payment that we became obligated to pay Astellas on September 17, 2017 upon the submission of the NDA and the completion of the

25

clinical trials in 2017 of DOPTELET for the treatment of thrombocytopenia in patients with CLD, scheduled to undergo a procedure, partially offset by the initiation of clinical trials to evaluate DOPTELET for the treatment of PST and CIT.
 
For the nine months ended September 30, 2018, research and development expenses included $8.8 million of clinical development costs associated with the clinical trials initiated to evaluate DOPTELET for the treatment of PST and CIT, $2.4 million of payroll-related expenses and $1.6 million of stock-based compensation expense.

For the nine months ended September 30, 2017, research and development expenses included $9.8 million of expenses under the TSA, $0.9 million of consulting fees, $0.7 million of payroll-related expenses and $0.6 million of stock-based compensation expense, as well as a $1.0 million milestone payment that we became obligated to pay Astellas on September 21, 2017 upon the submission of the NDA.
 
Selling, general and administrative expense
 
For the nine months ended September 30, 2018, selling, general and administrative expenses increased by $38.8 million, which was primarily driven by the increased level of headcount and sales and marketing activities to support the commercial launch of DOPTELET, increased corporate infrastructure and additional costs associated with operating as a public entity.
 
For the nine months ended September 30, 2018, selling, general and administrative expenses of $45.9 million, consists primarily of $17.6 million of payroll-related expenses, $10.0 million of commercial related expenses, $9.1 million of stock-based compensation expenses, $5.8 million of professional and consulting fees, $2.3 million of office operations-related expenses and $1.1 million in educational sponsorship and grants.
 
For the nine months ended September 30, 2017, selling, general and administrative expenses were $7.0 million, and were primarily attributable to $2.2 million of stock-based compensation expense, $1.2 million of payroll-related expenses, $1.8 million of consulting fees, $0.6 million of employee recruiting expenses, $0.6 million of office operations-related expenses, $0.2 million of travel expenses and $0.5 million of fees under the SAs with PBM Capital Group, LLC.

 Other expenses, net
 
Other expenses, net for the nine months ended September 30, 2018 consists primarily of $1.3 million of interest expense, amortization of debt issuance costs and accretion expense for the final payment related to our loan with Silicon Valley Bank, $0.5 million of withholding taxes related to the $5.0 upfront payment received from Fosun, $0.2 million of charitable contributions, and $0.4 million of various state franchise taxes partially offset by $1.4 million of income on our money market accounts. Other expenses, net for the nine months ended September 30, 2017 consisted primarily of $0.9 million of interest expense related to the Eisai Note, partially offset by $0.3 million of interest income on our money market mutual funds.
 
Liquidity and capital resources
 
We have funded our operations primarily through sales of preferred stock and common stock as well as through the incurrence of debt. On July 5, 2017, we closed our IPO, which resulted in the issuance and sale of 5,077,250 shares of our common stock at a public offering price of $17.00 per share, resulting in net proceeds of $78.7 million after deducting underwriting discounts and commissions and other offering costs. On February 27, 2018, we completed an underwritten public offering of 2,500,000 shares of our common stock at an offering price of $32.00 per share. Net proceeds raised from the offering were approximately $74.7 million, after deducting underwriting discounts and commissions and other offering expenses. In addition, on April 17, 2018, we borrowed $20.0 million from Silicon Valley Bank pursuant to the Loan and Security Agreement.
 
We commercially launched DOPTELET in June 2018. Prior to the generation of revenue from DOPTELET, we had not generated any commercial revenue from the sale of our products. We expect to incur substantial and increasing losses for the foreseeable future. Our principal sources of liquidity were our cash and equivalents, which totaled $122.0 million and $94.8 million at September 30, 2018 and December 31, 2017, respectively.
 

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The following table shows a summary of our cash flows for each of the periods shown below (in thousands):
 
 
Nine months ended September 30,
 
 
2018
 
2017
Cash and equivalents at the beginning of the period
 
$
94,846

 
$
28,709

Net cash used in operating activities
 
(36,257
)
 
(6,258
)
Net cash used in investing activities
 
(269
)
 
(35
)
Net cash provided by financing activities
 
63,707

 
77,998

Cash and equivalents at the end of the period
 
$
122,027

 
$
100,414

 
Operating activities
 
Operating activities used $36.3 million of cash during the nine months ended September 30, 2018, primarily for employee related expenses, consulting fees primarily related to our commercial readiness activities and clinical development fees related to the initiation of the PST program, partially offset by the receipt of a $4.5 million upfront payment from our strategic alliance with Fosun and cash receipts from our product sales. Operating cash flows also included office operational expenses, recruiting and legal fees.
 
Operating activities used $6.3 million of cash during the nine months ended September 30, 2017, primarily for consulting fees, payroll related expenses, office operational expenses, recruiting, professional and legal fees, travel and expenses under the SAs with PBM Capital Group, LLC.
 
Investing activities
 
Net cash used in investing activities related primarily for the purchases of equipment during the nine months ended September 30, 2018.  Investing activities during the nine months ended September 30, 2017 were insignificant.
 
Financing activities
 
For the nine months ended September 30, 2018, financing activities provided $63.7 million of cash, consisting primarily of net proceeds of $74.7 million from the issuance of common stock from our underwritten offering completed on February 27, 2018 and $20.0 million that was borrowed from Silicon Valley Bank under the Loan and Security Agreement, partially offset by the payment in full of the Eisai Note of $31.1 million and $37,705 in debt issuance costs to secure the new loan.
 
Financing activities provided $78.0 million of cash during the nine months ended September 30, 2017, consisting of the net proceeds of $78.7 million received upon the closing of our IPO on July 5, 2017, partially offset by the payment of $0.7 million of offering costs for our preferred stock sold in 2016.

 
Funding requirements
 
We expect our expenses to increase in connection with our ongoing activities, particularly as we continue to build out our commercial organization including the sales leadership, marketing and market access functions and expand our commercialization activities. As we seek to obtain marketing approval for DOPTELET in other indications, we will incur additional costs around clinical trials and research and development. In addition, if we obtain FDA approval for DOPTELET in other indication or any other drug candidates, we expect to incur significant commercialization expenses. Furthermore, we have begun and will continue to incur costs as a public company that we did not previously incur or have previously incurred at lower rates as a private company.  We expect that, based on our current operating plans, our existing cash and equivalents as of September 30, 2018 will be sufficient to fund our current planned operations for at least the next 12 months. We have based this estimate on assumptions that could prove to be wrong and we could use our capital resources sooner than planned.
Our future funding requirements will depend on many factors, including:
 
•
costs of continued commercial activities, including product sales, marketing, manufacturing and distribution, for DOPTELET in CLD and other indications, if approved;
•
the scope, progress, results and costs of clinical trials;
•
the scope, prioritization and number of our research and development programs;
•
the costs, timing and outcome of regulatory review of our drug candidates;
•
our ability to establish and maintain collaborations on favorable terms, if at all;

27

•
the extent to which we are obligated to reimburse, or entitled to reimbursement of, clinical trial costs under collaboration agreements, if any;
•
the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
•
the costs of retaining key research and development, sales and marketing personnel;
•
the costs of building out internal accounting, legal, compliance and other operational and administrative functions;
•
the timing and size of any milestone payments required under our existing or future arrangements;
•
the extent to which we acquire or in-license other drug candidates and technologies; and
•
the costs of establishing sales and marketing capabilities if we obtain regulatory approvals to market our drug candidates.
 
Clinical trial development is a time-consuming, expensive and uncertain process that takes many years to complete, and we may never generate the necessary data or results required to obtain marketing approval of and achieve sales of DOPTELET in other indications or other drug candidates. In addition, DOPTELET or any other drug candidates, if approved, may not achieve commercial success or may be limited in approved indications. Our commercial revenue will initially only be derived from sales of DOPTELET for the treatment of thrombocytopenia in adult patients with CLD who are scheduled to undergo a procedure. Accordingly, we may need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.
 
If we are unable to raise capital or otherwise obtain funding when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.
 
We will seek to obtain additional capital through the sale of debt or equity financings or other arrangements such as, collaborations, strategic alliances and licensing arrangements to fund operations; however, there can be no assurance that we will be able to raise needed capital under acceptable terms, if at all. The sale of additional equity may dilute existing stockholders and newly issued shares may contain senior rights and preferences compared to currently outstanding shares of common stock. Debt securities issued or other debt financing incurred may contain covenants and limit our ability to pay dividends or make other distributions to stockholders. If we are unable to obtain such additional financing, future operations would need to be scaled back or discontinued.
 
Contractual Obligations and Commitments
 
The following table discloses aggregate information about our contractual obligations and the periods in which payments are due as of September 30, 2018 (in thousands):
 
 
Payments due by Period
 
 
Total
 
Less Than
1 Year
 
1-3
Years
 
4-5
Years
 
More than
5 Years
 
 
(in thousands)
Long term debt obligations (including interest) (1)
 
$
22,000

 
$
6,667

 
$
15,333

 
$
—

 
$
—

Operating lease obligations (2)
 
489

 
333

 
156

 
—

 
—

Supply agreement with Eisai
 
1,728

 
1,728

 
—

 
—

 
—

Total
 
$
24,217

 
$
8,728

 
$
15,489

 
$
—

 
$
—

 
(1)         Represents the contractually required principal payments on our Loan Security Agreement in accordance with the required payment schedule and the $2.0 million final payment to Silicon Valley Bank on April 17, 2022.
(2)         Represents the contractually required payments under our operating lease obligations in existence as of September 30, 2018 in accordance with the required payment schedule. No assumptions were made with respect to renewing the lease terms at the expiration date of their initial terms.

Off-balance sheet arrangements
 
We do not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts. We therefore believe that we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

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Recent accounting pronouncements
 
See Note 2 to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements.
 
JOBS Act transition period
 
In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.
 
We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements under the JOBS Act. Subject to certain conditions, as an emerging growth company, we may rely on certain of these exemptions, including without limitation, (i) not providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) not complying with any requirement that may be adopted by the Public Company Accounting Oversight Board. We will remain an emerging growth company until the earliest of the following to occur of (1) the last day of the fiscal year (a) ending December 31, 2022, which is the end of the fiscal year following the fifth anniversary of the completion our IPO, (b) in which we have total annual gross revenue of at least $1.07 billion or (c) in which we are deemed to be a “large accelerated filer” under the rules of the U.S. Securities and Exchange Commission, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
 
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
 
Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments, including cash equivalents, are in the form of a money market fund. In addition, as discussed in Note 3 in the accompanying notes to the condensed consolidated financial statements included in this Quarterly Report, our Eisai Note had an interest rate of 5% per annum. If market rates were to decline, our required payments would have exceeded those based on the current market rate.
 
Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation had a material effect on our business, financial condition or results of operations for the three and nine ended September 30, 2018.
 
We contract with clinical research organizations globally. We may be subject to fluctuations in foreign currency rates in connection with certain of these agreements. Transactions denominated in currencies other than the U.S. dollar are recorded based on exchange rates at the time such transactions arise. As of September 30, 2018, substantially all of our total receivables and liabilities were denominated in the U.S. dollar.

Item 4.  Controls and Procedures
 
Disclosure Controls and Procedures
 
We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure.
 
The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
 

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With respect to the quarter ended September 30, 2018, under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.
 
Management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.
 
Changes in Internal Control over Financial Reporting:
 
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2018 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Part II.  Other Information
 
Item 1. Legal Proceedings.
 
We are not involved in any litigation that we believe could have a material adverse effect on our financial position or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of our executive officers, threatened against or affecting our company or our officers or directors in their capacities as such.
 
Item 1A. Risk Factors
 
Our business is subject to risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our securities.  Except for the risk factors set forth immediately below, our risk factors have not changed materially from those described in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on February 16, 2018.
 
We may not be able to generate sufficient cash to service our indebtedness, which currently consists of our loan from Silicon Valley Bank.
 
We have entered into a loan and security agreement with Silicon Valley Bank, pursuant to which we have borrowed an aggregate of $20.0 million. Our obligations under the loan and security agreement are secured by substantially all of our assets except for our intellectual property and certain other assets, and we may not encumber our intellectual property without Silicon Valley Bank’s prior written consent. The loan and security agreement contains a number of affirmative and negative covenants, including covenants regarding dispositions of property, business combinations or acquisitions, incurrence of additional indebtedness and transactions with affiliates, among other customary covenants. We are also restricted from paying dividends or making other distributions or payments on our capital stock, subject to limited exceptions. Our obligations under the loan agreement are subject to acceleration upon the occurrence of specified events of default, including a material adverse change in our business, operations or financial or other condition. We were in compliance with these covenants as of September 30, 2018. We may also enter into other debt agreements in the future which may contain similar or more restrictive terms.

Our ability to make scheduled monthly payments or to refinance our debt obligations depends on numerous factors, including the amount of our cash reserves and our actual and projected financial and operating performance. These amounts and our performance are subject to certain financial and business factors, as well as prevailing economic and competitive conditions, some of which may be beyond our control. We cannot assure you that we will maintain a level of cash reserves or cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our existing or future indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We cannot assure you that we would be able to take any of these actions, or that these actions would permit us to meet our scheduled debt service obligations. Failure to comply with the conditions of the loan and security agreement could result in an event of default, which could result in an acceleration of amounts due under the loan and security agreement. We

30

may not have sufficient funds or may be unable to arrange for additional financing to repay our indebtedness or to make any accelerated payments, and Silicon Valley Bank could seek to enforce security interests in the collateral securing such indebtedness, which would harm our business.
 
Our distribution agreements with ICS to market DOPTELET may not be successful.
 
We have entered into a distribution agreement with ICS to distribute DOPTELET in the United States. Under this agreement, ICS will generally be responsible for the warehousing, distribution, order management, and data management for DOPTELET. Although ICS has the exclusive right to distribute DOPTELET in the United States, the agreement does not require ICS to sell our products exclusively, and therefore, ICS is free to sell potentially competitive products. Because we are still relatively early in our commercial launch, we are not yet able to fully assess ICS’s performance in distributing DOPTELET in the United States, and it may take an extended period of time for us to accurately assess its performance under the agreement. Additionally, because the agreement with ICS is exclusive, we may be entirely dependent on ICS for sales in the United States for the duration of the agreement. If ICS fails to perform satisfactorily under the agreement, our ability to successfully commercialize DOPTELET would be adversely affected.

 
Item 2. Recent Sales of Unregistered Securities and Use of Proceeds.
 
(b) Use of IPO Proceeds
 
On June 28, 2017, our registration statement on Form S-1, as amended (File No 333-218479) was declared effective by the SEC in connection with our IPO, pursuant to which we sold 5,077,250 shares of common stock, $0.001 par value per share at a public offering price of $17.00 per share, including the full exercise by the underwriters of their option to purchase additional shares.
 
On July 5, 2017, we received net proceeds of $78.7 million, after deducting underwriting discounts and commissions and offering expenses borne by us. None of the expenses incurred by us were direct or indirect payments to any of (i) our directors or officers or their associates, (ii) persons owning 10 percent or more of our common stock, or (iii) our affiliates. The joint book-running underwriters of the IPO were J.P. Morgan Securities LLC, Jefferies LLC and Leerink Partners LLC.
 
There has been no material change in the planned use of proceeds from our IPO from that described in the final prospectus related to the offering, dated June 28, 2017, as filed with the SEC on June 30, 2017.
 

31

Item 6. Exhibits
 
Exhibit No.
 
Description
3.1*
 
3.2*
 
10.1*
 

10.2#+
 

10.3#+
 

31.1#
 
31.2#
 
32.1#++
 
101#
 
The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to the Condensed Consolidated Financial Statements (filed herewith).
 
+ Confidential treatment has been requested with respect to portions of this exhibit, indicated by asterisks, which has been filed separately with the SEC.
# Filed herewith.
* Previously filed.
++These certifications are being furnished solely to accompany this Quarterly Report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.


32

SIGNATURES
 
Pursuant to the requirements of the Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
Dova Pharmaceuticals, Inc.
 
 
 
 
Date: November 8, 2018
By:
/s/ Alex Sapir
 
Alex Sapir
 
President and Chief Executive Officer
 
(Principal Executive Officer)
 
 
Date: November 8, 2018
By:
/s/ Mark W. Hahn
 
Mark W. Hahn
 
Chief Financial Officer
 
(Principal Financial Officer)


33

Dova Pharmaceuticals Inc. Reports