Table of Contents

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

OR

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 001-39069

Aprea Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

(617) 463-9385

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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  o  No x

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

There were 20,990,502 shares of the registrant’s common stock, $0.001 par value, outstanding as of November 13, 2019.

Table of Contents

Aprea Therapeutics, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended September 30, 2019

Table of Contents

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes statements that are, or may be deemed, “forward-looking statements.” In some cases, these forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “designed,” “could,” “might,” “will,” “should,” “approximately” or, in each case, their negative or other variations thereon or comparable terminology, although not all forward-looking statements contain these words. They appear in a number of places throughout this Quarterly Report on Form 10-Q and include statements regarding our current intentions, beliefs, projections, outlook, analyses or current expectations concerning, among other things, our ongoing and planned development, commercialization, and market uptake of APR-246 and our other potential product candidates, the strength and breadth of our intellectual property, our ongoing and planned clinical trials, the timing of and our ability to make regulatory filings and obtain and maintain regulatory approvals for our product candidates, the legal and regulatory landscape impacting our business, the degree of clinical utility of our products, particularly in specific patient populations, expectations regarding clinical trial data, our development and validation of manufacturing capabilities, our results of operations, financial condition, liquidity, prospects, growth and strategies, the length of time that we will be able to continue to fund our operating expenses and capital expenditures, our expected financing needs and sources of financing, the industry in which we operate and the trends that may affect the industry or us.

By their nature, forward-looking statements involve risks and uncertainties because they relate to future events, competitive dynamics, and healthcare, regulatory and scientific developments and depend on economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. We caution you that forward-looking statements are not guarantees, or predictive, of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q.

Some of the factors that we believe could cause actual results to differ from those anticipated or predicted include:

·                  estimates of our expenses, capital requirements and our needs for additional financing;

·                  the prospects of APR-246 and other product candidates, which are still in development;

·                  outcome and results of ongoing or future preclinical studies and clinical trials of APR-246;

·                  the design of our multiple clinical trials, including the sample size, trial duration, endpoint definition, event rate assumptions and eligibility criteria;

·                  our expectations regarding the timing of data from our Phase 3 and additional clinical trials;

·                  market acceptance or commercial success of APR-246 and the degree of acceptance among physicians, patients, patient advocacy groups, health care payors and the medical community;

·                  our expectations regarding competition, potential market size, the size of the patient populations for APR-246, if approved for commercial use, and market acceptance;

·                  our ability to maintain regulatory approval of APR-246, and any related restrictions, limitations and/or warnings in the label of APR-246;

·                  the scope of protection we are able to establish and maintain for intellectual property rights covering APR-246;

·                  potential claims relating to our intellectual property and third-party intellectual property;

·                  the duration of our intellectual property estate that will provide protection for APR-246;

·                  developments relating to our competitors and our industry;

·                  our sales, marketing or distribution capabilities and our ability to commercialize APR-246, if we obtain regulatory approval;

·                  current and future agreements with third parties in connection with the manufacturing, commercialization, packaging and distribution of APR-246;

·                  our expectations regarding the ability of our current contract manufacturing partners to produce APR-246 in the quantities and timeframe that we will require;

·                  our expectations regarding our future costs of goods;

·                  our ability to attract, retain and motivate key personnel and increase the size of our organization;

·                  our ability to establish collaborations in lieu of obtaining additional financing;

·                  the impact of government laws and regulations;

Table of Contents

·                  our financial performance; and

·                  our expectations regarding the time during which we will be an emerging growth company under the JOBS Act or a smaller reporting company under the Exchange Act.

Any forward-looking statements that we make in this Quarterly Report on Form 10-Q speak only as of the date of such statement, and we undertake no obligation to update such statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q. You should also read carefully the factors described in the “Risk Factors” included in Part II, Item 1A of this Quarterly Report to better understand significant risks and uncertainties inherent in our business and underlying any forward-looking statements.  As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report on Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all.

This Quarterly Report on Form 10-Q includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe these industry publications and third-party research, surveys and studies are reliable, we have not independently verified such data.

We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

This Form 10-Q may include trademarks, tradenames, and service marks that are the property of other organizations. Solely for convenience, our trademarks and tradenames referred to in this Form 10-Q may appear without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the right of the applicable licensor to these trademarks and tradenames.

Table of Contents

Aprea Therapeutics, Inc.

Part I — Financial Information

Item 1.  Financial Statements

Aprea Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

1

Table of Contents

Aprea Therapeutics, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

2

Table of Contents

Aprea Therapeutics, Inc.

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

3

Table of Contents

Aprea Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

4

Table of Contents

Aprea Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of business and basis of presentation

Nature of business—Aprea Therapeutics, Inc. (or the “Company”) is a clinical-stage biopharmaceutical company focused on developing and commercializing novel cancer therapeutics that reactivate mutant tumor suppressor protein p53. p53 is the protein expressed from the TP53 gene, the most commonly mutated gene in cancer. The Company began principal operations in 2006 and is headquartered in Boston, Massachusetts with research facilities in Stockholm, Sweden.

Corporate reorganization — In September 2019, the Company completed a corporate reorganization whereby Aprea Therapeutics AB became a wholly-owned subsidiary of the Company.  In connection with the corporate reorganization, each issued and outstanding share of Series A, Series B and Series C convertible preferred stock of Aprea Therapeutics AB was exchanged on a one for one basis into shares of Series A, Series B and Series C convertible preferred stock of the Company.

Each share of common stock of Aprea Therapeutics AB ($0.11 par value) was also exchanged on a one for one basis into shares of common stock of the Company ($0.001 par value).

Basis of presentation and management plans—The accompanying financial statements are prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

Since its inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, and raising capital, and has financed its operations through the issuance of convertible preferred stock and common stock.

The Company is subject to risks common to companies in the biopharmaceutical industry. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be maintained, that any therapeutic products developed will obtain required regulatory approval or that any approved or consumer products will be commercially viable. Even if the Company’s development efforts are successful, it is uncertain when, if ever, the Company will generate significant product sales.

The Company believes that the September 30, 2019 cash balance of $52,334,102, together with the net proceeds from its initial public offering (or “IPO”) of common stock which was completed in October 2019 (see Note 9) will be sufficient to fund the Company’s operations into 2023. In the event that additional funds are not available thereafter, management would expect to significantly reduce expenditures to conserve cash, which would involve scaling back or curtailing new development activity.

2. Summary of significant accounting policies

The Company’s complete listing of significant accounting policies are described in Note 2 to the Company’s audited consolidated financial statements as of December 31, 2018 included in the prospectus that forms a part of the Company’s Registration Statement on Form S-1 (File No. 333-233662) dated October 2, 2019.

Principles of consolidation—The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries Aprea Therapeutics AB, Aprea Personal AB, which was incorporated in May 2009, and Aprea US, Inc., which was incorporated in June 2016. Management has concluded it has a single reporting segment for purposes of reporting financial condition and results of operations. All intercompany transactions and balances have been eliminated.

Unaudited interim consolidated financial statements—The accompanying unaudited interim condensed consolidated financial statements have been prepared by the Company in accordance with U.S. GAAP for interim information and pursuant to the rules and regulations of the Securities and Exchange commission (or the “SEC”) for reporting on Form 10-Q.  Accordingly, certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed interim

5

Table of Contents

Aprea Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

2. Summary of significant accounting policies (continued)

financial statements should be read in conjunction with the audited financial statements and related notes that appear in the Company’s final prospectus filed with the SEC on October 2, 2019, relating to the Company’s Registration Statements on Form S-1 (File No. 333-233662) for the Company’s IPO.

The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and in management’s opinion, include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the financial information for the interim periods have been made. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the full fiscal year or any future period.

Use of estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses as of and during the reporting period. The Company bases estimates and assumptions on historical experience when available and on various factors that it believes to be reasonable under the circumstances. The Company assesses estimates on an ongoing basis; however, actual results could materially differ from those estimates. Significant items subject to such estimates and assumptions include fair value of common stock and stock-based compensation expense.

Foreign currency and currency translation—The functional currency for Aprea Therapeutics AB and Aprea Personal AB, is the Swedish Krona. Assets and liabilities of Aprea Therapeutics AB and Aprea Personal AB are translated into United States dollars at the exchange rate in effect on the balance sheet date. Revenues and expenses are translated at the average exchange rate in effect during the period. Unrealized translation gains and losses are recorded as a cumulative translation adjustment, which is included in the consolidated statements of convertible preferred stock and stockholders’ deficit as a component of accumulated other comprehensive loss. Adjustments that arise from exchange rate changes on transactions denominated in a currency other than the local currency are included in other income and expense in the condensed consolidated statements of operations and comprehensive loss as incurred.

Deferred offering costs—The Company capitalizes deferred IPO costs, which primarily consist of direct, incremental legal, professional, accounting and other third-party fees relating to the Company’s IPO. The deferred IPO costs will be offset against IPO proceeds upon the completion of an offering (see Note 9). There were $0 and $4,070,690 of deferred IPO costs as of December 31, 2018 and September 30, 2019, respectively.

Fair value of financial instruments—The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability between market participants at measurement dates. ASC Topic 820, Fair Value Measurement (“ASC 820”), establishes a three-level valuation hierarchy for instruments measured at fair value. The hierarchy is based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The hierarchy defines three levels of valuation inputs, of which the first two are considered observable and the last is considered unobservable:

·                  Level 1 inputs: Quoted prices in active markets for identical assets or liabilities.

·                  Level 2 inputs: Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable, such as quoted market prices, interest rates and yield curves.

·                  Level 3 inputs: Unobservable inputs developed using estimates or assumptions developed by the Company, which reflect those that a market participant would use in pricing the asset or liability.

To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

6

Table of Contents

Aprea Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

2. Summary of significant accounting policies (continued)

The Company’s financial instruments consist of accounts payable. The carrying amount of accounts payable is considered a reasonable estimate of fair value due to the short-term maturity.

Convertible preferred stock—The Company has classified convertible preferred stock as temporary equity in the accompanying balance sheets due to certain change in control events that are outside of the Company’s control, including sale or transfer of control of the Company, as holders of the Preferred Stock could cause redemption of the shares in these situations. The Company does not accrete the carrying values of the Preferred Stock to the redemption values since a liquidation event was not considered probable as of September 30, 2019. Subsequent adjustments of the carrying values to the ultimate redemption values will be made only if it becomes probable that such a liquidation event will occur.

Accounting for leases—In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016 02, “Leases” (“ASC 842”) to enhance the transparency and comparability of financial reporting related to leasing arrangements. Under this new lease standard, most leases are required to be recognized on the balance sheet as right-of-use assets and lease liabilities. Disclosure requirements have been enhanced with the objective of enabling financial statement users to assess the amount, timing, and uncertainty of cash flows arising from leases. Prior to January 1, 2019, GAAP did not require lessees to recognize assets and liabilities related to operating leases on the balance sheet. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and corresponding lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement as well as the reduction of the right of use asset.

The Company has adopted the standard effective January 1, 2019, using the modified retrospective method. The new standard provides a number of optional practical expedients in transition. The Company has elected to apply the ‘package of practical expedients’ which allow us to not reassess (i) whether existing or expired arrangements contain a lease, (ii) the lease classification of existing or expired leases, or (iii) whether previous initial direct costs would qualify for capitalization under the new lease standard. The Company has also elected to apply (i) the practical expedient which allows us to not separate lease and non-lease components, for new leases entered into after adoption and (ii) the short-term lease exemption for all leases with an original term of less than 12 months, for purposes of applying the recognition and measurements requirements in the new standard. For the impact to the Company’s consolidated financial statement upon adoption of the new leasing standard, see Note 3 to our unaudited condensed consolidated financial statements.

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on specific facts and circumstances, the existence of an identified asset(s), if any, and the Company’s control over the use of the identified asset(s), if applicable. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of future lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company will utilize the incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. As of the ASC 842 effective date, the Company’s incremental borrowing rate ranged from approximately 3.0% to 4.3% based on the remaining lease term of the applicable leases.

The Company has elected not to separate lease and non-lease components as a single component. Operating leases are recognized on the balance sheet as ROU lease assets, lease liabilities current and lease liabilities non-current. Fixed rents are included in the calculation of the lease balances while variable costs paid for certain operating and pass-through costs are excluded. Lease expense is recognized over the expected term on a straight-line basis.

Stock-based compensation—The Company measures stock options and other stock-based awards granted to employees and directors based on their fair value on the date of the grant and recognize compensation expense of those awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. The Company applies the straight-line method of expense recognition to all awards with only service based vesting conditions.

7

Table of Contents

Aprea Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

2. Summary of significant accounting policies (continued)

For stock-based awards granted to non-employees, compensation expense is recognized over the period during which services are rendered by such non-employees until completed in accordance with the FASB issued ASU No. 2018-07, Compensation Stock Compensation (Topic 718): Improvements to Nonemployee Share Based Payment Accounting. The new standard largely aligns the accounting for share based payment awards issued to employees and nonemployees by expanding the scope of ASC 718 to apply to nonemployee share based transactions, as long as the transaction is not effectively a form of financing.

The Company estimates the fair value of each stock option grant on the date of grant using the Black Scholes option pricing model, which uses as inputs the fair value of the Company’s common stock and assumptions the Company makes for the volatility of its common stock, the expected term of its stock options, the risk free interest rate for a period that approximates the expected term of its stock options and its expected dividend yield.

Determination of Fair Value of Common Stock

As there has been no public market for the Company’s common stock to date, the estimated fair value of its common stock has been determined by its board of directors as of the date of each option grant, with input from management, considering the Company’s most recently available third party valuations of common stock and its board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately Held Company Equity Securities Issued as Compensation.

The Company’s common stock valuations were prepared using a hybrid method, which used market approaches to estimate its enterprise value. The hybrid method is a probability weighed expected return method, or PWERM, where the equity value in one or more scenarios is calculated using an option pricing method, or OPM. The OPM treats common stock and preferred stock as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Under this method, the common stock has value only if the funds available for distribution to stockholders exceeded the value of the preferred stock liquidation preference at the time of the liquidity event, such as a strategic sale or a merger. The PWERM is a scenario-based methodology that estimates the fair value of common stock based upon an analysis of future values for the company, assuming various outcomes. The common stock value is based on the probability weighted present value of expected future investment returns considering each of the possible outcomes available as well as the rights of each class of stock. The future value of the common stock under each outcome is discounted back to the valuation date at an appropriate risk adjusted discount rate and probability weighted to arrive at an indication of value for the common stock. These third party valuations were performed at various dates, which resulted in valuations of the Company’s common stock of $0.92 per share as of May 31, 2016, $1.01 per share as of October 2, 2017, $3.18 per share as of December 31, 2018 and $10.95 per share as of July 15, 2019.

In addition to considering the results of these third-party valuations, the Company’s board of directors considered various objective and subjective factors to determine the fair value of its common stock as of each grant date, including:

·                  the prices at which the Company sold shares of preferred stock and the superior rights and preferences of the preferred stock relative to its common stock at the time of each grant;

·                  the progress of the Company’s research and development programs, including the status and results of preclinical studies and clinical trials for its product candidates;

·                  the Company’s stage of development and commercialization and its business strategy;

8

Table of Contents

Aprea Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

2. Summary of significant accounting policies (continued)

·                  external market conditions affecting the biopharmaceutical industry and trends within the biopharmaceutical industry;

·                  the Company’s financial position, including cash on hand, and its historical and forecasted performance and operating results;

·                  the lack of an active public market for the Company’s common stock and its preferred stock;

·                  the likelihood of achieving a liquidity event, such as an IPO, or sale of the Company in light of prevailing market conditions; and

·                  the analysis of IPOs and the market performance of similar companies in the biopharmaceutical industry.

The assumptions underlying these valuations represented management’s best estimate, which involved inherent uncertainties and the application of management’s judgment. As a result, if the Company had used significantly different assumptions or estimates, the fair value of its common stock and its stock-based compensation expense could have been materially different.

Net loss per share—The Company has reported losses since inception and has computed basic net loss per share attributable to common stockholders by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period, without consideration for potentially dilutive securities. The Company computes diluted net loss per common share after giving consideration to all potentially dilutive common shares, including options to purchase common stock and convertible preferred stock, outstanding during the period determined using the treasury-stock and if-converted methods, except where the effect of including such securities would be antidilutive. Because the Company has reported net losses since inception, these potential common shares have been anti-dilutive and basic and diluted loss per share have been the same.

The following table sets forth the potentially dilutive securities that have been excluded from the calculation of diluted net loss per share because to include them would be anti-dilutive (in common stock equivalent shares):

Recently issued accounting pronouncements—not yet adopted

In June 2018, the FASB issued ASU No. 2018-07, “Compensation—Stock Compensation”, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees, except for specific exceptions. This ASU is effective for annual or any interim periods beginning after December 15, 2019. The Company is currently assessing the impact of adopting this authoritative guidance on its financial statements.

3. Leases

On January 1, 2019, the Company adopted ASC 842 using the modified retrospective transition approach allowed under ASU 2018-11 which releases companies from presenting comparative periods and related disclosures under ASC 842 and requires a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption (Note 2). The Company is party to two operating leases for office or laboratory space. The Company’s finance leases are immaterial both individually and in the aggregate. The Company has elected to apply the short-term lease exception to all leases of one year or less.  Rent

9

Table of Contents

Aprea Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

3. Leases (continued)

expense for three and nine months ended September 30, 2019 was $38,734 and $166,518, respectively, which are included in operating expenses.

Further, the Company has applied the guidance in ASC 842 to its corporate office and laboratory leases and has determined that these should be classified as operating leases. Consequently, as a result of the adoption of ASC 842, the Company recognized a ROU lease asset of approximately $329,384 with a corresponding lease liability of approximately $348,040 based on the present value of the minimum rental payments of such leases. In accordance with ASC 842, the beginning balance of the ROU lease asset was reduced by the existing deferred rent liability at inception of approximately $18,656. In the consolidated balance sheets at September 30, 2019, the Company has a ROU asset balance of $251,168 and a current and non-current lease liability of $114,102 and $152,779, respectively, relating to the ROU lease asset. The balance of both the ROU lease asset and the lease liabilities primarily consists of future payments under the Company’s office lease in Boston, Massachusetts.

The Company is party to an operating lease in Boston, Massachusetts for office and laboratory space. The lease commenced in November 2016 with the initial term set to expire in December 2021. This office lease does not have any renewal options.

The Company was party to an operating lease in Solna, Sweden that had month-to-month payments and expired on June 30, 2019. Additionally, the Company entered into a new operating lease for office and laboratory space in Solna, Sweden that is effective July 1, 2019 and expires in June 2022. Base rent for this lease is approximately $128,000 annually.  The Company recognized a ROU lease asset of approximately $355,330 with a corresponding lease liability of the same amount based on the present value of the minimum rental payments of such leases.  As of September 30, 2019, the Company has a ROU asset balance of $309,150 and a current and non-current lease liability of $112,749 and $205,625, respectively, relating to the ROU lease asset relating to its lease in Solna, Sweden.

Quantitative information regarding the Company’s leases for the three and nine months ended September 30, 2019 is as follows:

Future lease payments under noncancelable leases are as follows at September 30, 2019:

10

Table of Contents

Aprea Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

3. Leases (continued)

As most of the Company’s leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the incremental borrowing rate on January 1, 2019 for operating leases that commenced prior to that date.

4. Accrued expenses

Accrued expenses consist of the following:

5. Convertible preferred stock

The Company has 440,000,000 shares authorized for all classes of equity combined.

Series A Preferred

In June 2011, the Company issued 145,472 shares of Series A Preferred for gross proceeds of $3,233,417. In March 2016, the Company issued 466,974 shares of Series A Preferred as settlement of its outstanding bridge loans totaling $3,249,627. All 612,446 shares of Series A Preferred were issued to related parties.

As of September 30, 2019, the rights and preferences of the Series A Preferred are as follows:

Conversion—Each share of Series A Preferred may be converted at any time, at the option of the holder, into a share of common stock. The Series A Preferred automatically converts into shares of common stock when 1) shareholders representing a majority of the outstanding preferred shares calls for such conversion or 2) at the closing of an initial public offering of the Company’s common stock at a per share price of at least one and a half (1.5) times the average amount (EUR 16.05 based on all Series C preferred shares issued as of September 30, 2019) paid per Series C preferred share (as adjusted for share splits and similar) and aggregate proceeds in excess of EUR 50,000,000.

Dividends—Holders of Series A Preferred do not accrue dividends.

Voting rights—Preferred Stock and common stock vote together as one class on an as converted basis. Common stock voting rights on certain matters are subject to the powers, preferences, and rights of the Preferred Stock. Holders are entitled to vote on all matters and shall have the number of votes equal to the number of shares of common stock into which the shares of Preferred Stock held by such holder are then convertible.

Series B Preferred

In March 2016, the Company issued 3,322,764 shares of Series B Preferred for gross proceeds of $22,609,485. The Company also issued 590,446 shares of Series B Preferred in settlement of its outstanding bridge loans totaling $4,108,818. In October 2017, the Company issued 3,322,759 Series B preferred shares at a price per share of $7.02, for an aggregate purchase price of $23,349,617. All 7,235,969 shares of Series B Preferred were issued to related parties.

11

Table of Contents

Aprea Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

5. Convertible preferred stock (continued)

As of September 30, 2019, the rights and preferences of the Series B Preferred are as follows:

Conversion—Each share of Series B Preferred may be converted at any time, at the option of the holder, into a share of common stock. The Series B Preferred automatically converts into shares of common stock when 1) shareholders representing a majority of the outstanding preferred shares calls for such conversion or 2) at the closing of an initial public offering of the Company’s common stock at a per share price of at least one and a half (1.5) times the average amount (EUR 16.05 based on all Series C preferred shares issued as of September 30, 2019) paid per Series C preferred share (as adjusted for share splits and similar) and aggregate proceeds in excess of EUR 50,000,000.

Dividends—Holders are entitled to dividends of 8%, compounded annually if not paid. No dividends have been declared or paid as of September 30, 2019. The company has not accrued dividends on the Series B Preferred since dividends are only payable upon the occurrence of a liquidation event, including the transfer of more than fifty percent of the Company’s outstanding shares or the transfer of substantially all of the Company’s intellectual property. Approximately $12,220,935 of accrued dividends that were payable through September 30, 2019 was added to the stated liquidation preference amount of the Series B Preferred, which totaled $62,288,856 at September 30, 2019.

Voting rights—Preferred Stock and common stock vote together as one class on an as converted basis. Common stock voting rights on certain matters are subject to the powers, preferences, and rights of the Preferred Stock. Holders are entitled to vote on all matters and shall have the number of votes equal to the number of shares of common stock into which the shares of Preferred Stock held by such holder are then convertible.

Series C Preferred

In November 2018, the Company issued 4,712,704 shares of Series C Preferred for gross proceeds of $56,725,342. In February 2019, the Company issued 467,173 shares of Series C Preferred for gross proceeds of $5,651,872. A total of 4,219,854 shares of Series C Preferred were issued to related parties.

As of September 30, 2019, the rights and preferences of the Series C Preferred are as follows:

Conversion—Each share of Series C Preferred may be converted at any time, at the option of the holder, into a share of common stock. The Series C Preferred automatically converts into shares of common stock when 1) shareholders representing a majority of the outstanding preferred shares calls for such conversion or 2) at the closing of an initial public offering of the Company’s common stock at a per share price of at least one and a half (1.5) times the average amount (EUR 16.05 based on all Series C preferred shares issued as of September 30, 2019) paid per Series C preferred share (as adjusted for share splits and similar) and aggregate proceeds in excess of EUR 50,000,000.

Dividends—Holders are entitled to dividends of 8%, compounded annually if not paid. No dividends have been declared or paid as of September 30, 2019. The company has not accrued dividends on the Series C Preferred since dividends are only payable upon the occurrence of a liquidation event, including the transfer of more than fifty percent of the Company’s outstanding shares or the transfer of substantially all of the Company’s intellectual property. Approximately $4,074,601 of accrued dividends that were payable through September 30, 2019 was added to the stated liquidation preference amount of the Series C Preferred, which totaled $66,451,815 at September 30, 2019.

Voting rights—Preferred Stock and common stock vote together as one class on an as converted basis. Common stock voting rights on certain matters are subject to the powers, preferences, and rights of the Preferred Stock. Holders are entitled to vote on all matters and shall have the number of votes equal to the number of shares of common stock into which the shares of Preferred Stock held by such holder are then convertible.

12

Table of Contents

Aprea Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

5. Convertible preferred stock (continued)

Liquidation preference

Upon liquidation, dissolution, or winding up of business, the Preferred Stock holders are entitled to receive a liquidation preference in priority to holders of common stock at the original issue price plus, in the case of Series B and Series C Preferred, any unpaid accumulated dividends as follows:

1)                                     If a liquidation event occurs prior to the Company achieving a certain clinical milestone, Series C Preferred shareholders shall receive an amount per Series C Preferred share equal to the original subscription price per Series C Preferred share (as adjusted for share splits and similar) plus unpaid accumulated dividends. Secondly, after the Series C Preferred shareholders have received full payment, the Series B Preferred shareholders shall receive an amount per Series B preferred share equal to the original subscription price per Series B Preferred share (as adjusted for share splits and similar) plus unpaid accumulated dividends. Thirdly, after the Series B and C Preferred shareholders have received full payment, the Series A Preferred shareholders shall receive an amount per Series A preferred share equal to the original subscription price per Series A Preferred share (as adjusted for share splits and similar). When the Preferred A, B and C shareholders are satisfied in full, any excess assets available for distribution will be allocated ratably among holders of common stock and preferred stock based on their pro rata shareholdings on an as-if-converted basis.

2)                                     If a liquidation event occurs after the Company achieves a certain clinical milestone, Series B and C Preferred shareholders, based on their pro rata shareholdings, shall receive an amount per Series B and C Preferred share equal to the original subscription price per Series B and C Preferred share (as adjusted for share splits and similar) plus unpaid accumulated dividends. Secondly, after the Series B and C Preferred shareholders have received full payment, the Series A Preferred shareholders shall receive an amount per Series A preferred share equal to the original subscription price per Series A Preferred share (as adjusted for share splits and similar). When the Preferred A, B and C shareholders are satisfied in full, any excess assets available for distribution will be allocated ratably among holders of common stock and preferred stock based on their pro rata shareholdings on an as-if-converted basis.

The liquidation preferences apply to each series of preferred stock only to the extent the holders would receive less than three times their respective original purchase prices.

6. Stockholders’ equity (deficit)

Common Stock

The holders of common stock are entitled to one vote for each share of common stock. Subject to the payment in full of all preferential dividends to which the holders of the Preferred Stock are entitled, the holders of common stock shall be entitled to receive dividends out of funds legally available. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, after the payment or provision for payment of all debts and liabilities of the Company and all preferential amounts to which the holders of Preferred Stock are entitled with respect to the distribution of assets in liquidation, the holders of common stock shall be entitled to share ratably in the remaining assets of the Company available for distribution.

13

Table of Contents

Aprea Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

6.  Stockholders’ equity (deficit) (continued)

Stock-Based Compensation Expense

The Company recorded stock-based compensation expense of $246,225 and $79,791 for the three months ended September 30, 2019 and 2018, respectively.  The Company recorded stock-based compensation expense of $531,134 and $249,645 for the nine months ended September 30, 2019 and 2018, respectively.

7.  Income Taxes

The Company has no income tax expense due to operating losses incurred for the three and nine months ended September 30, 2019 and 2018.  The Company has provided a valuation allowance for the full amount of the net deferred tax assets as, based on all available evidence, it is considered more likely than not that all the recorded deferred tax assets will not be realized in a future period.  At December 31, 2018, the Company had $61.6 million, $0.5 million and $0.4 million of foreign, federal and state net operating loss carryforwards, respectively, that expire at various dates through 2036.  Certain of these foreign, federal and state net operating loss carryforwards may be subject to Internal Revenue Code Section 382 or similar provisions or the equivalent Swedish regulations, which impose limitations on their utilization amounts.

Realization of the future tax benefits is dependent on may factors, including the Company’s ability to generate taxable income within the net operating loss carryforward period.  Under the provisions of the U.S. Internal Revenue Code and Sweden tax law, certain substantial changes in the Company’s ownership, including a sale of the Company or significant changes in ownership due to a sales of equity, may have limited, or may limit in the future, the amount of net operating loss carryforwards that could be used annually to offset future taxable income.  For U.S. and Swedish income tax purposes, the Company has not completed a study to assess whether a change of control has occurred or whether there have been changes of control since the Company’s formation due to the complexity and cost associated with such study and because there could be additional changes of control in the future.  As a result, the Company is not able to estimate the effect of the change in control, if any, on the Company’s ability to utilize U.S. or Swedish net operating losses or other tax attribute carryforwards in the future.  For Swedish income tax purposes, the Company has estimated that approximately $12.5 million of its net operating losses may be subject to limitations in accordance with the country’s group contribution restriction laws at December 31, 2018.

The Company files tax returns in Sweden, the United States, Pennsylvania and Massachusetts, and all tax years since inception remain open to examination by the major taxing jurisdictions to which the Company is subject, as carryforward attributes generated in years past may still be adjusted upon examination by the Internal Revenue Service (IRS) or other authorities if they have or will be used in a future period.  The Company is not currently under examination by the IRS or any other jurisdictions for any tax years.

As of September 30, 2019 and December 31, 2018, the Company had no uncertain tax positions or related interest and penalties accrued.

In June 2018, Sweden pass law on changes to the Swedish regulations on corporate income taxation.  The law applies from January 1, 2019.  Among other things, the changes decrease the corporate income tax rate in two steps from 22% to 21.4% as of January 1, 2019 and 20.6% as of January 1, 2021.  U.S. GAAP requires companies to revalue their deferred tax assets and deferred tax liabilities as of the date of enactment, with the resulting tax effects accounted for in the reporting period on enactment.  This revaluation resulted in an overall reduction of deferred tax assets of $0.7 million and a corresponding reduction in the valuation allowance.  As such, there was no net impact to the Company’s statement of operations as a result of the reduction in tax rates.

8. Commitments and contingencies

The Company records a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.  As of September 30, 2019, the Company has not recorded a provision for any contingent losses

14

Table of Contents

Aprea Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

9. Subsequent events

In October 2019, the Company completed its initial public offering of 6,516,667 shares of common stock at a price to the public of $15.00 per share, which included the exercise in full by the underwriters of their option to purchase an additional 850,000 shares of common stock.  The Company received gross proceeds, before deducting underwriting discounts and commissions and other offering expenses, of approximately $97.75 million.

Immediately prior to consummation of the IPO, all outstanding shares of Series A, Series B and Series C convertible preferred stock of the Company were converted into common stock at a ratio of 1:1.  Upon the closing of the IPO, a total of 20,726,532 shares of common stock were outstanding, which includes approximately 3,365,000 shares that were purchased by related parties.  The Company’s common stock began trading on The Nasdaq Global Select Market on October 3, 2019 under the symbol “APRE”.

15

Table of Contents

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

You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited financial information and notes thereto included in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business and related financing, including forward-looking statements that involve risks and uncertainties.  As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a clinical-stage biopharmaceutical company focused on developing and commercializing novel cancer therapeutics that reactivate mutant p53 tumor suppressor protein. p53 is the protein expressed from the TP53 gene, the most commonly mutated gene in cancer. We believe that mutant p53 is an attractive therapeutic target due to the high incidence of p53 mutations across a range of cancer types and its involvement in key cellular activities such as apoptosis. Cancer patients with mutant p53 face a significantly inferior prognosis even when treated with the current standard of care, and a large unmet need for these patients remains. Our lead product candidate, APR-246, is a small molecule p53 reactivator that is in late-stage clinical development for hematologic malignancies, including myelodysplastic syndromes, or MDS, and acute myeloid leukemia, or AML. APR-246 has received Orphan Drug and Fast Track designations from the FDA for MDS, and Orphan Drug designation from the EMA for MDS, AML and ovarian cancer, and we believe APR-246 will be a first-in-class therapy if approved by applicable regulators. We have commenced a pivotal Phase 3 trial of APR-246 with azacitidine for frontline treatment of TP53 mutant MDS and expect initial data from this trial in the second half of 2020. Our pivotal Phase 3 trial is supported by data from two ongoing Phase 1b/2 investigator initiated trials, one in the U.S. and one in France, testing APR-246 with azacitidine as frontline treatment in TP53 mutant MDS and AML patients.

Aprea Therapeutics AB, or Aprea AB, was originally incorporated in 2002 and commenced principal operations in 2006. We incorporated Aprea Therapeutics, Inc. (the “Company”) in May 2019. In September 2019 we completed a corporate reorganization and, as a result, all of the issued and outstanding stock of Aprea AB was exchanged for common stock, preferred stock or options, as applicable, of the Company As a result of such transactions, Aprea AB became a wholly-owned subsidiary of the Company.

We have devoted substantially all of our resources to developing our product candidates, including APR-246, building our intellectual property portfolio, business planning, raising capital and providing general and administrative support for these operations. To date, we have financed our operations through private placements of preferred stock. Through September 30, 2019, we had received net proceeds of $136.9 million from our sales of preferred and common stock.

Since our inception, we have incurred significant losses on an aggregate basis. Our ability to generate product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of our product candidates. Our net losses were $6.2 million and $15.0 million for the three and nine months ended September 30, 2019 and $15.2 million and $15.5 million for the years ended December 31, 2017 and 2018, respectively. As of September 30, 2019, we had an accumulated deficit of $77.5 million. These losses have resulted primarily from costs incurred in connection with research and development activities, patent investment, and general and administrative costs associated with our operations. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years.

We anticipate that our expenses will increase substantially if and as we:

·                  conduct our current and future clinical trials and additional preclinical research of APR-246;

·                  initiate and continue research and preclinical and clinical development of our other product candidates;

·                  seek to identify and develop additional product candidates;

·                  seek marketing approvals for any of our product candidates that successfully complete clinical trials, if any;

16

Table of Contents

·                  establish a sales, marketing, manufacturing and distribution infrastructure to commercialize any products for which we may obtain marketing approval;

·                  require the manufacture of larger quantities of our product candidates for clinical development and potentially commercialization;

·                  maintain, expand, protect and enforce our intellectual property portfolio;

·                  acquire or in-license other drugs and technologies;

·                  defend against any claims of infringement, misappropriation or other violation of third-party intellectual property;

·                  hire and retain additional clinical, quality control and scientific personnel;

·                  add operational, financial and management information systems and personnel, including personnel to support our drug development, any future commercialization efforts and our transition to a public company; and

·                  continue to operate as a public company.

Furthermore, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution.

As a result, we will need additional financing to support our continuing operations. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may include collaborations with third parties. We may be unable to raise additional funds or enter into other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates.

Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

As of September 30, 2019, we had cash and cash equivalents of $52.3 million. In October 2019, we completed our initial public offering (“IPO”) raising proceeds of approximately $90.9 million, after deducting underwriting discounts and commissions, but prior to deducting other offering expenses.  We believe that the estimated net proceeds from our IPO, together with our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements into 2023. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “—Liquidity and Capital Resources.”

Components of our results of operations

Revenue

We have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future. If our development efforts for APR-246 or other product candidates that we may develop in the future are successful and result in marketing approval or collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from collaboration or license agreements that we may enter into with third parties.

Operating expenses

Our expenses since inception have consisted solely of research and development costs and general and administrative costs.

17

Table of Contents

Research and development expenses

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

·                  expenses incurred under agreements with third parties, including contract research organizations, or CROs, that conduct research, preclinical activities and clinical trials on our behalf as well as contract manufacturing organizations, or CMOs, that manufacture our product candidates for use in our preclinical and clinical trials;

·                  salaries, benefits and other related costs, including stock-based compensation expense, for personnel engaged in research and development functions;

·                  costs of outside consultants, including their fees, stock-based compensation and related travel expenses;

·                  costs of laboratory supplies and acquiring, developing and manufacturing preclinical study and clinical trial materials;

·                  expenses related to compliance with regulatory requirements; and

·                  facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.

We expense research and development costs as incurred. We recognize costs for certain development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, or information provided to us by our vendors and our clinical investigative sites. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our financial statements as prepaid or accrued research and development expenses.

We typically use our employee and infrastructure resources across our development programs. We track outsourced development costs and milestone payments made to our research partners by product candidate or development program, but we do not allocate personnel costs or other internal costs to specific development programs or product candidates.

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will continue to increase for the foreseeable future as we initiate additional clinical trials of APR-246, pursue later stages of clinical development of APR-246, initiate clinical trials for product candidates other than APR-246 and continue to discover and develop additional product candidates.

We cannot determine with certainty the duration and costs of the current or future clinical trials of our product candidates or if, when, or to what extent we will generate revenue from the commercialization and sale of any our product candidates for which we obtain marketing approval. We may never succeed in obtaining marketing approval for any of our product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including:

·                  the scope, rate of progress, expense and results of our ongoing clinical trials of APR-246, as well as of any future clinical trials of APR-246 or other product candidates and other research and development activities that we may conduct;

·                  uncertainties in clinical trial design and patient enrollment rates;

·                  significant and changing government regulation and regulatory guidance;

·                  the timing and receipt of any marketing approvals; and

·                  the expense of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the U.S.

18

Table of Contents

Food and Drug Administration, or FDA, or another regulatory authority were to require us to conduct clinical trials beyond those that we anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant trial delays due to patient enrollment or other reasons, we would be required to expend significant additional financial resources and time on the completion of clinical development.

We are currently conducting multiple clinical trials of APR-246: our Phase 3 trial in the United States for the treatment of TP53 mutant MDS with azacitidine, our Phase 1b/2 trials in the United States and France for the treatment of MDS and AML with azacitidine, and our Phase 2 trial of post-transplant maintenance therapy with azacitidine in MDS and AML. At this time, we cannot reasonably estimate the cost for initiating and completing other clinical trials of APR-246 and preclinical studies of APR-246, as it will be highly dependent on the clinical data from ongoing clinical trials as well as any target disease subpopulations chosen for further evaluation.

General and administrative expenses

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, corporate and business development and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax and consulting services; insurance costs; travel expenses; and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.

We expect that our general and administrative expenses will increase in the future as we increase our general and administrative personnel headcount to support personnel in research and development and to support our operations generally as we increase our research and development activities and activities related to the potential commercialization of our product candidates. We also have incurred and continue to incur increased expenses associated with being a public company, including costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements; director and officer insurance costs; and investor and public relations costs.

Other income and expense

Interest income and expense

Interest expense consists of bank charges and fees incurred on our cash and cash equivalents. Our interest income will increase in the future as our investment balances will be higher due to the cash proceeds from our IPO.

Foreign currency gain

Our consolidated financial statements are presented in U.S. dollars, which is our reporting currency. The financial position and results of operations of our subsidiaries Aprea AB and Aprea Personal AB are measured using the foreign subsidiaries’ local currency as the functional currency. Aprea AB cash accounts holding U.S. dollars are remeasured based upon the exchange rate at the date of remeasurement with the resulting gain or loss included in the consolidated statement of operations and comprehensive loss. Expenses of such subsidiaries have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the consolidated balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of shareholders’ equity and as other comprehensive loss on the consolidated statement of operations and comprehensive loss.

Income taxes

Since Aprea AB’s inception in 2002, we have not recorded any U.S. federal, state or foreign income tax expense or benefits for the net losses we have incurred in any year, due to our uncertainty of realizing a benefit from those items. We have provided a valuation allowance for the full amount of the net deferred tax assets as, based on all available evidence, it is considered more likely than not that all the recorded deferred tax assets will not be realized in a future period. At December 31, 2018, we had $61.6 million, $0.5 million and $0.4 million of foreign, federal and state net operating loss carryforwards, respectively, that expire at various dates through 2036. Certain of these foreign, federal and state net operating loss carryforwards may be subject to Internal Revenue Code Section 382 or similar provisions or equivalent Swedish regulations, which impose limitations on their utilization amounts.

19

Table of Contents

Critical accounting policies and use of estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of our financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in the notes to our financial statements, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.

Accrued research and development expenses

As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses at each balance sheet. This process involves reviewing open contract and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advanced payments. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses include fees paid to:

·                  CROs in connection with performing research activities on our behalf and conducting preclinical studies and clinical trials on our behalf;

·                  investigative sites or other service providers in connection with clinical trials;

·                  vendors in connection with preclinical and clinical development activities; and

·                  vendors related to product manufacturing and development and distribution of preclinical and clinical supplies.

We base our expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CROs that conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing fees, we estimate the time period over which services will be performed, enrollment of patients, number of sites activated and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or amount of prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period. To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses.

Stock-based compensation

We measure stock options and other stock-based awards granted to employees and directors based on their fair value on the date of the grant and recognize compensation expense of those awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. We apply the straight-line method of expense recognition to all awards with only service-based vesting conditions and apply the graded-vesting method to all awards with performance-based vesting conditions or to awards with both service-based and performance-based vesting conditions.

20

Table of Contents

For stock-based awards granted to non-employees, compensation expense is recognized over the period during which services are rendered by such non-employees until completed in accordance with the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The new standard largely aligns the accounting for share-based payment awards issued to employees and nonemployees by expanding the scope of ASC 718 to apply to nonemployee share-based transactions, as long as the transaction is not effectively a form of financing.

We estimate the fair value of each stock option grant on the date of grant using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield.

Determination of fair value of common stock

As a privately held company, there has been no public market for our common stock to date, the estimated fair value of our common stock has been determined by our board of directors as of the date of each option grant, with input from management, considering our most recently available third-party valuations of common stock and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Our common stock valuations were prepared using a hybrid method, which used market approaches to estimate our enterprise value. The hybrid method is a probability-weighed expected return method, or PWERM, where the equity value in one or more scenarios is calculated using an option-pricing method, or OPM. The OPM treats common stock and preferred stock as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Under this method, the common stock has value only if the funds available for distribution to stockholders exceeded the value of the preferred stock liquidation preference at the time of the liquidity event, such as a strategic sale or a merger. The PWERM is a scenario-based methodology that estimates the fair value of common stock based upon an analysis of future values for the company, assuming various outcomes. The common stock value is based on the probability-weighted present value of expected future investment returns considering each of the possible outcomes available as well as the rights of each class of stock. The future value of the common stock under each outcome is discounted back to the valuation date at an appropriate risk-adjusted discount rate and probability weighted to arrive at an indication of value for the common stock. These third-party valuations were performed at various dates, which resulted in valuations of our common stock of $0.92 per share as of May 31, 2016, $1.01 per share as of October 2, 2017, $3.18 per share as of December 31, 2018 and $10.95 per share as of July 15, 2019.

In addition to considering the results of these third-party valuations, our board of directors considered various objective and subjective factors to determine the fair value of our common stock as of each grant date, including:

·                  the prices at which we sold shares of preferred stock and the superior rights and preferences of the preferred stock relative to our common stock at the time of each grant;

·                  the progress of our research and development programs, including the status and results of preclinical studies and clinical trials for our product candidates;

·                  our stage of development and commercialization and our business strategy;

·                  external market conditions affecting the biopharmaceutical industry and trends within the biopharmaceutical industry;

·                  our financial position, including cash on hand, and our historical and forecasted performance and operating results;

·                  the lack of an active public market for our common stock and our preferred stock;

·                  the likelihood of achieving a liquidity event, such as an IPO or sale of our company in light of prevailing market conditions; and

·                  the analysis of IPOs and the market performance of similar companies in the biopharmaceutical industry.

21

Table of Contents

The assumptions underlying these valuations represented management’s best estimate, which involved inherent uncertainties and the application of management’s judgment. As a result, if we had used significantly different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could have been materially different.

Income taxes

We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in our tax returns. Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax bases of the assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance against deferred tax assets is recorded if, based on the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Potential for recovery of deferred tax assets is evaluated by considering several factors, including estimating the future taxable profits expected, estimating future reversals of existing taxable temporary differences, considering taxable profits in carryback periods, and considering prudent and feasible tax planning strategies.

We account for uncertain tax positions using a more-likely-than-not threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors including, but not limited to, changes in the law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity, and changes in facts or circumstances related to a tax position. As of each balance sheet date, we did not have any uncertain tax positions.

Emerging growth company and smaller reporting company status

We are an emerging growth company, as defined in the JOBS Act. Under this act, emerging growth companies are permitted to delay adopting new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We may remain classified as an EGC until the end of the fiscal year in which the fifth anniversary of our IPO occurs, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time or if we have annual gross revenues of $1.07 billion or more in any fiscal year, we would cease to be an EGC as of December 31 of the applicable year. We also would cease to be an EGC if we issue more than $1 billion of non-convertible debt over a three-year period.

We are also a “smaller reporting company,” as such term is defined in Rule 12b-2 of the Exchange Act, meaning that the market value of our common stock held by non-affiliates is less than $700 million and our annual revenue is less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our common stock held by non-affiliates is less than $250 million or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our common stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.

22

Table of Contents

Results of operations

Comparison of the three months ended September 30, 2019 and 2018

Research and development expenses

Research and development expenses for the three months ended September 30, 2019 were $4.9 million, compared to $2.3 million for the three months ended September 30, 2018. The increase of $2.6 million was primarily related to the advancement of our clinical product candidate APR-246. In Q1 2019 we commenced a pivotal Phase 3 clinical trial of APR-246 with azacitidine for frontline treatment of TP53 mutant MDS which is supported by two ongoing Phase 1b/2 investigator initiated trials, one in the U.S. and one in France, testing APR-246 with azacitidine as frontline treatment in TP53 mutant MDS and AML patients.

General and administrative expenses

General and administrative expenses for the three months ended September 30, 2019 were $2.3 million, compared to $0.6 million for the three months ended September 30, 2018. The increase of $1.7 million was primarily related to increases of $1.0 million in legal and accounting fees, $0.3 million in consulting fees and $0.3 million in personnel related costs.  The increase in legal, accounting and consulting fees was primarily related to costs associated with the corporate reorganization that was completed in September 2019 as well as the preparation of our financial statements and overall readiness to become a public company.  The increase in personnel related costs was primarily related to increased non-cash stock-based compensation expense the addition of a member of senior management in August 2019.

Other income and expense

Foreign currency gain for the three months ended September 30, 2019 was $1.0 million compared to a foreign currency loss of $0.2 million for the three months ended September 30, 2018. The increase of $1.2 million was primarily due to a strengthening of the U.S. dollar against the Swedish Krona during the three months ended September 30, 2019. Interest expense for the three months ended September 30, 2019 consisted of interest expense associated with our facility leases.

23

Table of Contents

Comparison of the nine months ended September 30, 2019 and 2018

Research and development expenses

Research and development expenses for the nine months ended September 30, 2019 were $12.9 million, compared to $9.8 million for the nine months ended September 30, 2018. The increase of $3.1 million was primarily related to the advancement of our clinical product candidate APR-246. In Q1 2019 we commenced a pivotal Phase 3 clinical trial of APR-246 with azacitidine for frontline treatment of TP53 mutant MDS which is supported by two ongoing Phase 1b/2 investigator initiated trials, one in the U.S. and one in France, testing APR-246 with azacitidine as frontline treatment in TP53 mutant MDS and AML patients.

General and administrative expenses

General and administrative expenses for the nine months ended September 30, 2019 were $4.7 million, compared to $1.8 million for the nine months ended September 30, 2018. The increase of $2.9 million was primarily related to increases of $1.8 million in legal and accounting fees, $0.6 million in personnel related costs and $0.3 million in consulting fees.  The increase in legal, accounting and consulting fees was primarily related to costs associated with the corporate reorganization that was completed in September 2019 as well as the preparation of our financial statements and overall readiness to become a public company.  The increase in personnel related costs was primarily related to increased non-cash stock-based compensation expense the addition of a member of senior management in August 2019.

Other income and expense

Foreign currency gain for the nine months ended September 30, 2019 was $2.6 million compared to $0.7 million for the nine months ended September 30, 2018. The increase of $1.9 million was primarily due to a strengthening of the U.S. dollar against the Swedish Krona during the nine months ended September 30, 2019. Interest expense for the nine months ended September 30, 2019 consisted of interest expense associated with our facility leases.

Liquidity and capital resources

Since our inception, we have incurred significant losses on an aggregate basis. We have not yet commercialized any of our product candidates, which are in various phases of preclinical and clinical development, and we do not expect to generate revenue from sales of any products for several years, if at all. To date, we have financed our operations through private placements of our preferred and common stock. Through September 30, 2019, we had received net proceeds of $136.9 million from our sales of preferred and common stock. As of September 30, 2019, we had cash and cash equivalents of $52.3 million.

24

Table of Contents

Cash flows

The following table summarizes our sources and uses of cash for each of the periods presented:

Operating activities.

The cash used in operating activities resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital. Net cash used in operating activities was $16.2 million for the nine months ended September 30, 2019 compared to $11.4 million for the nine months ended September 30, 2018. The increase in cash used in operating activities of $4.8 million was primarily attributable to an increase in our net loss adjusted for non-cash charges of $5.6 million and an increase in deferred offering costs related to our IPO of $4.2 million.  The increase was partially offset by a net increase in accounts payable and accrued liabilities of $5.0 million.

Investing activities.

During the nine months ended September 30, 2019 and 2018, cash used in investing activities represented the purchase of property and equipment which totaled $16,435 and $4,506, respectively.

We expect that investing activities will increase over the next several years.

Financing activities.

Net cash provided by financing activities was $5.6 million for the nine months ended September 30, 2019 compared to $1,415 for the nine months ended September 30, 2018. The increase in cash provided by financing activities of $5.6 million was primarily attributable to the issuance of Series C convertible preferred stock in February 2019 for net proceeds of $5.6 million.

Funding requirements

We expect our expenses to increase substantially in connection with our ongoing development activities related to APR-246 and other product candidates and programs which are still in the early stages of clinical development. In addition, we have incurred and continue to incur additional costs associated with operating as a public company. We expect that our expenses will increase substantially if and as we:

·                  conduct our current and future clinical trials and additional preclinical research of APR-246;

·                  initiate and continue research and preclinical and clinical development of our other product candidates;

·                  seek to identify and develop additional product candidates;

·                  seek marketing approvals for any of our product candidates that successfully complete clinical trials, if any;

·                  establish a sales, marketing, manufacturing and distribution infrastructure to commercialize any products for which we may obtain marketing approval;

25

Table of Contents

·                  require the manufacture of larger quantities of our product candidates for clinical development and potentially commercialization;

·                  maintain, expand, protect and enforce our intellectual property portfolio;

·                  acquire or in-license other drugs and technologies;

·                  defend against any claims of infringement, misappropriation or other violation of third-party intellectual property;

·                  hire and retain additional clinical, quality control and scientific personnel;

·                  build out new facilities or expand existing facilities to support our ongoing development activity;

·                  add operational, financial and management information systems and personnel, including personnel to support our drug development, any future commercialization efforts and our transition to a public company; and

·                  continue to operate as a public company.

As of September 30, 2019, we had cash and cash equivalents of $52.3 million. We believe that our existing cash and cash equivalents along with the estimated net proceeds from our IPO which was completed in October 2019, will enable us to fund our operating expenses and capital expenditure requirements into 2023. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect.

Because of the numerous risks and uncertainties associated with the development of APR-246 and other product candidates and programs and because the extent to which we may enter into collaborations with third parties for development of our product candidates is unknown, we are unable to estimate the timing and amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our future capital requirements will depend on many factors, including:

·                  the scope, progress, results and costs of our current and future clinical trials of APR-246 for our current targeted indications;

·                  the scope, progress, results and costs of drug discovery, preclinical research and clinical trials for APR-246 and our other product candidates;

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

·                  the costs, timing and outcome of regulatory review of our product candidates;

·                  the extent to which we acquire or invest in businesses, products and technologies, including entering into or maintaining licensing or collaboration arrangements for product candidates on favorable terms, although we currently have no commitments or agreements to complete any such transactions;

·                  the costs and timing of future commercialization activities, including drug sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval, to the extent that such sales, marketing, manufacturing and distribution are not the responsibility of any collaborator that we may have at such time;

·                  the amount of revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval;

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

·                  our headcount growth and associated costs as we expand our business operations and our research and development activities; and