UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2019

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

For the transition period from to

Commission File Number: 001-37926

RA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware		26-2908274
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

87 CambridgePark Drive
Cambridge, MA		02140
(Address of principal executive offices)		(Zip code)

617-401-4060

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $0.001 par value per share		RARX		Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x 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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company x

Emerging growth company x

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. x

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

The number of shares outstanding of the registrant’s common stock as of October 31, 2019 was 47,143,469.

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved.

Forward-looking statements include all statements that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “anticipate,” “project,” “target,” “design,” “estimate,” “predict,” “potential,” “plan” or the negative of these terms, and similar expressions and comparable terminology intended to identify forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, statements regarding the structure, timing and completion of the proposed acquisition of the Company by UCB S.A (“UCB”); any anticipated effects of the announcement, pendency or completion of the proposed acquisition on the value of our stock; our or UCB’s ability to obtain any required regulatory approvals in connection with the proposed acquisition; expenses related to the proposed acquisition by UCB and any potential future costs; expectations regarding the sufficiency of our cash and cash equivalents; our anticipated capital requirements and uses of cash; safety, efficacy and regulatory and clinical progress of our product candidates, including zilucoplan; trial design, timeline and enrollment of our ongoing and planned clinical programs; timing of the release of clinical trial data; and our collaboration agreement with Merck & Co., Inc. and our license agreement with Camurus AB, including without limitation potential milestone payments thereunder. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties and other important factors that could cause our actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including, but not limited to:

· the risk that the proposed acquisition by UCB may not be consummated at all or in the anticipated timeframe;

· failure to consummate the proposed acquisition by UCB could negatively impact our business, financial condition, results of operations or our stock price;

· the initiation, timing, progress and results of our research and development programs, including a Phase 3 clinical program evaluating zilucoplan for the treatment of generalized myasthenia gravis and a Phase 2 trial of zilucoplan for the treatment of immune-mediated necrotizing myopathy, and future pre-clinical and clinical studies;

· the risk that topline data from our Phase 3 and Phase 2 clinical programs may not be indicative of results from future trials;

· our ability to advance any product candidates into, and successfully complete, clinical studies and obtain regulatory approval for them;

· our ability to identify additional product candidates using our Extreme DiversityTM platform;

· the timing or likelihood of regulatory filings and approvals;

· our ability to commercialize, market and manufacture our product candidates, if approved;

· the pricing and reimbursement of our product candidates, if approved;

· the rate and degree of market acceptance and clinical utility of any products for which we receive marketing approval;

· the implementation of our strategic plans for our business, product candidates and technology;

· the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and technology;

· our ability to maintain our existing or establish future collaborations and/or licenses;

· our financial performance;

· developments relating to our competitors and our industry, including the impact of government regulation; and

· other risks and uncertainties, including the important factors listed under Item 1A, “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2018, as supplemented by our subsequent filings with the Securities and Exchange Commission (“SEC”).

Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q and, except as required by law, we undertake no obligation to update or revise publicly any forward looking-statements, whether as a result of new information, future events or otherwise after the date of this Quarterly Report on Form 10-Q. We qualify all of our forward-looking statements by these cautionary statements.

NOTE REGARDING TRADEMARKS

All brand names or trademarks appearing in this report are the property of their respective holders. Unless the context requires otherwise, references in this report to the “Company,” “we,” “us,” and “our” refer to Ra Pharmaceuticals, Inc.

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PART I: FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

RA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except per share data)

	September 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	292,602		$	209,822
Prepaid expenses and other current assets	7,578			2,585
Total current assets	300,180			212,407
Property and equipment, net	4,524			5,165
Operating lease right-of-use assets, net	2,600			—
Restricted cash	1,334			1,334
Other assets	300			314
Total assets	$	308,938		$	219,220
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	327		$	3,245
Accrued expenses	10,352			6,477
Operating lease liabilities	987			—
Deferred rent	—			479
Total current liabilities	11,666			10,201
Operating lease liabilities, net of current portion	3,494			—
Deferred rent, net of current portion	—			1,880
Deferred tax liabilities	21			21
Total liabilities	15,181			12,102
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued and outstanding	—			—
Common stock, $0.001 par value; 150,000 shares authorized; 47,096 and 42,072 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively	47			42
Additional paid-in capital	547,778			395,233
Accumulated deficit	(254,068		)	(188,157		)
Total stockholders’ equity	293,757			207,118
Total liabilities and stockholders’ equity	$	308,938		$	219,220

See Notes to Unaudited Condensed Consolidated Financial Statements.

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RA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue	$	3,000		$	—		$	3,000		$	—
Operating expenses:
Research and development	(23,244		)	(13,375		)	(56,439		)	$	(39,092	)
General and administrative	(5,972		)	(3,504		)	(15,712		)	(10,637		)
Total operating expenses	(29,216		)	(16,879		)	(72,151		)	(49,729		)
Loss from operations	(26,216		)	(16,879		)	(69,151		)	(49,729		)
Other income, net	1,241			375			3,240			981
Net loss	$	(24,975	)	$	(16,504	)	$	(65,911	)	$	(48,748	)

Net loss per common share — basic and diluted	$	(0.55	)	$	(0.51	)	$	(1.52	)	$	(1.60	)
Weighted average number of common shares outstanding — basic and diluted	45,766			32,349			43,418			30,652

See Notes to Unaudited Condensed Consolidated Financial Statements.

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RA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

(in thousands)

	Common Stock			Additional Paid-In						Total Stockholders’
	Shares	Amount		Capital			Accumulated Deficit			Equity
January 1, 2019	42,072	$	42	$	395,233		$	(188,157	)	$	207,118
Exercise of common stock options	118	—		769			—			769
Stock-based compensation	—	—		2,890			—			2,890
Shares issued upon vesting of restricted stock and under the employee purchase plan, net of tax withholdings	64	—		(484		)	—			(484		)
Net loss	—	—		—			(19,039		)	(19,039		)
March 31, 2019	42,254	42		398,408			(207,196		)	191,254
Exercise of common stock options	96	—		748			—			748
Stock-based compensation	—	—		3,445			—			3,445
Shares issued upon vesting of restricted stock and under the employee purchase plan, net of tax withholdings	23	—		139			—			139
Net loss	—	—		—			(21,897		)	(21,897		)
June 30, 2019	42,373	42		402,740			(229,093		)	173,689
Issuance of common stock from public offerings, net of underwriter discounts and issuance costs	4,600	5		140,228			—			140,233
Exercise of common stock options	123	—		997			—			997
Stock-based compensation	—	—		3,813			—			3,813
Net loss	—	—		—			(24,975		)	(24,975		)
September 30, 2019	47,096	$	47	$	547,778		$	(254,068	)	$	293,757

	Common Stock			Additional Paid-In					Total Stockholders’
	Shares	Amount		Capital		Accumulated Deficit			Equity
January 1, 2018	22,626	$	23	$	192,375	$	(123,214	)	$	69,184
Issuance of common stock from public offerings, net of underwriter discounts and issuance costs	9,660	9		54,034		—			54,043
Stock-based compensation	—	—		1,946		—			1,946
Net loss	—	—		—		(16,498		)	(16,498		)
March 31, 2018	32,286	32		248,355		(139,712		)	108,675
Exercise of common stock options	50	—		179		—			179
Stock-based compensation	—	—		1,812		—			1,812
Net loss	—	—		—		(15,746		)	(15,746		)
June 30, 2018	32,336	32		250,346		(155,458		)	94,920
Exercise of common stock options	52	—		248		—			248
Stock-based compensation	—	—		1,794		—			1,794
Net loss	—	—		—		(16,504		)	(16,504		)
September 30, 2018	32,388	$	32	$	252,388	$	(171,962	)	$	80,458

See Notes to Unaudited Condensed Consolidated Financial Statements.

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RA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities
Net loss	$	(65,911	)	$	(48,748	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,606			1,186
Stock-based compensation	10,148			5,553
Other, net	74			—
Changes in operating assets and liabilities:
Prepaid expenses and other current assets	(4,959		)	110
Accounts payable and accrued expenses	1,158			(757		)
Operating lease liabilities	(866		)	—
Other, net	—			(216		)
Net cash used in operating activities	(58,750		)	(42,872		)
Cash flows from investing activities
Purchase of property and equipment	(629		)	(915		)
Net cash used in investing activities	(629		)	(915		)
Cash flows from financing activities
Proceeds from common stock offering, net of underwriter discounts	140,530			54,482
Payment of common stock offering costs	(540		)	(371		)
Payments related to restricted stock units vesting	(583		)	—
Proceeds from exercises of stock options and ESPP shares	2,752			426
Other, net	—			(72		)
Net cash provided by financing activities	142,159			54,465

Net increase in cash, cash equivalents and restricted cash	82,780			10,678
Cash, cash equivalents and restricted cash, beginning of period	211,156			71,715
Cash, cash equivalents and restricted cash, end of period	$	293,936		$	82,393

Reconciliation of cash, cash equivalents and restricted cash:
Cash, cash equivalents and restricted cash, end of period	$	293,936		$	82,393
Less restricted cash	(1,334		)	(1,334		)
Cash and cash equivalents, end of period	$	292,602		$	81,059

See Notes to Unaudited Condensed Consolidated Financial Statements.

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RA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business and Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited and have been prepared by Ra Pharmaceuticals, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission. The year-end condensed consolidated balance sheet data was derived from the Company’s audited financial statements, but does not include all disclosures required by U.S. GAAP. These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The condensed consolidated financial statements, in the opinion of management, reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position and results of operations.

Description of Business

The Company is a clinical-stage biopharmaceutical company using its proprietary peptide chemistry platform to create novel therapeutics to treat life-threatening diseases that are caused by excessive or uncontrolled activation of the complement system, an essential component of the body’s innate immune system. The Company’s lead product candidate, zilucoplan, is being developed as a convenient self-administered subcutaneous (‘‘SC’’) injection, which is an injection into the tissue under the skin, for the treatment of various complement-mediated diseases, including generalized myasthenia gravis (‘‘gMG’’), immune-mediated necrotizing myopathy (“IMNM”), amyotrophic lateral sclerosis (“ALS”), and other tissue-based complement-mediated disorders with high unmet medical need. Additionally, the Company is pursuing discovery and pre-clinical programs targeting selective inhibition of other uncontrolled complement pathway factors to treat a variety of neurologic, renal, and inflammatory diseases. In addition to the Company’s focus on developing novel therapeutics to treat complement-mediated diseases, the Company has validated its Extreme Diversity platform by successfully identifying and delivering orally-available cyclic peptides for a non-complement cardiovascular target with a large market opportunity in a collaboration with Merck & Co., Inc (“Merck”).

The Company is subject to risks common to other life science companies in the development stage, including, but not limited to, uncertainty of product development and commercialization, lack of marketing and sales history, development by its competitors of new technological innovations, dependence on key personnel, market acceptance of products, product liability, protection of proprietary technology, ability to raise additional financing, and compliance with Food and Drug Administration and other government regulations. If the Company does not successfully commercialize any of its product candidates, it will be unable to generate recurring product revenue or achieve profitability. If the Company is unable to raise capital when needed or on attractive terms, it would be forced to delay, reduce, eliminate or out-license certain of its research and development programs or future commercialization efforts.

Since inception, the Company has generated an accumulated deficit of $254.1 million as of September 30, 2019 and has devoted substantially all of its efforts to research and development, business planning, acquiring operating assets, seeking protection for its technology and product candidates, and raising capital. As of September 30, 2019, the Company had cash and cash equivalents of $292.6 million, which is expected to fund operating expenses and capital expenditure requirements through at least the end of 2021.

Proposed Acquisition by UCB

On October 9, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with UCB S.A (“UCB”). See Note 2, “Merger Agreement” for a description of the transactions contemplated by the Merger Agreement.

Public Offerings

In July 2019, the Company completed a follow-on public offering of 4,600,000 shares of common stock, including the full exercise of the underwriters’ option to purchase an additional 600,000 shares, at $32.50 per share and received aggregate net proceeds of $140.2 million, after deducting $9.0 million of underwriting discounts and commissions and approximately $0.3 million of offering expenses.

Principles of Consolidation

The Company’s condensed consolidated financial statements reflect its financial statements and those of its subsidiaries in which the Company holds a controlling financial interest, including Cosmix, Ra Europe Limited, and Ra Pharmaceuticals Security Corporation. Intercompany balances and transactions are eliminated in consolidation.

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Reclassifications

Certain reclassifications have been made to the prior year condensed consolidated balance sheet to conform to the current year presentation. These reclassifications have no impact on the Company’s net loss or cash flows.

Use of Estimates

The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires that the Company make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, judgments and methodologies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. There have been no material changes to the significant accounting policies during the period ended September 30, 2019, except as described below.

Leases

Effective January 1, 2019, the Company adopted Accounting Standards Codification (“ASC”), Topic 842, Leases (“ASC 842”), using the required modified retrospective approach and utilizing the effective date as its date of initial application. The prior period is presented in accordance with the previous guidance in ASC 840, Leases (“ASC 840”).

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities. The Company has elected not to recognize on the balance sheet leases with terms of one year or less. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. However, certain adjustments to the right-of-use asset may be required for items such as incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

In accordance with the guidance in ASC 842, components of a lease should be split into three categories: lease components (e.g. land, building, etc.), non-lease components (e.g. common area maintenance, consumables, etc.), and non-components (e.g. property taxes, insurance, etc.). Then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on the respective relative fair values to the lease components and non-lease components.

Although separation of lease and non-lease components is required, certain practical expedients are available. Entities may elect the practical expedient to not separate lease and non-lease components. Rather, they would account for each lease component and the related non-lease component together as a single component. For new and amended leases beginning in 2019 and after, the Company has elected to account for the lease and non-lease components for leases for classes of all underlying assets and allocate all of the contract consideration to the lease component only.

Research and Development Expenses

The Company expenses research and development costs to operations when incurred in accordance with ASC, Topic 730, Research and Development. The Company defers and capitalizes nonrefundable advance payments made by the Company for research and development activities until the related goods are received or the related services are performed.

Research and development expenses comprise costs incurred in performing research and development activities, including salaries, benefits and other employee-related expenses, share-based compensation expense, laboratory supplies and other direct expenses, facilities cost, overhead costs, license agreement fees with no alternative future use, third-party contract costs relating to pre-clinical studies and clinical trial activities and related contract manufacturing expenses, and other outside costs.

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Newly Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases, (“ASU 2016-02”), which superseded the lease accounting requirements in ASC 840 and established ASC 842. ASC 842 requires a lessee to recognize assets and liabilities on the balance sheet for most leases and changes many key definitions, including the definition of a lease. The new standard includes a short-term lease exception for leases with a term of 12 months or less, as part of which a lessee can make an accounting policy election not to recognize lease assets and lease liabilities. Lessees will continue to differentiate between finance leases (previously referred to as capital leases) and operating leases using classification criteria that are substantially similar to the previous guidance.

ASU 2016-02 became effective on January 1, 2019, requiring the use of a modified retrospective transition approach applied at the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11, Leases, Targeted Improvements, (“ASU 2018-11”), which contains certain amendments to ASU 2016-02 intended to provide relief in implementing the new standard. ASU 2018-11 provides registrants with an option to not restate comparative periods presented in the financial statements. The Company adopted this new standard on January 1, 2019 using a cumulative-effect adjustment on the effective date of the standard, for which comparative periods are presented in accordance with the previous guidance in ASC 840, Leases.

In adopting the new standard, the Company elected to utilize the available package of practical expedients permitted under the transition guidance within the new standard, which does not require the reassessment of the following: i) whether existing or expired arrangements are or contain a lease, ii) the lease classification of existing or expired leases, and iii) whether previous initial direct costs would qualify for capitalization under the new lease standard. Additionally, the Company made an accounting policy election to keep leases with a term of 12 months or less off of its balance sheet. The initial adoption of this standard resulted in the recognition of operating lease liabilities and right-of-use assets of $5.3 million and $3.0 million, respectively, on the Company’s balance sheet. The $2.3 million difference between the account balances relates to the write-off of the previously existing ASC 840 balances, which was primarily driven by the tenant improvements allowance. The adoption of the standard did not have a material effect on the statements of operations or statement of cash flows.

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, (“ASU 2018-07”). The standard aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions. Under the new guidance, the measurement of equity-classified nonemployee awards is fixed at the grant date. The Company adopted this new standard on January 1, 2019. The adoption of ASU 2018-07 did not have a significant impact on its financial statements.

2. Merger Agreement

On October 9, 2019, the Company entered into the Merger Agreement with UCB. The Merger Agreement provides for the merger of a wholly owned subsidiary of UCB (the “Merger Sub”) with and into the Company (the “Acquisition”), with the Company surviving the merger as a wholly owned subsidiary of UCB. At the effective time of the Acquisition (the “Effective Time”), each share of common stock of the Company outstanding immediately prior to the Effective Time (other than shares (i) owned by the Company and its subsidiaries, UCB or Merger Sub or (ii) held by stockholders who are entitled to, but did not vote in favor of the Acquisition (or consent thereto in writing) and are entitled to demand and properly demand appraisal of such shares pursuant to Delaware law) will be automatically converted into the right to receive $48.00 in cash per share, without interest (the “Merger Consideration”). The total transaction value, net of the Company’s cash, is approximately $2.1 billion.

The closing of the Acquisition is subject to the adoption of the Merger Agreement by the affirmative vote of a majority of the outstanding shares of common stock of the Company entitled to vote thereon. The closing of the Acquisition is also subject to various customary conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, the receipt of all other required antitrust approvals, the absence of any governmental order prohibiting the consummation of the transactions contemplated by the Merger Agreement, the accuracy of the representations and warranties contained in the Merger Agreement (subject to certain materiality qualifications), compliance with the covenants and agreements in the Merger Agreement in all material respects and the absence of any continuing material adverse effect on the Company. The Acquisition is not subject to any financing condition.

The Company has made customary representations, warranties and covenants in the Merger Agreement. The Merger Agreement further provides that, upon termination of the Merger Agreement under specified circumstances, including termination of the Merger Agreement by UCB as a result of an adverse change in the recommendation of the Company’s board of directors and termination of the Merger Agreement by the Company to enter into an agreement in respect of a competing acquisition proposal, the Company may be required to pay UCB a termination fee of $75.0 million in cash.

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3. Supplemental Balance Sheet Information

Property and equipment, net

Property and equipment, net consists of the following (in thousands):

	September 30, 2019			December 31, 2018
Computer equipment and software	$	63		$	53
Furniture, fixtures and office equipment	390			390
Laboratory equipment	6,619			6,149
Leasehold improvements	3,753			3,755
	10,825			10,347
Accumulated depreciation	(6,301		)	(5,182		)
Property and equipment, net	$	4,524		$	5,165

Depreciation expense was $0.4 million for each of the three months ended September 30, 2019 and 2018, respectively, and $1.2 million and $1.1 million for the nine months ended September 30, 2019 and 2018, respectively.

Restricted cash

The Company is contingently liable under an unused letter of credit with a bank, related to the Company’s facility lease. As a result, as of September 30, 2019 and December 31, 2018, the Company had restricted cash securing the letters of credit. The cash will be restricted until the termination or modification of the lease arrangement.

Accrued expenses

Accrued expenses consist of the following (in thousands):

	September 30, 2019		December 31, 2018
Payroll and employee-related costs	$	3,228	$	3,309
Research and development costs	5,941		2,491
Other	1,183		677
Total	$	10,352	$	6,477

4. Fair Value Measurements

The Company has certain assets recorded at fair value, which may be classified as Level 1, 2, or 3 within the fair value hierarchy:

· Level 1 - Fair values are determined utilizing prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

· Level 2 - Fair values are determined by utilizing quoted prices for identical or similar assets and liabilities in active markets or other market observable inputs such as interest rates, yield curves, and foreign currency spot rates.

· Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

The fair value hierarchy level is determined by asset and liability class based on the lowest level of significant input. During the three and nine months ended September 30, 2019, there were no transfers between levels.

The fair value of the cash equivalents was determined through quoted prices provided by third-party pricing services.

Assets measured at fair value on a recurring basis are summarized below (in thousands):

	September 30, 2019
	Level 1		Level 2		Level 3		Total
Cash equivalents — Money market funds	$	294,570	$	—	$	—	$	294,570
Total assets	$	294,570	$	—	$	—	$	294,570

	December 31, 2018
	Level 1		Level 2		Level 3		Total
Cash equivalents — Money market funds	$	210,404	$	—	$	—	$	210,404
Total assets	$	210,404	$	—	$	—	$	210,404

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5. Leases

The Company leases certain office space, laboratory space, and equipment. At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. The Company does not recognize right-of-use assets or lease liabilities for leases determined to have a term of 12 months or less. For new and amended leases beginning in 2019 and after, the Company has elected to account for the lease and non-lease components for leases for classes of all underlying assets and allocate all of the contract consideration to the lease component only.

In September 2015, the Company entered into an operating lease for laboratory and office space at its headquarters in Cambridge, Massachusetts. The lease expires in April 2023 and contains various clauses for renewal at the Company’s option and certain rent escalation clauses. The Company is also obligated to pay operating costs, including property taxes, insurance, maintenance and other operating expenses. In connection with the lease, the Company was provided tenant improvements allowance totaling approximately $2.7 million by the landlord as reimbursement for capital improvements to the facility.

In September 2019, the Company entered into an operating sub-lease for additional office space in Cambridge, Massachusetts. The sub-lease is expected to commence on December 1, 2019 and expires in June 2022. The Company is obligated to pay an upfront security deposit in the amount of $82 thousand. Total minimum future lease payments for the lease of $1.3 million have not commenced as of September 30, 2019, as the Company does not yet control the underlying asset, and are not included in the unaudited condensed consolidated financial statements. Beginning January 1, 2021, the Company will become obligated to pay additional operating costs and property taxes for any increases to any amount above the previous base year amount.

As of September 30, 2019, the Company’s balance sheet included operating lease liabilities and right-of-use assets of $4.5 million and $2.6 million, respectively. The difference between the account balances relates to the write-off of the previously existing ASC 840 balances, which was primarily driven by the tenant improvements allowance. Lease related financial information is summarized below (in thousands):

Operating leases	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost	$	230	$	689
Short-term lease cost	37		81
Variable lease cost	230		687
Total operating lease costs	$	497	$	1,457

Year Ended December 31,	Maturity of Lease Liabilities
2019 (remaining three months)	$	236
2020	1,442
2021	1,483
2022	1,524
2023	513
Total lease payments	5,198
Less: imputed interest	(717		)
Total operating lease liabilities	$	4,481

Future minimum commitments due under operating lease agreements as of December 31, 2018 were as follows (in thousands):

Year Ended December 31,	Minimum Lease Payments
2019	$	1,403
2020	1,442
2021	1,483
2022	1,524
2023	513
Total operating lease liabilities	$	6,365

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6. Commitments and Contingencies

License Agreements

In July 2019, the Company entered into an exclusive worldwide license agreement with Camurus AB (“Camurus”) that allows for the use of Camurus’ proprietary FluidCrystal® (FC) drug-delivery technology to develop, manufacture, and commercialize a long-acting formulation of zilucoplan, and up to three additional compounds, for the treatment of multiple complement-mediated disorders. Due to the early stage of the assets licensed, the Company recorded expense for the upfront payment of $2.0 million during the third quarter 2019. As of September 30, 2019, the Company could be required to pay up to $14.5 million in additional development milestones and other license payments, up to $55 million in sales milestones, and tiered single digit royalty payments on commercial sales under the agreement with Camurus.

7. Revenue Recognition

In April 2013, the Company entered into a multi-target collaboration and license agreement with Merck to use its proprietary drug discovery technology platform to identify orally available cyclic peptides for non-complement program targets nominated by Merck and provide specific research and development services. Under the contract, the Company granted Merck licenses under certain of its intellectual property rights to manufacture, develop, and commercialize compounds and products directed to selected program targets.

At the signing of the Merck Agreement, Merck paid an upfront nonrefundable, technology license fee of $4.5 million. In addition, the Merck Agreement provides for reimbursement of research and development services provided by the Company and includes low to mid-single digit percentage royalties on future sales, if any, and milestone payments that could total up to $65.0 million; including pre-clinical and clinical milestones of $20.0 million, $9.0 million of which have been received to date; regulatory milestones of $19.0 million; and commercial milestones of $26.0 million.

The Company assessed this arrangement in accordance with ASC 606 and concluded that the contract counterparty, Merck, is a customer. The Company has identified the following promised goods and services in connection with the Merck Agreement: (1) rights to use the Company’s technology platform for each program target, and (2) the research and development services provided during the research term, including participation on the joint steering committee. The Company determined that the license to the Company’s early stage intellectual property is not distinct from the research and development services and accounted for all promises as a single combined performance obligation. The primary factor considered in this determination included the expectation that the research and development services will involve significant further development of the initial intellectual property licensed to Merck.

At execution and the end of each reporting period, the transaction price allocated to the single performance obligation included the $4.5 million technology license fee received and the payments for research and development services expected to be received by the Company. At execution, none of the pre-clinical, clinical or 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 the receipt of the milestones is outside the control of the Company and contingent upon success of future pre-clinical and clinical studies and Merck’s efforts. The $0.5 million, $3.0 million, and $2.5 million pre-clinical milestone payments received to date were added to the transaction price in the fourth quarter of 2013, the second quarter of 2016, and the fourth quarter of 2018, respectively, when they were considered probable of being reached. At the end of each reporting period, the Company continues to assess the probability of achievement of the remaining clinical or regulatory milestones and any related constraint and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments to the transaction price will be recorded as revenue in the period of adjustment.

Any consideration related to the sales-based milestones (including royalties) will be recognized when the related sales occur as they were determined to relate predominantly to the licenses granted to Merck and therefore were excluded from the transaction price.

During the three and nine months ended September 30, 2019, the Company recognized $3.0 million in revenue for the achievement of a clinical milestone under the Merck Agreement as it was considered probable of being reached. There was no revenue earned in the comparative three-month period in 2018.

8. Stock-Based Compensation

The Company has stock-based compensation plans under which employees, directors and consultants may be granted stock-based awards such as stock options, stock appreciation rights, restricted stock awards, unrestricted stock awards, restricted stock units, performance-based awards, or dividend equivalent rights.

The following table provides stock-based compensation by the financial statement line item in which it is reflected (in thousands):

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Research and development	$	2,109	$	980	$	5,669	$	2,837
General and administrative	1,704		815		4,479		2,716
Total	$	3,813	$	1,795	$	10,148	$	5,553

During the nine months ended September 30, 2019, the Company issued 1.9 million stock options with a per share weighted-average grant date fair value of $15.08. During the nine months ended September 30, 2019, 102,239 restricted stock units vested.

During the three and nine months ended September 30, 2019, there were no shares and 27,544 shares, respectively, otherwise issuable upon the settlement of awards surrendered in satisfaction of tax withholdings with an aggregate value of nil and $0.6 million, respectively. No such net settlement occurred during the three and nine months ended September 30, 2018.

9. Net Loss Per Share

The Company computes basic and diluted net loss per share using a methodology that gives effect to the impact of outstanding participating securities (the “two-class method”). As the three and nine months ended September 30, 2019 and 2018 resulted in net losses, there is no income allocation required under the two-class method or dilution attributed to weighted average shares outstanding in the calculation of diluted loss per share.

The following common stock equivalents were excluded from the computation of diluted weighted average shares outstanding as their effect would be anti-dilutive (in thousands):

	As of September 30,
	2019	2018
Stock options	5,526	3,996
Restricted stock units	196	307
Total	5,722	4,303

10. Subsequent Events

On November 1, 2019, a lawsuit entitled Elaine Wang v. Ra Pharmaceuticals, Inc., et al., was filed in the United States District Court for the District of Delaware against the Company and the members of the Company’s board of directors. On November 5, 2019, a putative class action lawsuit entitled Earl M. Wheby, Jr. v. Ra Pharmaceuticals, Inc., et al., was filed in the United States District Court for the District of Delaware against the Company and the members of the Company’s board of directors. The lawsuits allege that the proxy statement filed by the Company on November 1, 2019 with the SEC in connection with the Acquisition omits material information with respect to the transactions contemplated by the Merger Agreement, rendering it false and misleading in violation of Sections 14(a) and 20(a) of the Exchange Act. The plaintiffs seek, among other things, injunctive relief, rescission, declaratory relief and unspecified monetary damages. The Company believes these lawsuits are wholly without merit, and intends to vigorously defend against the claims.

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MG, is a chronic, complement-mediated, autoimmune disease that causes weakness in the skeletal muscles. Patients with MG present with muscle weakness that characteristically becomes increasingly severe with repeated use and recovers with rest. Muscle weakness can be localized to specific muscles, such as those responsible for eye movements, but often progresses to affect a broader range, including head, limb, and respiratory muscles. This is often described as the generalized, or severe, form of the disease. In August 2018, we announced the early completion of enrollment of 44 patients in our Phase 2 trial of zilucoplan in gMG, surpassing our original enrollment target of 36 patients. In November 2018, we announced completion of dosing of all patients, and we reported positive top-line data in December 2018. In May 2019, we presented results from the open-label, long-term extension study, in which statistically significant and clinically meaningful improvements in primary and secondary endpoints were sustained in patients treated with zilucoplan at 24 weeks. In September 2019, the FDA granted Orphan Drug Designation to zilucoplan for the treatment of MG. In October 2019, Ra Pharma announced the initiation of dosing in a single, pivotal, randomized, double-blind, placebo-controlled Phase 3 trial evaluating zilucoplan for the treatment of gMG, or the RAISE study. The trial, which incorporates feedback from the U.S. Food and Drug Administration (FDA), the European Medicines Agency (EMA), and Japan’s Pharmaceuticals and Medical Devices Agency (PMDA), is designed to evaluate the efficacy of a once-daily, subcutaneously (SC) self-administered dose of 0.3 mg/kg of zilucoplan versus placebo. Top-line results from the RAISE study are expected in early 2021.

IMNM is an autoimmune myopathy characterized by skeletal muscle necrosis, severe proximal limb weakness, and elevated creatine kinase, or CK, levels. IMNM is categorized into two subtypes defined by the presence of distinct autoantibodies against 3-hydroxy-3-methylglutaryl-coenzyme A reductase, or signal recognition particle. In IMNM, these autoantibodies drive complement-mediated necrosis of muscle fibers, resulting in severe, progressive, and debilitating proximal muscle weakness. In June 2019, we announced the FDA’s clearance of our Investigational New Drug, or IND, application for zilucoplan for the treatment of IMNM. We expect to initiate a Phase 2 clinical trial evaluating zilucoplan for the treatment of IMNM by year-end 2019.

ALS is the most prevalent adult-onset progressive motor neuron disease, causing the progressive degeneration of motor neurons, resulting in progressive muscle weakness and atrophy that can eventually lead to partial or total paralysis. In September 2019, zilucoplan was selected as one of the first clinical candidates to be evaluated in a pioneering platform trial for ALS, led by the Sean M. Healey & AMG Center for ALS at Mass General. The Healey Center has agreed to provide funding for the execution of the platform trial to accelerate the development of effective treatments for patients with ALS.

We have a life-cycle management plan with an extended release, or XR, program for zilucoplan and an oral, small molecule C5 inhibitor, as well as inhibitors of other complement factors for certain renal, autoimmune, and central nervous system, or CNS, diseases. Our XR program includes two formulations: the poly (D,L-lactic-co-glycolic acid), or PLGA, XR formulation of zilucoplan and the FluidCrystal®, or FC, XR formulation of zilucoplan. We anticipate the XR program entering human clinical studies in the first half of 2020.

In April 2019, we presented pre-clinical data for the PLGA XR formulation of zilucoplan, in which rapid and sustained pharmacodynamic inhibition of complement C5 was achieved with once-weekly subcutaneous dosing in non-human primates. We believe these data support the possibility of once weekly or less frequent dosing for zilucoplan.

In July 2019, we entered into an exclusive worldwide license agreement for the use of Camurus AB’s proprietary FC technology to develop, manufacture, and commercialize a long-acting formulation of zilucoplan. In July 2019, we reported pre-clinical data for the FC XR formulation of zilucoplan, in which non-human primates receiving a single dose of the FC XR formulation of zilucoplan rapidly achieved and maintained target levels of complement inhibition for at least seven days without the need for intravenous loading.

In addition to our focus on developing novel therapeutics to treat complement-mediated diseases, we have validated our Extreme Diversity platform by successfully identifying and delivering orally-available cyclic peptides for a non-complement cardiovascular target with a large market opportunity in a collaboration with Merck & Co., Inc., or Merck. In August 2019, we earned a clinical development milestone from Merck associated with the dosing of the first patient in a Phase 1 clinical trial.

Proposed Acquisition by UCB

On October 9, 2019, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with UCB S.A., or UCB, pursuant to which the Company will survive the proposed acquisition as an indirect wholly owned subsidiary of UCB. Under the terms of the Merger Agreement, our stockholders will receive $48.00 in cash for each share of common stock held at closing. The total transaction value, net of our cash, is approximately $2.1 billion. The boards of directors of both companies have unanimously approved the transaction, which remains subject to approval by our stockholders and to obtaining antitrust clearance and other customary closing conditions. The transaction is expected to close by the end of the first quarter of 2020. For additional discussion, please refer to Note 2, “Merger Agreement” to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

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Financial Update

Since our inception in June 2008, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, acquiring and developing our proprietary chemistry technology, identifying potential product candidates and conducting pre-clinical studies of our product candidate and clinical trials of our lead product candidate, zilucoplan. To date, we have not generated any product revenue and have financed our operations primarily through public offerings and the private placement of our securities and revenue from our collaboration with Merck. As of September 30, 2019, we had received an aggregate of $515.5 million in net proceeds from the issuance of equity and debt securities and $23.0 million in payments in connection with our collaboration and license agreement with Merck, or the Merck Agreement.

In July 2019, we completed a follow-on public offering of 4,600,000 shares of our common stock, including the full exercise of the underwriters’ over-allotment option to purchase an additional 600,000 shares, at $32.50 per share and received aggregate net proceeds of $140.2 million, after deducting $9.0 million of underwriting discounts and commissions and approximately $0.3 million of offering expenses.

As of September 30, 2019, we had an accumulated deficit of $254.1 million. Our net losses were $65.9 million and $48.7 million for the nine months ended September 30, 2019 and 2018, respectively. We have incurred significant net operating losses in every year since our inception and expect to continue to incur increasing net operating losses and significant expenses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase significantly as we:

· continue to advance our lead program, zilucoplan, a self-administered, subcutaneous C5 inhibitor, through clinical development in gMG, IMNM, ALS, and other tissue-based, complement-mediated disorders with high unmet medical need;

· continue our current research programs and development activities;

· seek to identify additional research programs and additional product candidates;

· initiate pre-clinical testing and clinical trials for any product candidates we identify and develop, maintain, expand and protect our intellectual property portfolio;

· hire additional research, clinical, scientific, and commercial personnel;

· incur additional costs associated with operating as a public company, including expanding our operational, financial and management teams; and

· incur additional costs associated with commercialization activities for any of our product candidates that receive marketing approval to the extent such costs are not the responsibility of any future collaborators, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities.

As of September 30, 2019, we had cash and cash equivalents of $292.6 million, which is expected to fund operating expenses and capital expenditure requirements through at least the end of 2021. We do not expect to generate revenue from product sales unless and until we successfully complete development and obtain regulatory approval for a product candidate, which we expect will take a number of years and is subject to significant uncertainty. Additionally, we believe that our cash and cash equivalents as of September 30, 2019, will be sufficient to enable us to fund pre-commercialization activities for zilucoplan, the XR formulations of zilucoplan, and the clinical development of our pipeline programs. It is also possible that we will not achieve the progress that we expect with respect to zilucoplan because the actual costs and timing of clinical development activities are difficult to predict and are subject to substantial risks and delays. We will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.

Financial Overview

Revenue

We have derived all of our revenue to date from a collaboration and license agreement with Merck, which we entered into in April 2013. Under the Merck Agreement, we used our proprietary drug discovery technology platform to identify orally available cyclic peptides for non-complement targets nominated by Merck. As of September 30, 2019, we recorded $23.0 million in revenue in connection with our Merck Agreement. We received a $3.0 million clinical development milestone payment for the dosing of the first

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patient in a Phase 1 clinical trial from Merck during the three and nine months ended September 30, 2019. We are also entitled to receive future aggregate milestone payments of up to $56.0 million and low-to-mid single digit percentage royalties on any future sales under the Merck Agreement. For additional information about the Merck Agreement, see Item 8, “Financial Statements and Supplementary Data” in our Annual Report on Form 10-K for the year ended December 31, 2018.

To date, we have not generated any revenue from product sales and do not expect to do so in the near future. We expect that our revenue will be less than our expenses for the foreseeable future and that we will experience increasing losses as we continue our development of, and seek regulatory approvals for, our product candidates and begin to commercialize any approved products. Our ability to generate revenue for each product candidate for which we receive regulatory approval will depend on numerous factors, including competition, commercial manufacturing capability and market acceptance of our products.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including development of our proprietary chemistry technology platform, and our pre-clinical and clinical candidates, which include:

· employee-related expenses, including salaries, benefits, and stock-based compensation expense;

· expenses incurred under agreements with contract research organizations (“CROs”), contract manufacturing organizations (“CMOs”), and independent contractors that conduct research and development, pre-clinical and clinical activities on our behalf;

· costs of purchasing lab supplies and non-capital equipment used in our pre-clinical activities and in manufacturing pre-clinical study and clinical trial materials;

· license agreement fees with no alternative future use;

· consulting, licensing and professional fees related to research and development activities; and

· facility costs, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance, and other supplies.

We expense research and development costs as incurred. We recognize costs for certain development activities, such as pre-clinical studies and clinical trials, based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors such as patient enrollment or clinical site activations for services received and efforts expended.

Research and development activities are central to our business model. We expect research and development costs to increase significantly for the foreseeable future as our current development programs progress and new programs are added.

The following table sets forth our research and development expenses related to our product candidate pipeline:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(in thousands)
Zilucoplan	$	10,600	$	5,450	$	24,752	$	17,277
Other pipeline programs	1,700		2,045		4,245		4,167
Allocated costs	12,300		7,495		28,997		21,444
Unallocated costs	10,944		5,880		27,442		17,648
Total	$	23,244	$	13,375	$	56,439	$	39,092

The expenses allocated to our product pipeline in the table above relate to CRO and CMO costs associated with our pre-clinical studies and clinical trials. We do not allocate compensation, benefits and other employee-related expenses, costs related to facilities, depreciation, share-based compensation, research and development support services, laboratory supplies and certain other costs directly to programs.

Because of the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration and completion costs of the current or future pre-clinical studies, clinical trials, pharmaceutical development, and chemical, manufacturing and controls or if, when, or to what extent we will generate revenues from the commercialization and sale of

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our product candidates. We may never succeed in achieving regulatory approval for our product candidates. The duration, costs, and timing of pre-clinical studies and clinical trials and development of our product candidates will depend on a variety of factors, including:

· successful completion of pre-clinical studies and Investigational New Drug-enabling studies;

· successful enrollment in, and completion of, clinical trials;

· receipt of marketing approvals from applicable regulatory authorities;

· establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;

· obtaining and maintaining patent and trade secret protection and non-patent exclusivity;

· launching commercial sales of the product, if and when approved, whether alone or in collaboration with others;

· acceptance of the product, if and when approved, by patients, the medical community and third-party payors;

· effectively competing with other therapies and treatment options;

· a continued acceptable safety profile following approval;

· enforcing and defending intellectual property and proprietary rights and claims; and

· achieving desirable medicinal properties for the intended indications.

A change in the outcome of any of these factors could mean a significant change in the costs and timing associated with the development of our current and future pre-clinical and clinical product candidates. For example, if the Food and Drug Administration (“FDA”), or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development, or if we experience significant delays in execution of or enrollment in any of our pre-clinical studies or clinical trials, we could be required to expend significant additional financial resources and time on the completion of pre-clinical and clinical development. We expect our research and development expenses to increase for the foreseeable future as we continue the development of product candidates.

General and Administrative Expenses

General and administrative expenses consist primarily of employee related expenses, including salaries, benefits, and stock-based compensation, for personnel in executive, finance, facility operations and administrative functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters, and fees for accounting, tax and consulting services.

We anticipate that our general and administrative expenses will increase in the future to support continued research and development activities, and potential commercialization of our product candidates. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, among other expenses.

Other Income (Expense), Net

Other income (expense), net primarily consists of interest income earned on our cash and cash equivalents.

Critical Accounting Policies and Significant Judgments and Estimates

Our discussion and analysis of our liquidity, capital resources and results of operations is based upon our condensed consolidated financial statements prepared in accordance with generally accepted accounting principles in the U.S. The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the reported periods and related disclosures. These estimates and assumptions are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on our historical experience, trends in the industry and various other factors that are

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believed to be reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions.

There have been no material changes to our critical accounting policies from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2018. We believe that our application of the following accounting policies, each of which require significant judgments and estimates on the part of management, and each of which is described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2018, is the most critical to aid in fully understanding and evaluating our reported financial results: (1) revenue recognition, (2) research and development expenses, and (3) stock-based compensation.

Results of Operations

Three Months Ended September 30, 2019 and 2018

The following table summarizes our results of operations:

	Three Months Ended September 30,
	2019			2018			$ Change			% Change
	(in thousands, except percentages)
Revenue	$	3,000		$	—		$	3,000		100.0	%
Operating expenses:
Research and development	(23,244		)	(13,375		)	(9,869		)	73.8	%
General and administrative	(5,972		)	(3,504		)	(2,468		)	70.4	%
Total operating expenses	(29,216		)	(16,879		)	(12,337		)	73.1	%
Loss from operations	(26,216		)	(16,879		)	(9,337		)	55.3	%
Other income, net	1,241			375			866			230.9	%
Net loss	$	(24,975	)	$	(16,504	)	$	(8,471	)	51.3	%

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Revenue

The $3.0 million increase in revenue for the three months ended September 30, 2019 is related to the achievement of a clinical development milestone earned under our collaboration agreement with Merck. There was no revenue earned in the comparative three-month period in 2018.

Research and Development Expenses

Research and development expenses increased by approximately $9.8 million to $23.2 million for the three months ended September 30, 2019, from $13.4 million for the three months ended September 30, 2018. This increase was attributable to: a $4.8 million increase in CRO and CMO expenses for our zilucoplan development program; a $2.2 million increase in compensation, benefits, non-cash stock-based compensation and other employee-related expenses due to 2019 salary increases and higher average headcount to support our increased research and development activities; a $2.0 million increase in licensing fees related to an upfront payment in connection with the Camurus FluidCrystal® (FC) drug-delivery technology license agreement; a $0.4 million increase in consulting and professional fees; and a $0.4 million net increase in other expenses.

General and Administrative Expenses

General and administrative expenses increased by $2.5 million to $6.0 million for the three months ended September 30, 2019, from $3.5 million for the three months ended September 30, 2018. This increase was attributable to: a $1.2 million increase in compensation, benefits, non-cash stock-based compensation and other employee-related expenses due to 2019 salary increases and higher average headcount to support our increased activities; a $0.4 million increase in consulting and professional fees related to pre-commercialization activities; a $0.4 million increase in legal, audit and insurance costs; and a $0.5 million net increase in other expenses primarily relating to patent costs.

Other Income, Net

Other income, net increased by approximately $0.8 million to $1.2 million in other income, net during the three months ended September 30, 2019, from $0.4 million in other income, net for the three months ended September 30, 2018. This increase was due primarily to an increase in interest income.

Nine Months Ended September 30, 2019 and 2018

	Nine Months Ended September 30,
	2019			2018			$ Change			% Change
	(in thousands, except percentages)
Revenue	$	3,000		$	—		$	3,000		100.0	%
Operating expenses:
Research and development	(56,439		)	(39,092		)	(17,347		)	44.4	%
General and administrative	(15,712		)	(10,637		)	(5,075		)	47.7	%
Total operating expenses	(72,151		)	(49,729		)	(22,422		)	45.1	%
Loss from operations	(69,151		)	(49,729		)	(19,422		)	39.1	%
Other income, net	3,240			981			2,259			230.3	%
Net loss	$	(65,911	)	$	(48,748	)	$	(17,163	)	35.2	%

Revenue

The $3.0 million increase in revenue for the nine months ended September 30, 2019 is related to the achievement of a clinical development milestone earned under our collaboration agreement with Merck. There was no revenue earned in the comparative nine-month period in 2018.

Research and Development Expenses

Research and development expenses increased by $17.3 million to $56.4 million for the nine months ended September 30, 2019, from $39.1 million for the nine months ended September 30, 2018. This increase was attributable to: a $7.6 million increase in CRO and CMO expenses for our zilucoplan development program; a $5.4 million increase in compensation, benefits, non-cash stock-based compensation and other employee-related expenses due to 2019 salary increases and higher average headcount to support our increased research and development activities; a $2.0 million increase in license fees related to an upfront payment for the Camurus

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agreement; a $1.1 million increase in consulting and professional fees; a $0.4 million increase in laboratory supplies and reagent expenses; and a $0.8 million net increase in other expenses.

General and Administrative Expenses

General and administrative expenses increased by $5.1 million to $15.7 million for the nine months ended September 30, 2019, from $10.6 million for the nine months ended September 30, 2018. This increase was attributable to: a $2.6 million increase in compensation, benefits, non-cash stock-based compensation and other employee-related expenses due to 2019 salary increases and higher average headcount to support our increased activities; a $0.8 million increase in consulting and professional fees related to pre-commercialization activities; a $0.7 million increase in legal, audit and insurance costs; a $0.4 million increase to patent costs; and a $0.6 million net increase in other expenses.

Other Income, Net

Other income, net increased by approximately $2.2 million to $3.2 million in other income, net during the nine months ended September 30, 2019, from $1.0 million in other income, net for the nine months ended September 30, 2018. This increase was primarily due to an increase in interest income.

Liquidity and Capital Resources

Overview

We have funded our operations from inception through September 30, 2019 primarily through the public offerings and the private placement of our securities and revenue from our collaboration with Merck. As of September 30, 2019, we had received an aggregate of $515.5 million in net proceeds from the issuance of equity and debt securities and $23.0 million in payments in connection with our collaboration and license agreement with Merck. As of September 30, 2019, we had cash and cash equivalents of $292.6 million.

In July 2019, we completed a follow-on public offering of 4,600,000 shares of common stock, including the full exercise of the underwriters’ option to purchase an additional 600,000 shares, at $32.50 per share and received aggregate net proceeds of $140.2 million, after deducting $9.0 million of underwriting discounts and commissions and approximately $0.3 million of offering expenses.

Cash Flows

The following table provides information regarding our cash flows:

	Nine Months Ended September 30,
	2019			2018
	(in thousands)
Net cash provided by (used in):
Operating activities	$	(58,750	)	$	(42,872	)
Investing activities	(629		)	(915		)
Financing activities	142,159			54,465
Net increase in cash	$	82,780		$	10,678

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Net Cash Used in Operating Activities

Cash flows used in operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. Operating cash flow is derived by adjusting our net loss for (1) non-cash operating items such as depreciation and amortization and stock-based compensation as well as (2) changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our results of operations.

Net cash used in operating activities was $58.8 million for the nine months ended September 30, 2019 compared to $42.9 million for the nine months ended September 30, 2018. The increase in net cash used in operations was attributable to: a $17.2 million increase in our net loss as a result of higher operating expenses, primarily in connection with our zilucoplan development program and other research and development pipeline programs; a net increase in operating assets; partially offset by a net increase in operating liabilities and higher non-cash expenses, including stock-based compensation, depreciation and amortization.

Net Cash Used in Investing Activities

Net cash used in investing activities was $0.6 million for the nine months ended September 30, 2019 compared to approximately $1.0 million for the nine months ended September 30, 2018. The decrease in cash used in investing activities was primarily due to a decrease in purchases of property and equipment.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was approximately $142.2 million for the nine months ended September 30, 2019 compared to $54.5 million for the nine months ended September 30, 2018. The increase in cash provided by financing activities was due primarily to the $140.5 million in proceeds raised from the July 2019 follow-on offering as compared to the $54.5 million in proceeds raised from the February 2018 follow-on offering in the comparative period; and an increase of $2.3 million in proceeds from exercises of stock option and purchases of shares under our Employee Stock Purchase Plan; partially offset by $0.6 million in payments related to restricted stock units vesting.

Funding Requirements

We expect our expenses to increase in connection with our ongoing development activities, particularly as we advance the Phase 3 clinical program for zilucoplan, continue clinical trials of zilucoplan in additional indications, advance the development of our pipeline programs, initiate new research and development efforts and seek marketing approval for any product candidates that we successfully develop. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to establishing sales, marketing, distribution and other commercial infrastructure to commercialize such products. Furthermore, we anticipate increased costs associated with being and operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.

As of September 30, 2019, we had cash and cash equivalents of $292.6 million, which is expected to fund operating expenses and capital expenditure requirements through at least the end of 2021. We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with the development and commercialization of zilucoplan and the research, development and commercialization of other potential product candidates, we are unable to estimate the exact amount of our operating capital requirements. Our future capital requirements will depend on many factors, including:

· the scope, progress, timing, costs and results of clinical trials of, and research and pre-clinical development efforts for, our current and future product candidates;

· our ability to enter into and the terms and timing of any collaborations, licensing agreements or other arrangements;

· the number of future product candidates that we pursue and their development requirements;

· the outcome, timing and costs of seeking regulatory approvals;

· the costs of commercialization activities for any of our product candidates that receive marketing approval to the extent such costs are not the responsibility of any future collaborators, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;

· subject to receipt of marketing approval, revenue, if any, received from commercial sales of our current and future product candidates;

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· our headcount growth and associated costs as we expand our research and development and establish a commercial infrastructure; and

· the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims.

Identifying potential product candidates and conducting pre-clinical studies and clinical trials 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 and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Accordingly, we will 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.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of a common stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

If we raise funds through additional collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Off-Balance Sheet Arrangements

As of September 30, 2019, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K promulgated under the Exchange Act.

Recent Accounting Pronouncements

For a discussion of recently adopted or issued accounting pronouncements please refer to Note 1, “Nature of Business and Basis of Presentation” to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We are exposed to market risk related to changes in interest rates. As of September 30, 2019, we had cash and cash equivalents of $292.6 million, consisting primarily of money market funds. 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 cash equivalents are in held in short-term money market funds. Due to short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our portfolio.

Foreign Currency Risk

We are also exposed to market risk related to changes in foreign currency exchange rates. From time to time, we engage contract research organizations, or CROs, and investigational sites globally. We are therefore subject to fluctuations in foreign currency rates in connection with these engagements. We do not currently hedge our foreign currency exchange rate risk. As of September 30, 2019, we had minimal or no assets or liabilities denominated in foreign currencies.

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Effects of Inflation

We do not believe that inflation and changing prices during the three months ended September 30, 2019 had a significant impact on our results of operations or financial condition.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Our disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2019.

(b) Changes in Internal Controls

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended September 30, 2019 that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

On November 1, 2019, a lawsuit entitled Elaine Wang v. Ra Pharmaceuticals, Inc., et al., was filed in the United States District Court for the District of Delaware against us and the members of our board of directors. On November 5, 2019, a putative class action lawsuit entitled Earl M. Wheby, Jr. v. Ra Pharmaceuticals, Inc., et al., was filed in the United States District Court for the District of Delaware against us and the members of our board of directors. The lawsuits allege that the proxy statement filed by us on November 1, 2019 with the SEC in connection with the proposed acquisition omits material information with respect to the transactions contemplated by the Merger Agreement with UCB, rendering it false and misleading in violation of Sections 14(a) and 20(a) of the Exchange Act. The plaintiffs seek, among other things, injunctive relief, rescission, declaratory relief and unspecified monetary damages. We believe these lawsuits are wholly without merit, and intend to vigorously defend against the claims.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, careful consideration should be given to the risk factors below and the risk factors discussed in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect our business, financial condition, and/or future results. The risks described below and in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. Except as set forth below, there have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2018.

Risks Related to the Proposed Acquisition by UCB

The conditions under the Merger Agreement to UCB’s consummation of the proposed acquisition may not be satisfied at all or in the anticipated timeframe.

On October 9, 2019, we entered into the Merger Agreement with UCB and Merger Sub, pursuant to which Merger Sub will be merged with and into the Company, with the Company surviving the proposed acquisition as an indirect wholly owned subsidiary of UCB.

Consummation of the proposed acquisition is subject to approval by our stockholders, receipt of certain regulatory approvals, the absence of any law or order by any governmental authority that would make illegal or otherwise prohibit, restrict or prevent the proposed acquisition, and other conditions specified in the Merger Agreement. As a result, there can be no assurance that the proposed acquisition will be consummated. These conditions are described in more detail in the Merger Agreement, which is filed as an exhibit to the Current Report on Form 8-K, filed with the SEC on October 10, 2019, and incorporated herein by reference.

The Company intends to pursue all required approvals in accordance with the Merger Agreement. However, no assurance can be given that the required approvals will be obtained and, even if all such approvals are obtained, no assurance can be given to the terms, conditions and timing of the approvals or that they will satisfy the terms of the Merger Agreement.

Furthermore, we and our board of directors have been named as defendants in a lawsuit brought by a purported holder of our common stock challenging our board of directors’ actions in connection with the proposed acquisition and seeking, among other things, injunctive relief to enjoin the defendants from completing the proposed acquisition on the agreed-upon terms. See Part II, Item 1, “Legal Proceedings” for more information regarding such lawsuits. If a settlement or other resolution is not reached in this lawsuit and the plaintiff secures injunctive relief prohibiting, delaying or otherwise adversely affecting our ability to consummate the proposed acquisition, then such injunctive or other relief may prevent the proposed acquisition from becoming effective within the expected timeframe or at all.

The announcement of, or a failure to consummate, the proposed acquisition could negatively impact our business, financial condition, results of operations or our stock price.

Our announcement of having entered into the Merger Agreement could cause a material disruption to our business and there can be no assurance that the conditions to the consummation of the proposed acquisition will be satisfied. The Merger Agreement may also be terminated by the Company and/or UCB in certain specified circumstances, including, subject to compliance with the terms of the Merger Agreement, by us in order to accept a third-party acquisition proposal that our board of directors determines constitutes a superior

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proposal upon payment of a termination fee (the “Termination Fee”) to UCB of $75 million. We are subject to several risks as a result of the announcement of the Merger Agreement, including, but not limited to, the following:

· If the proposed acquisition is not completed, the share price of our common stock may change to the extent that the current market price of our common stock reflects an assumption that the proposed acquisition will be consummated;

· Certain costs related to the proposed acquisition, including the fees and/or expenses of our legal, accounting and financial advisors, must be paid even if the proposed acquisition is not completed;

· Pursuant to the Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to the completion of the proposed acquisition, which restrictions could adversely affect our ability to realize certain of our business strategies or take advantage of certain business opportunities;

· The attention of our management may be directed toward the consummation of the proposed acquisition and related matters, and their focus may be diverted from the day-to-day business operations of our company, including from other opportunities that might otherwise be beneficial to us;

· The inability to retain certain key employees who may have sought and obtained different employment in anticipation of the consummation of the proposed acquisition;

· Our inability to hire capable employees, given the uncertainty regarding the future of the Company, in order to execute on our continuing business operations;

· A failure of the proposed acquisition may result in negative publicity and/or a negative impression of us in the investment community or business community generally; and

· Third parties may determine to terminate and/or attempt to renegotiate their relationships with us as a result of the Merger, whether pursuant to the terms of their existing agreements with us or otherwise.

The Merger Agreement contains provisions that could make it difficult for a third party to acquire us prior to the completion of the proposed acquisition.

The Merger Agreement contains restrictions on our ability to obtain a third-party proposal for an acquisition of our company. These provisions include our agreement not to solicit or initiate any additional discussions with third parties regarding other proposals to acquire us, as well as restrictions on our ability to respond to such proposals, subject to fulfillment of certain fiduciary requirements of our board of directors. The Merger Agreement also contains certain termination rights, including, under certain circumstances, a requirement for us to pay to UCB the Termination Fee.

These provisions might discourage an otherwise-interested third-party from considering or proposing an acquisition of our company, even one that may be deemed of greater value to our stockholders than the proposed acquisition. Furthermore, even if a third-party elects to propose an acquisition, the concept of a termination fee may result in that third-party offering a lower value to our stockholders than such third-party might otherwise have offered.

Our executive officers and directors may have interests that are different from, or in addition to, those of our stockholders generally.

Our executive officers and directors may have interests in the proposed acquisition that are different from, or are in addition to, those of our stockholders generally. These interests include direct or indirect ownership of our common stock, stock options and restricted stock units, and the potential receipt of change in control or other severance payments in connection with the consummation of the proposed acquisition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

None.

2.1+		Agreement and Plan of Merger, dated as of October 9, 2019, by and among the Registrant, UCB S.A. and Franq Merger Sub, Inc., an indirectly wholly owned subsidiary of UCB S.A. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37926) filed October 10, 2019).

3.1		Third Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37926) filed November 29, 2016).

3.2		Amended and Restated By-laws of the Registrant, as currently in effect (incorporated by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37926) filed November 29, 2016).

10.1*†		License Agreement, dated as of July 15, 2019, by and between the Registrant and Camurus AB.

31.1*		Certification of Chief Executive Officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Chief Financial Officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, by Douglas A. Treco, Ph.D., President and Chief Executive Officer of the Company, and David C. Lubner, Executive Vice President and Chief Financial Officer of the Company.

101.INS		Extensible Business Reporting Language (XBRL) Instance Document.

101.SCH		XBRL Schema Document.

101.CAL		XBRL Calculation Linkbase Document.

101.LAB		XBRL Labels Linkbase Document.

101.PRE		XBRL Presentation Linkbase Document.

101.DEF		XBRL Definition Linkbase Document.

	RA PHARMACEUTICALS, INC.

	By:	/s/ Douglas A. Treco
		Douglas A. Treco, Ph.D.
		President and Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ David C. Lubner
		David C. Lubner
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

		Page

PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018	4
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018	5
	Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018	6
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	25

PART II — OTHER INFORMATION		25
Item 1	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 6.	Exhibits	27

SIGNATURES		28

Other information

September 30, 2019

Operating cash flows used for operating leases

Weighted average remaining lease term in years

Weighted average discount rate