We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of
OncoGenex Pharmaceuticals, Inc.
as of December 31, 2016 and 2015, and the related consolidated statements of loss and comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2016 and our report dated February 23, 2017 expressed an unqualified opinion thereon.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
OncoGenex Pharmaceuticals, Inc. (referred to as “OncoGenex,” “we,” “us,” or “our”) is committed to the development and commercialization of new therapies that address treatment resistance in cancer patients. We were incorporated in the state of Delaware and are headquartered in Bothell, Washington and have a subsidiary in Vancouver, British Columbia.
Basis of Presentation
The consolidated financial statements include the accounts of OncoGenex and our wholly owned subsidiary, OncoGenex Technologies Inc., or OncoGenex Technologies. All intercompany balances and transactions have been eliminated.
Liquidity
We have historically experienced recurring losses from operations that have generated an accumulated deficit of $196.9 million through December 31, 2016. At December 31, 2016, we had cash, cash equivalents and short-term investments of $25.5 million.
2. ACCOUNTING POLICIES
Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes thereto. Actual results could differ from these estimates. Estimates and assumptions principally relate to estimates of the fair value of our warrant liability, the initial fair value and forfeiture rates of stock options issued to employees and consultants, the estimated compensation cost on performance restricted stock unit awards and clinical trial and manufacturing accruals, estimated useful lives of property, plant and equipment and estimates and assumptions in contingent liabilities.
Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents, which we consider as available for sale and carry at fair value, with unrealized gains and losses, if any, reported as accumulated other comprehensive income or loss, which is a separate component of stockholders’ equity.
Short-Term Investments
Short-term investments consist of financial instruments purchased with an original maturity of greater than three months and less than one year. We consider our short-term investments as available-for-sale and carry them at fair value, with unrealized gains and losses except other than temporary losses, if any, reported as accumulated other comprehensive income or loss, which is a separate component of stockholders’ equity. Realized gains and losses on the sale of these securities are recognized in net income or loss. The cost of investments sold is based on the specific identification method.
Fair value of financial instruments
The fair value of our cash equivalents and marketable securities is based on quoted market prices and trade data for comparable securities. We determine the fair value of our warrant liability based on the Black-Scholes pricing model and using considerable judgment, including estimating stock price volatility and expected warrant life. Other financial instruments including amounts receivable, accounts payable, accrued liabilities other, accrued clinical liabilities, accrued compensation and lease termination liability are carried at cost, which we believe approximates fair value because of the short-term maturities of these instruments.
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Intellectual Property
The costs of acquiring intellectual property rights to be used in the research and development process, including licensing fees and milestone payments, are charged to research and development expense as incurred in situations where we have not identified an alternative future use for the acquired rights, and are capitalized in situations where we have identified an alternative future use. No costs associated with acquiring intellectual property rights have been capitalized to date. Costs of maintaining intellectual property rights are expensed as incurred.
Revenue Recognition
Revenue recognized to date is attributable to the upfront payment we received in the fourth quarter of 2009 pursuant to the collaboration agreement with Teva, as well as cash reimbursements from Teva for costs incurred by us under the clinical development plan. In April 2015, we and Teva entered into an agreement, or the Termination Agreement, pursuant to which the Collaboration Agreement was terminated and we regained rights to custirsen.
Pursuant to the Termination Agreement, Teva paid to us, as advanced reimbursement for certain continuing research and development activities related to custirsen, an amount equal to $27.0 million less approximately $3.8 million, which reduction represented a hold-back amount of $3.0 million and $0.8 million for certain third-party expenses incurred by Teva between January 1, 2015 and April 24, 2015, or Closing Date. Teva was permitted to deduct from the $3.0 million hold-back certain costs incurred after January 1, 2015 that arose after the Closing Date. Teva is responsible for expenses related to custirsen incurred pursuant to the Collaboration Agreement through December 31, 2014. We are responsible for certain custirsen-relate d expenses from and after January 1, 2015. Pursuant to the Termination Agreement, we received a nominal amount from the remaining hold-back after deductions by Teva for certain costs incurred after the Closing Date. We do not expect to receive any addition al amounts from Teva.
As a result of the termination of the Collaboration Agreement with Teva, we do not expect to earn any additional collaboration revenue beyond the amounts provided as advanced reimbursement for custirsen -related development expenses as set forth in the Termination Agreement. The advanced reimbursement payment made by Teva, as part of the Termination Agreement, was deferred and was recognized as collaboration revenue on a dollar for dollar basis as costs were incurred as part the of continuing research and development activities related to custirsen and certain other antisense inhibitors of clusterin. We have fully utilized the $23.2 million in advance reimbursement for custirsen-related development costs between January 1, 2015 and June 30, 2016.
Prior to the termination of the collaboration agreement, we and Teva shared certain custirsen-related development costs. We had spent the required $30 million in direct and indirect development costs, such as full-time equivalent (FTE) reimbursement for time incurred by our personnel for the benefit of the custirsen development plan. Teva funded all other expenses under the collaboration agreement including the three phase 3 clinical trials under the clinical development plan. On a quarterly basis Teva reimbursed all development expenses incurred in accordance with our clinical development plan. Our policy was to account for these reimbursements as Collaboration Revenue. For a summary description of the collaboration agreement with Teva see also Note 4.
The terminated collaboration agreement contained multiple elements and deliverables, and required evaluation pursuant to ASC 605-25,
Multiple-Element Arrangements
, or ASC 605-25. We evaluated the facts and circumstances of the collaboration agreement to determine whether we had obligations constituting deliverables under ASC 605-25. We concluded that we had multiple deliverables under the collaboration agreement, including deliverables relating to the grant of a technology license, and performance of manufacturing, regulatory and clinical development services in the U.S. and Canada, and estimated that the period in which it would perform those deliverables began in the fourth quarter of 2009 and was completed in the fourth quarter of 2012. Because we have been able to establish vendor specific objective evidence, or VSOE, of the fair value of the maintenance, regulatory, and clinical services, we concluded that these deliverables should be accounted as separate units of accounting under ASC 605-25. In establishing VSOE for the manufacturing, regulatory, and clinical development services, management relied on rates charged by other service providers providing similar development services.
Because we were not able to reliably estimate the fair value of the technology license, we used the residual value approach to determine the amount of revenue to recognize. Based on this approach, we recognized $22 million in 2009 relating to this element.
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Property and Equip
ment
Property and equipment assets are recorded at cost less accumulated depreciation. Depreciation expense on assets acquired under capital lease is recorded within depreciation expense. Depreciation is recorded on a straight-line basis over the following periods:
Computer equipment
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3 years
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Furniture and fixtures
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5 years
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Machinery and equipment
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5 - 10 years
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Leasehold improvements and equipment under capital lease
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Over the term of the lease
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Impairment of Long-Lived Assets
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. We conduct our long-lived asset impairment analyses in accordance with ASC 360-10-15, “Impairment or Disposal of Long-Lived Assets.” ASC 360-10-15 requires us to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.
Income Taxes
Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the differences between the carrying values of assets and liabilities and their respective income tax bases and for operating losses and tax credit carry forwards. A valuation allowance is provided for the portion of deferred tax assets that is more likely than not to be unrealized. Deferred tax assets and liabilities are measured using the enacted tax rates and laws.
Scientific Research and Development Tax Credits
The benefits of tax credits for scientific research and development expenditures are recognized in the year the qualifying expenditure is made provided there is reasonable assurance of recoverability. The tax credits recorded are based on our estimates of amounts expected to be recovered and are subject to audit by taxation authorities. The non-refundable tax credit reduces the tax provision; however, no reduction to the tax provision has been recorded to date as we record a full valuation allowance. All qualifying expenditures are eligible for non-refundable tax credits only.
Research and Development Costs
Research and development costs are expensed as incurred, net of related refundable investment tax credits, with the exception of non-refundable advanced payments for goods or services to be used in future research and development, which are capitalized in accordance with ASC 730, “Research and Development” and included within Prepaid Expenses or Other Assets depending on when the assets will be utilized.
Clinical trial expenses are a component of research and development costs. These expenses include fees paid to contract research organizations and investigators and other service providers, which conduct certain product development activities on our behalf. We use an accrual basis of accounting, based upon estimates of the amount of service completed. In the event payments differ from the amount of service completed, prepaid expense or accrued liabilities amounts are adjusted on the balance sheet. These expenses are based on estimates of the work performed under service agreements, milestones achieved, patient enrollment and experience with similar contracts. We monitor each of these factors to the extent possible and adjusts estimates accordingly.
Stock-Based Compensation
Effective January 1, 2006, we adopted the fair value recognition provisions of the ASC 718, “Stock Compensation”, using the modified prospective method with respect to options granted to employees and directors. Under this transition method, compensation cost is recognized in the financial statements beginning with the effective date for all share-based payments granted after January 1, 2006 and for all awards granted prior to but not yet vested as of January 1, 2006. The expense is amortized on a straight-line basis over the graded vesting period.
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Restricted Stock Unit Awards
We grant restricted stock unit awards that generally vest and are expensed over a four-year period. We also granted restricted stock unit awards that vest in conjunction with certain performance conditions to certain executive officers and key employees. At each reporting date, we evaluate whether achievement of the performance conditions is probable. Compensation expense is recorded over the appropriate service period based upon our assessment of accomplishing each performance provision or the occurrence of other events that may have caused the awards to accelerate and vest.
Segment Information
We follow the requirements of ASC 280, “Segment Reporting.” We have one operating segment, dedicated to the development and commercialization of new cancer therapies, with operations located in Canada and the United States.
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) consists of unrealized gains and losses on our available-for-sale marketable securities. We report the components of comprehensive loss in the statement of stockholders’ equity.
Loss per Common Share
Basic loss per common share is computed using the weighted average number of common shares outstanding during the period. Diluted loss per common share is computed in accordance with the treasury stock method. The effect of potentially issuable common shares from outstanding stock options, restricted stock unit awards and warrants are anti-dilutive for all periods presented.
Warrants
We account for warrants pursuant to the authoritative guidance on accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, on the understanding that in compliance with applicable securities laws, the warrants require the issuance of registered securities upon exercise and therefore do not sufficiently preclude an implied right to net cash settlement. We classify warrants on the consolidated balance sheet as a liability which is revalued at each balance sheet date subsequent to the initial issuance. We also have warrants classified as equity and these are not reassessed for their fair value at the end of each reporting period. Warrants classified as equity are initially measured at their fair value and recognized as part of stockholders’ equity. Determining the appropriate fair-value model and calculating the fair value of registered warrants requires considerable judgment, including estimating stock price volatility and expected warrant life. The computation of expected volatility was based on the historical volatility of shares of our common stock for a period that coincides with the expected life of the warrants. A small change in the estimates used may have a relatively large change in the estimated valuation. We use the Black-Scholes pricing model to value the warrants. Changes in the fair value of the warrants classified as liabilities are reflected in the consolidated statement of loss as gain (loss) on revaluation of warrants.
Foreign Currency Translation
Our functional and reporting currency is the U.S. dollar. Revenues and expenses denominated in other than U.S. dollars are translated at average monthly rates.
The functional currency of our foreign subsidiary is the U.S. dollar. For this foreign operation, assets and liabilities denominated in other than U.S. dollars are translated at the period-end rates for monetary assets and liabilities and historical rates for non-monetary assets and liabilities. Revenues and expenses denominated in other than U.S. dollars are translated at average monthly rates. Gains and losses from this translation are recognized in the consolidated statement of loss.
Pending Adoption of Recent Accounting Pronouncements
On February 2016, the Financial Accounting Standards Board ("FASB") issued its new leases standard, ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 is aimed at putting most leases on lessees’ balance sheets, but it would also change aspects of lessor accounting. ASU 2016-02 is effective for public business entities for annual periods beginning after December 15, 2018 and interim periods within that year. This standard is expected to have a significant impact on our current accounting for our lease arrangements, particularly our current operating lease arrangements, as well as, disclosures. We are currently evaluating the impact of adoption on our financial position and results from operations.
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In May 2014, the FASB, issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606): Revenue from Contracts with Customers, which guidance in this update will supersede the revenue recognition requirements in Topic 605, R
evenue Recognition, and most industry-specific guidance when it becomes effective. ASU No. 2014-09 affects any entity that enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets u
nless those contracts are within the scope of other standards. The core principal of ASU No. 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which th
e company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, esti
mating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017, inclu
ding interim periods within that reporting period, which will be our fiscal year 2018 (or December 31, 2018), and entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Early adoption
is permitted.
We are currently in the process of evaluating the impact of adoption of ASU No. 2014-09 and cannot reasonably estimate how the adoption of the standard will impact our consolidated financial statements and related disclosures
.
Recently Adopted Accounting Policies
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. For public business entities, the amendments in this Update are effective for annual periods beginning after 15 December 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after 15 December 2017, and interim periods within annual periods beginning after 15 December 2018. The adoption of this standard did not have a significant impact on our financial position or results of operations
.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The standard requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. Entities are currently required to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. The amendments, which require non-current presentation only (by jurisdiction), are effective for financial statements issued for annual periods beginning after December 15, 2016 with earlier application permitted as of the beginning of an interim or annual reporting period. The guidance is to be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The adoption of this standard did not have a significant impact on our financial position or results of operations.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810) — Amendments to the Consolidation Analysis. ASU 2015-02 eliminates the deferral of FAS 167 and makes changes to both the variable interest model and the voting model. For public business entities, the guidance is effective for annual and interim periods beginning after 15 December 2015. For nonpublic business entities, it is effective for annual periods beginning after 15 December 2016, and interim periods beginning after 15 December 2017. The adoption of this standard did not have a significant impact on our financial position or results of operations.
In January 2015, the FASB issued ASU 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU 2015-01 eliminates the concept of reporting extraordinary items, but retains current presentation and disclosure requirements for an event or transaction that is of an unusual nature or of a type that indicates infrequency of occurrence. Transactions that meet both criteria would now also follow such presentation and disclosure requirements. For all entities, the guidance is effective for annual periods, and interim periods within those annual periods, beginning after 15 December 2015. The adoption of this standard did not have a significant impact on our financial position or results of operations.
In August 2014, the Financial Accounting Standards Board, or FASB issued Accounting Standards Updated, or ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 2015-40) (ASU 2014-15). ASU 2014-15 provides guidance to U.S. GAAP about management’s responsibility to evaluate whether there is a substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This new rule requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles currently in the U.S. auditing standards. Specifically, ASU 2014-15 (1) defines the term substantial doubt, (2) requires an evaluation of every reporting period including interim periods, (3) provides principles for considering the mitigating effect of management’s plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). This guidance is effective for annual periods ending after December 15, 2016. The adoption of this standard did not have a significant impact on our financial statement disclosures
.
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3. FINANCIAL INSTRUMENTS AND RISK
For certain of our financial instruments, including cash and cash equivalents, amounts receivable, accounts payable, accrued liabilities other, accrued clinical liabilities, accrued compensation and lease termination liability carrying values approximate fair value due to their short-term nature. Our cash equivalents and short-term investments are recorded at fair value.
Financial risk is the risk to our results of operations that arises from fluctuations in interest rates and foreign exchange rates and the degree of volatility of these rates as well as credit risk associated with the financial stability of the issuers of the financial instruments. Foreign exchange rate risk arises as a portion of our investments which finance operations and a portion of our expenses are denominated in other than U.S. dollars.
We invest our excess cash in accordance with investment guidelines, which limit our credit exposure to any one financial institution or corporation other than securities issued by the U.S. government. We only invest in A (or equivalent) rated securities with maturities of one year or less. These securities generally mature within one year or less and in some cases are not collateralized. At December 31, 2016, the average days to maturity of our portfolio of cash equivalents and marketable securities was 45 days (December 31, 2015 – 61 days). We do not use derivative instruments to hedge against any of these financial risks.
4. COLLABORATION AGREEMENT
In December 2009, we, through our wholly-owned subsidiary, OncoGenex Technologies, entered into a collaboration agreement, or Collaboration Agreement, with Teva Pharmaceutical Industries Ltd., or Teva, for the development and global commercialization of custirsen (and related compounds), a pharmaceutical compound designed to inhibit the production of clusterin, a protein we believe is associated with cancer treatment resistance, or the Licensed Product. In December 2014, we and Teva agreed to terminate the Collaboration Agreement upon entry into a termination agreement. In April 2015, we and Teva entered into an agreement, or the Termination Agreement, pursuant to which the Collaboration Agreement was terminated and we regained rights to custirsen.
Pursuant to the Termination Agreement, Teva paid to us, as advanced reimbursement for certain continuing research and development activities related to custirsen, an amount equal to $27.0 million less approximately $3.8 million, which reduction represented a hold-back amount of $3.0 million and $0.8 million for certain third-party expenses incurred by Teva between January 1, 2015 and April 24, 2015, or Closing Date. Teva was permitted to deduct from the $3.0 million hold-back certain costs incurred after January 1, 2015 that arose after the Closing Date. Teva is responsible for expenses related to custirsen incurred pursuant to the Collaboration Agreement through December 31, 2014. We are responsible for certain custirsen-related expenses from and after January 1, 2015. Pursuant to the Termination Agreement, we received a nominal amount from the remaining hold-back after deductions by Teva for certain costs incurred after the Closing Date. We do not expect to receive any additional amounts from Teva.
In accordance with the Termination Agreement, Teva transferred certain third-party agreements for the phase 3 clinical trial in second-line chemotherapy in patients with non-small cell lung cancer, or ENSPIRIT, and custirsen development activities to us on the Closing Date. If any additional historical third-party agreements are discovered after the Closing Date and are used to conduct the ENSPIRIT study, then Teva will use commercially reasonable effort to assign such agreements to us and will be responsible for any costs invoiced under such agreements in excess of an aggregate of $0.1 million. We will be responsible for the initial $0.1 million of costs under such agreements.
All licenses granted by us to Teva under the Collaboration Agreement were terminated as of the Closing Date. In addition, Teva assigned to us certain patent applications related to custirsen and abandoned certain other patent applications as requested by us. Furthermore, Teva granted to us and our affiliates an exclusive license (except as to Teva and its affiliates) to any know-how created under and during the term of the Collaboration Agreement to develop, manufacture and commercialize custirsen and certain other antisense inhibitors of clusterin, as set forth in more detail in the Termination Agreement. Teva additionally granted to us and our affiliates a non-exclusive license to any intellectual property owned by or licensed to Teva and its affiliates, whether as of the Closing Date or thereafter, to develop, manufacture and commercialize custirsen, subject to certain limitations. Teva also agreed not to challenge the patentability, validity or enforceability of certain of our patents, and agreed not to file any patent applications covering custirsen or any antisense inhibitor of clusterin for 18 months after the Closing Date
.
We are responsible for any such expenses incurred from and after January 1, 2015. We do not owe Teva any development milestone payments or royalty payments on sales of custirsen, if any.
As part of the termination, Teva assigned to us the investigational new drug application for custirsen and submitted amendments, on a country-by-country basis, transferring sponsorship of the ENSPIRIT study to us. In July 2015, we became the sole trial sponsor for the ENSPIRIT study in all countries.
We and Teva released each other from all claims related to the Collaboration Agreement. In addition, we agreed to indemnify Teva and its affiliates against any third-party claims attributable to the development and commercialization of custirsen prior to the
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execution of the Collaboration Agreement and after the Closing Date, and any third-party claims attributable to the conduct of
the phase 3 clinical trial in second-line chemotherapy in patients with metasta
tic castrate resistant prostate cancer, or
AFFINITY. Teva agreed to indemnify us and our affiliates against any third-party claims attributable to the development of custirsen during the period between the execution of the Collaboration Agreement and the C
losing Date, but excluding the AFFINITY study. The parties’ indemnity obligations cover, among other things, third-party claims brought by current or former patients in the relevant studies and patient product liability claims.
Revenue for the year ended December 31, 2016 was $5.1 million, which consists of recognition of deferred collaboration revenue representing our efforts in the development of custirsen. As of June 30, 2016, the full amount of the advanced reimbursement payment was recognized into collaboration revenue. The advanced reimbursement payment made by Teva, as part of the Termination Agreement, was deferred and recognized as collaboration revenue on a dollar for dollar basis as costs were incurred as part of the continuing research and development activities related to custirsen.
Ionis and UBC License Agreements
In January 2017, we discontinued further development of OGX-225. We provided a notice of discontinuance to Ionis, notifying them that we have discontinued development of OGX-225 resulting in termination of the license agreement related to this product candidate. We intend to also terminate the UBC license agreement related to OGX-225 provided that Ionis does not exercise its reversion rights within 90 days of the notice of discontinuance. If Ionis exercises its reversion rights related to OGX-225, we believe Ionis will assume the rights and obligations under the UBC license agreement.
In November 2016, we provided a notice of discontinuance to Ionis, or the Notice of Discontinuance, and a letter of termination to UBC, or the Letter of Termination, notifying the parties that we have discontinued development of custirsen, resulting in termination of all licensing agreements related to custirsen. We believe that all financial obligations, other than continuing mutual indemnification obligations and our requirement to pay for out-of-pocket patent expenses incurred up to the date of termination and for abandoning the custirsen patents and patent applications, under all agreements with Ionis and UBC, including the Ionis settlement agreement, are no longer owed and no further payments are due.
Under the license agreements with Ionis and UBC, we were required to pay royalties to each of Ionis and UBC based on a percentage of net sales. We did not make any royalty payments to either Ionis or UBC in 2016. In addition, pursuant to the terms of the agreements with Ionis, we were required to pay to Ionis up to 20% of all non-royalty revenue (defined to mean revenue not based on net sales of products) we receive from third parties.
In May and November 2015, we received communications from Ionis requesting payment of 30% of the $23.2 million paid by Teva under the Termination Agreement, as well as 30% of any amounts paid by Teva upon release of the $3.0 million holdback amount. In January 2016, Ionis filed a lawsuit and claimed that we were in breach of the license agreement for failing to pay Ionis a share of the advance reimbursement payment from Teva and other non-monetary consideration received from Teva in connection with the termination of the Collaboration Agreement. Ionis sought damages and a declaratory judgment that, based on our alleged breach, Ionis has the right to terminate the license agreement.
In August 2016, we and Ionis settled this lawsuit. Pursuant to the settlement, we paid to Ionis a $1.4 million upfront payment. In addition, under the settlement agreement, we were required to pay to Ionis additional success-based payments of up to an amount that does not exceed $5.0 million based on, (i) an additional 5% royalty on net sales of custirsen and (ii) 50% of any money we receive related to the sale, license or any other commercial transaction involving custirsen, subject to certain limitations. As a result of the Notice of Discontinuance, we believe that all financial obligations under the settlement agreement are no longer owed and no further payments are due.
5. FAIR VALUE MEASUREMENTS
Assets and liabilities recorded at fair value in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. For certain of our financial instruments including amounts receivable and accounts payable the carrying values approximate fair value due to their short-term nature.
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ASC 820 “Fair Value Measurements and Disclosures,” specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observab
le or unobservable. In accordance with ASC 820, these inputs are summarized in the three broad level listed below:
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Level 1 – Quoted prices in active markets for identical securities.
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Level 2 – Other significant inputs that are observable through corroboration with market data (including quoted prices in active markets for similar securities).
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Level 3 – Significant unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability.
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As quoted prices in active markets are not readily available for certain financial instruments, we obtain estimates for the fair value of financial instruments through third-party pricing service providers.
In determining the appropriate levels, we performed a detailed analysis of the assets and liabilities that are subject to ASC 820.
We invest our excess cash in accordance with investment guidelines that limit the credit exposure to any one financial institution other than securities issued by the U.S. Government. These securities are not collateralized and mature within one year.
A description of the valuation techniques applied to our financial instruments measured at fair value on a recurring basis follows.
Financial Instruments
Cash
Significant amounts of cash are held on deposit with large well established U.S. and Canadian financial institutions.
U.S. Government and Agency Securities
U.S. Government Securities
U.S. government securities are valued using quoted market prices. Valuation adjustments are not applied. Accordingly, U.S. government securities are categorized in Level 1 of the fair value hierarchy.
U.S. Agency Securities
U.S. agency securities are comprised of two main categories consisting of callable and non-callable agency issued debt securities. Non-callable agency issued debt securities are generally valued using quoted market prices. Callable agency issued debt securities are valued by benchmarking model-derived prices to quoted market prices and trade data for identical or comparable securities. Actively traded non-callable agency issued debt securities are categorized in Level 1 of the fair value hierarchy. Callable agency issued debt securities are categorized in Level 2 of the fair value hierarchy.
Corporate and Other Debt
Corporate Bonds and Commercial Paper
The fair value of corporate bonds and commercial paper is estimated using recently executed transactions, market price quotations (where observable), bond spreads or credit default swap spreads adjusted for any basis difference between cash and derivative instruments. The spread data used are for the same maturity as the bond. If the spread data does not reference the issuer, then data that reference a comparable issuer are used. When observable price quotations are not available, fair value is determined based on cash flow models with yield curves, bond or single name credit default swap spreads and recovery rates based on collateral values as significant inputs. Corporate bonds and commercial paper are generally categorized in Level 2 of the fair value hierarchy; in instances where prices, spreads or any of the other aforementioned key inputs are unobservable, they are categorized in Level 3 of the hierarchy.
Warrants
As of December 31, 2016, we recorded a $0.2 million warrant liability. We reassess the fair value of the common stock warrants classified as liabilities at each reporting date utilizing a Black-Scholes pricing model. Inputs used in the pricing model include estimates of stock price volatility, expected warrant life and risk-free interest rate. The computation of expected volatility is based on the historical volatility of shares of our common stock for a period that coincides with the expected life of the warrants that are classified as liabilities. Warrants that are classified as liabilities are categorized in Level 3 of the fair value hierarchy. A small change in the estimates used may have a relatively large change in the estimated valuation. Warrants that are classified as equity are not considered liabilities and therefore are not reassessed for their fair values at each reporting date.
66
The following table presents the changes in fair value of our total Level 3 financial liabilities for the year ended Decem
ber 31, 2016. During the twelve months ended December 31, 2016, no common stock warrants were issued that were classified as liabilities (in thousands):
|
|
Liability at
|
|
|
|
|
|
|
Unrealized
|
|
|
Liability at
|
|
|
|
December 31,
|
|
|
Issuance of
|
|
|
Gain on
|
|
|
December 31,
|
|
|
|
2015
|
|
|
Warrants
|
|
|
warrants
|
|
|
2016
|
|
Warrant liability
|
|
$
|
1,105
|
|
|
$
|
—
|
|
|
$
|
(873
|
)
|
|
$
|
232
|
|
The following table presents information about our assets and liabilities that are measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value (in thousands):
December 31, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,800
|
|
Money market securities (cash equivalents)
|
|
|
11,931
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,931
|
|
Corporate bonds and commercial paper (cash equivalents)
|
|
|
1,502
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,502
|
|
Government securities
|
|
|
2,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,000
|
|
Restricted cash (Note 12)
|
|
|
272
|
|
|
|
—
|
|
|
|
—
|
|
|
|
272
|
|
Corporate bonds and commercial paper (short term investments)
|
|
|
—
|
|
|
|
8,230
|
|
|
|
—
|
|
|
|
8,230
|
|
Total assets
|
|
$
|
17,505
|
|
|
$
|
8,230
|
|
|
$
|
—
|
|
|
$
|
25,735
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
232
|
|
|
$
|
232
|
|
December 31, 2015
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
14,034
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,034
|
|
Money market securities (cash equivalents)
|
|
|
20,276
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,276
|
|
Restricted cash (Note 12)
|
|
|
272
|
|
|
|
—
|
|
|
|
—
|
|
|
|
272
|
|
Corporate bonds and commercial paper
|
|
|
—
|
|
|
|
20,876
|
|
|
|
—
|
|
|
|
20,876
|
|
Total assets
|
|
$
|
34,582
|
|
|
$
|
20,876
|
|
|
$
|
—
|
|
|
$
|
55,458
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,105
|
|
|
$
|
1,105
|
|
Cash and cash equivalents and short term investments (in thousands):
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
December 31, 2016
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Cash
|
|
$
|
1,800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,800
|
|
Money market securities
|
|
|
11,931
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,931
|
|
Corporate bonds and commercial paper
|
|
|
1,502
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,502
|
|
Total cash and cash equivalents
|
|
$
|
15,233
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,233
|
|
Money market securities (restricted cash)
|
|
|
272
|
|
|
|
—
|
|
|
|
—
|
|
|
|
272
|
|
Total restricted cash
|
|
$
|
272
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
272
|
|
Corporate bonds and commercial paper
|
|
|
8,231
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
8,230
|
|
Government securities
|
|
|
2,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,000
|
|
Total short-term investments
|
|
$
|
10,231
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
10,230
|
|
67
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
December 31, 2015
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Cash
|
|
$
|
14,034
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,034
|
|
Money market securities
|
|
|
20,276
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,276
|
|
Total cash and cash equivalents
|
|
$
|
34,310
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
34,310
|
|
Money market securities (restricted cash)
|
|
|
272
|
|
|
|
—
|
|
|
|
—
|
|
|
|
272
|
|
Total restricted cash
|
|
$
|
272
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
272
|
|
Corporate bonds and commercial paper
|
|
|
20,885
|
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
20,876
|
|
Total short-term investments
|
|
$
|
20,885
|
|
|
$
|
—
|
|
|
$
|
(9
|
)
|
|
$
|
20,876
|
|
Our gross realized gains and losses on sales of available-for-sale securities were not material for the years ended December 31, 2016 and 2015.
All securities included in cash and cash equivalents have maturities of 90 days or less at the time of purchase. All securities included in short-term investments have maturities of within one year of the balance sheet date. The cost of securities sold is based on the specific identification method.
We only invest in A (or equivalent) rated securities with maturities of one year or less. We do not believe that there are any other than temporary impairments related to our investment in marketable securities at December 31, 2016, given the quality of the investment portfolio, its short-term nature, and subsequent proceeds collected on sale of securities that reached maturity.
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
657
|
|
|
$
|
567
|
|
|
$
|
90
|
|
Furniture and fixtures
|
|
|
172
|
|
|
|
167
|
|
|
|
5
|
|
Machinery and equipment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Leasehold improvements
|
|
|
262
|
|
|
|
167
|
|
|
|
95
|
|
Computer software
|
|
|
502
|
|
|
|
439
|
|
|
|
63
|
|
Equipment under capital lease
|
|
|
114
|
|
|
|
109
|
|
|
|
5
|
|
Total property and equipment
|
|
$
|
1,707
|
|
|
$
|
1,449
|
|
|
$
|
258
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
628
|
|
|
$
|
490
|
|
|
$
|
138
|
|
Furniture and fixtures
|
|
|
172
|
|
|
|
163
|
|
|
|
9
|
|
Machinery and equipment
|
|
|
218
|
|
|
|
1
|
|
|
|
217
|
|
Leasehold improvements
|
|
|
257
|
|
|
|
99
|
|
|
|
158
|
|
Computer software
|
|
|
494
|
|
|
|
425
|
|
|
|
69
|
|
Equipment under capital lease
|
|
|
114
|
|
|
|
103
|
|
|
|
11
|
|
Total property and equipment
|
|
$
|
1,883
|
|
|
$
|
1,281
|
|
|
$
|
602
|
|
Impairment of Long-Lived Assets
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. We conduct our long-lived asset impairment analyses in accordance with ASC 360-10-15, “Impairment or Disposal of Long-Lived Assets.” ASC 360-10-15 requires us to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.
68
In the fourth quarter of 2016, we concluded that we had a triggering event
requiring assessment of impairment for certain of our long-lived assets in
conjunction with our restructuring actions announced in October 2016. As a result, we reviewed our long-lived assets for impairment and recorded a $0.2 million impairment charge, representing the entire amount of the then carrying value of the machinery an
d equipment, on our statement of loss. The full amount of the impairment charge related to drug product manufacturing equipment.
7. EXCESS LEASE LIABILITY
On August 21, 2008, Sonus Pharmaceuticals, Inc., or Sonus, completed a transaction (“the Arrangement”) with OncoGenex Technologies Inc., or OncoGenex Technologies, whereby Sonus acquired all of the outstanding preferred shares, common shares and convertible debentures of OncoGenex Technologies. Sonus then changed its name to OncoGenex Pharmaceuticals, Inc. Prior to the Arrangement, Sonus entered into a non-cancellable lease arrangement for office space located in Bothell, Washington, which is considered to be in excess of our current requirements. The liability was computed as the present value of the difference between the remaining lease payments due less the estimate of net sublease income and expenses and had been accounted for in accordance with ASC 805-20, “Business Combinations -Identifiable Assets and Liabilities, and Any Non-controlling Interest.” Effective 2014, we entered into a Lease Termination Agreement with the landlord for the office space in Bothell such that the lease terminated effective March 1, 2015. Under the Lease Termination Agreement, we paid BMR-217TH Place LLC (“BMR”) a $2.0 million termination fee on the Termination Date.
We
agreed to pay BMR an additional termination fee of $1.3 million within 30 days after we (i) meet the primary endpoint for our phase 3 clinical trial for the treatment of second line metastatic CRPC with custirsen and (ii) close a transaction or transactions pursuant to which we receive funding in an aggregate amount of at least $20.0 million. As a result of the Lease Termination Agreement, we have recorded the lease termination fees and have made an adjustment to remove the excess lease liability. We re-assessed that the likelihood of meeting both contingent events is no longer possible due to not achieving the primary endpoint on our AFFINITY trial. As a result, we have reversed the $1.3 million in lease termination liability on our balance sheet during the third quarter of 2016 and recognized a recovery on our statement of loss.
8. OTHER ASSETS
Other assets include prepaid amounts related to clinical trials that will not be utilized in the next 12 months and deposits paid for office space in accordance with the terms of the operating lease agreements.
9. INCOME TAX
[a] The reconciliation of income tax attributable to operations computed at the statutory tax rate to income tax expense is as follows. OncoGenex Technologies, a Canadian corporation, which is subject to combined Canadian federal and provincial statutory tax rates for December 31, 2016, 2015, and 2014 of 26.0%, 26.0%, and 26.0%, respectively. Following the reverse takeover by OncoGenex Technologies of Sonus Pharmaceuticals, Inc. (which subsequently changed its name to OncoGenex Pharmaceuticals, Inc.) in 2008, OncoGenex Technologies became a wholly owned subsidiary of OncoGenex Pharmaceuticals, which is a Delaware incorporated company subject to US Federal Statutory rates of 34% for all three years presented.
For the purposes of estimating the tax rate in effect at the time that deferred tax assets and liabilities are expected to reverse, we used the furthest out available future tax rate in the applicable jurisdictions. For the years ended December 31, 2016, 2015 and 2014 the future Canadian enacted rates we used were 26%, 26%, and 26%, respectively, while for the US the future enacted rate we used was 34% for all three periods presented.
[b] At December 31, 2016, we have investment tax credits of $2.6 million (2015—$2.3 million) available to reduce future Canadian income taxes otherwise payable. We also have non-capital loss carryforwards of $115.9 million (2015—$100.4 million) available to offset future taxable income in Canada and federal net operating loss carryforwards of $158.4 million (2015—$151.9 million) to offset future taxable income in the United States.
69
Under Section 382 of the Internal Revenue Code of 1986, substantial changes in our ownership may limit the amount of net operating loss carryforwards and development tax credit carryforwards that could be utilized annually in the future
to offset taxable income. Any such annual limitation may significantly reduce the utilization of the net operating losses and tax credits before they expire. A preliminary 382 limitation review has been undertaken but a formal study has never been complet
ed. The results of any future study could indicate that the U.S. losses may be materially limited; however, the amount of such limitation cannot be reasonably quantified at this time, but may be significant. In each period since our inception, we have reco
rded a valuation allowance for the full amount of our deferred tax asset, as the realization of the deferred tax asset is uncertain.
(In thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Income taxes at statutory rates (at a rate of 34% for all
periods presented)
|
|
$
|
(6,844
|
)
|
|
$
|
(5,712
|
)
|
|
$
|
(8,922
|
)
|
Expenses not deducted for tax purposes
|
|
|
(67
|
)
|
|
|
(14
|
)
|
|
|
(452
|
)
|
Effect of tax rate changes on deferred tax assets and liabilities
|
|
|
(3
|
)
|
|
|
(13
|
)
|
|
|
(9
|
)
|
Rate differential on foreign earnings
|
|
|
972
|
|
|
|
689
|
|
|
|
1,445
|
|
Reduction (increase) in benefit of operating losses
|
|
|
196
|
|
|
|
(32
|
)
|
|
|
441
|
|
Reduction in the benefit of other tax attributes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Investment tax credits
|
|
|
(252
|
)
|
|
|
(297
|
)
|
|
|
(357
|
)
|
Change in valuation allowance
|
|
|
6,203
|
|
|
|
5,114
|
|
|
|
7,854
|
|
Book to tax return adjustments
|
|
|
(205
|
)
|
|
|
265
|
|
|
|
—
|
|
Other
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
Income tax expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
As a result, we have not recognized any federal or state income tax benefit in our statement of operations. The initial public offering of common stock by us in 1995 caused an ownership change pursuant to applicable regulations in effect under the Internal Revenue Code of 1986. Therefore, our use of losses incurred through the date of ownership change will be limited during the carryforward period and may result in the expiration of net operating loss carryforwards in the United States before utilization.
The investment tax credits and non-capital losses and net operating losses for income tax purposes expire as follows (in thousands):
|
|
Investment
|
|
|
Net Operating
|
|
|
Non-capital
|
|
|
|
Tax Credits
|
|
|
Losses
|
|
|
Losses
|
|
2016
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
2017
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
2018
|
|
|
150
|
|
|
|
10,795
|
|
|
|
—
|
|
2019
|
|
|
102
|
|
|
|
32
|
|
|
|
—
|
|
2020
|
|
|
76
|
|
|
|
2,745
|
|
|
|
—
|
|
2021
|
|
|
69
|
|
|
|
400
|
|
|
|
—
|
|
2022
|
|
|
105
|
|
|
|
11,766
|
|
|
|
—
|
|
2023
|
|
|
96
|
|
|
|
10,785
|
|
|
|
—
|
|
2024
|
|
|
111
|
|
|
|
16,814
|
|
|
|
—
|
|
2025
|
|
|
144
|
|
|
|
2,062
|
|
|
|
—
|
|
2026
|
|
|
400
|
|
|
|
27,157
|
|
|
|
7,335
|
|
2027
|
|
|
173
|
|
|
|
22,225
|
|
|
|
4,949
|
|
2028
|
|
|
390
|
|
|
|
12,648
|
|
|
|
8,020
|
|
2029
|
|
|
317
|
|
|
|
4,358
|
|
|
|
(9
|
)
|
2030
|
|
|
346
|
|
|
|
5,034
|
|
|
|
6,288
|
|
2031
|
|
|
608
|
|
|
|
6,200
|
|
|
|
12,121
|
|
2032
|
|
|
505
|
|
|
|
8,418
|
|
|
|
17,278
|
|
2033
|
|
|
411
|
|
|
|
2,366
|
|
|
|
23,240
|
|
2034
|
|
|
492
|
|
|
|
2,609
|
|
|
|
17,077
|
|
2035
|
|
|
328
|
|
|
|
5,342
|
|
|
|
3,120
|
|
2036
|
|
|
286
|
|
|
|
6,635
|
|
|
|
16,531
|
|
|
|
$
|
5,109
|
|
|
$
|
158,391
|
|
|
$
|
115,950
|
|
70
In addition, we have unclaimed tax deductions of approximately $14.6
million related to scientific research and experimental development expenditures available to carry forward indefinitely to reduce Canadian taxable income of future years. We also have research and development tax credits of $2.4 million available to redu
ce future taxes payable in the United States. The research and development tax credits expire between 2018 and 2036.
[c] Significant components of our deferred tax assets as of December 31 are shown below (in thousands):
The potential income tax benefits relating to these deferred tax assets have not been recognized in the accounts as their realization did not meet the requirements of “more likely than not” under the liability method of tax allocation. Accordingly, a valuation allowance has been recorded and no deferred tax assets have been recognized as at December 31, 2016 and 2015.
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Tax basis in excess of book value of assets
|
|
$
|
6,483
|
|
|
$
|
6,308
|
|
Non-capital loss carryforwards
|
|
|
84,358
|
|
|
|
77,746
|
|
Research and development deductions and credits
|
|
|
7,969
|
|
|
|
7,484
|
|
Stock options
|
|
|
3,743
|
|
|
|
3,448
|
|
Restructuring liability
|
|
|
624
|
|
|
|
474
|
|
Other
|
|
|
112
|
|
|
|
1,627
|
|
Total deferred tax assets
|
|
|
103,289
|
|
|
|
97,087
|
|
Valuation allowance
|
|
$
|
(103,289
|
)
|
|
$
|
(97,087
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
-
|
|
|
|
-
|
|
[d] Under ASC 740, the benefit of an uncertain tax position that is more likely than not of being sustained upon audit by the relevant taxing authority must be recognized at the largest amount that is more likely than not to be sustained. No portion of the benefit of an uncertain tax position may be recognized if the position has less than a 50% likelihood of being sustained.
A reconciliation of the unrecognized tax benefits of uncertain tax positions for the year ended December 31, 2016 is as follows (in thousands):
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Balance at January 1
|
|
$
|
2,055
|
|
|
$
|
2,039
|
|
|
$
|
2,007
|
|
Additions based on tax positions related to the current year
|
|
|
16
|
|
|
|
16
|
|
|
|
32
|
|
Additions based on tax positions related to prior years
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at December 31
|
|
$
|
2,071
|
|
|
$
|
2,055
|
|
|
$
|
2,039
|
|
As of December 31, 2016, unrecognized benefits of approximately $2.0 million, if recognized, would affect our effective tax rate, and would reduce our deferred tax assets.
Our accounting policy is to treat interest and penalties relating to unrecognized tax benefits as a component of income taxes. As of December 31, 2016 and December 31, 2015 we had no accrued interest and penalties related to income taxes.
We are subject to taxes in Canada and the U.S. until the applicable statute of limitations expires. Tax audits by their very nature are often complex and can require several years to complete.
Tax
|
|
Years open to
|
Jurisdiction
|
|
examination
|
Canada
|
|
2008 to 2016
|
US
|
|
2013 to 2016
|
10. COMMON STOCK
[a] Authorized
75,000,000 authorized common voting share, par value of $0.001, and 5,000,000 preferred shares, par value of $0.001.
71
[b] Issued and outstanding shares
At-The-Market Issuance Sales Agreement
In June 2013, we entered into an At-the-Market Issuance Sales Agreement, or Sales Agreement, with MLV & Co. LLC, or MLV, under which we may offer and sell shares of our common stock having aggregate sales proceeds of up to $25 million from time to time through MLV as our sales agent. Sales of our common stock through MLV, if any, will be made by any method permitted that is deemed an “at the market” offering as defined in Rule 415 under the Securities Act of 1933, as amended, including by means of ordinary brokers’ transactions on The NASDAQ Capital Market or otherwise at market prices prevailing at the time of sale, in block transactions, or as otherwise agreed upon by us and MLV. MLV will use commercially reasonable efforts to sell our common stock from time to time, based upon instructions from us (including any price, time or size limits or other customary parameters or conditions we may impose). We will pay MLV a commission of up to 3.0% of the gross sales proceeds of any shares of common stock sold through MLV under the Sales Agreement. We are not obligated to make any sales of common stock under the Sales Agreement. The offering of our shares of common stock pursuant to the Sales Agreement will terminate upon the earlier of (i) the sale of all common stock subject to the Sales Agreement or (ii) termination of the Sales Agreement in accordance with its terms.
On April 27, 2015, we and MLV terminated the Sales Agreement. We were not subject to any termination penalties related to termination of the Sales Agreement. Under the Sales Agreement, we offered and sold 809,214 shares of our common stock with MLV & Co. LLC. These sales resulted in gross proceeds to us of approximately $3.0 million and offering expenses of $0.1 million.
July 2014 Registered Offering
On July 2, 2014, we completed an underwritten registered offering pursuant to which we sold 5,559,866 Series A units at a price per unit of $3.48 and 1,340,538 Series B units at a price per unit of $3.47.
Each Series A unit consisted of one share of common stock and a Series A warrant to purchase up to one-half of one share of common stock at an initial exercise price of $4.00 per share. Each Series A warrant is exercisable at any time on or after the date of issuance until the fifth anniversary of the issuance of the Series A warrants.
Each Series B unit consisted of a Pre-Funded Series B warrant to purchase up to one share of common stock at an initial exercise price of $0.01 per share and a Series B warrant to purchase up to one-half of one share of common stock at an initial exercise price of $4.00 per share. Each Pre-Funded Series B warrant and Series B warrant is exercisable at any time on or after the date of issuance until the fifth anniversary of the issuance of the Pre-Funded Series B warrants and Series B warrants, respectively.
We received net proceeds of approximately $22.4 million, after deducting underwriting discounts and commissions and offering expenses. Gross proceeds of $24.0 million and underwriting discounts and commissions and offering expenses of $1.6 million were allocated as follows:
|
|
|
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-funded
|
|
|
Series A
|
|
|
Series B
|
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Common
|
|
|
|
Common
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
|
Stock
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Warrants
|
|
Units Issued
|
|
|
5,559,866
|
|
|
|
1,340,538
|
|
|
|
2,779,933
|
|
|
|
670,269
|
|
Gross Proceeds (in thousands)
|
|
$
|
14,084
|
|
|
$
|
3,387
|
|
|
$
|
5,261
|
|
|
$
|
1,268
|
|
Underwriting discount and offering expense (in thousands)
|
|
$
|
885
|
|
|
$
|
213
|
|
|
$
|
428
|
|
|
$
|
103
|
|
The Series A and Series B common stock warrants are classified as liabilities. The underwriting discount and offering expenses allocated to the Series A and Series B common stock warrants have been expensed in the Consolidated Statement of Loss.
The common stock and Series B prefunded common stock warrants are classified as equity. The underwriting discount and offering expenses allocated to the common stock and Series B prefunded common stock warrants have been charged against the allocated gross proceeds.
Purchase Agreement and Financing with Lincoln Park Capital
On April 30, 2015, we and Lincoln Park Capital Fund, LLC, or LPC, entered into a share and unit purchase agreement, or Purchase Agreement, pursuant to which we have the right to sell to LPC up to $18.0 million in shares of our common stock, par value $0.001 per share, subject to certain limitations and conditions set forth in the Purchase Agreement.
72
Pursuant to the Purchase Agreement, LPC initially purchased 956,938 Series A-1 Units a
t a purchase price of $2.09 per unit, with each Series A-1 Unit consisting of (a) one share of Common Stock and (b) one warrant to purchase one-quarter of a share of Common Stock at an exercise price of $2.40 per share, or Series A-1 Warrant. Each Series
A-1 Warrant is exercisable six months following the issuance date until the date that is five years and six months after the issuance date and is subject to customary adjustments. The Series A-1 Warrants were issued only as part of the Series A-1 Units in
the initial purchase of $2.0 million and no warrants were issued in connection with any other purchases of common stock under the Purchase Agreement.
After the initial purchase, as often as every business day over the 24-month term of the Purchase Agreement, and up to an aggregate amount of an additional $16.0 million (subject to certain limitations) of shares of common stock, we had the right, from time to time, in our sole discretion and subject to certain conditions to direct LPC to purchase up to 125,000 shares of common stock with such amounts increasing as the closing sale price of our common stock as reported on The NASDAQ Capital Market increased. The purchase price of shares of common stock pursuant to the Purchase Agreement was based on prevailing market prices of common stock at the time of sales without any fixed discount, and we controlled the timing and amount of common stock sold to LPC. In addition, we had the right to direct LPC to purchase additional amounts as accelerated purchases if on the date of a regular purchase the closing sale price of the common stock is not below $1.50 per share. As consideration for entering into the Purchase Agreement, we issued to LPC 126,582 shares of common stock; no cash proceeds were received from the issuance of these shares.
From April 30, 2015 through August 13, 2015, we offered and sold 6,814,980 shares of our common stock pursuant to our Purchase Agreement with LPC. These sales resulted in gross proceeds to us of approximately $18.0 million and offering expenses of $0.4 million. As of August 13, 2015, no further amounts remained available for sale under this offering program
Stock Option Exercises
During the year ended December 31, 2016, we did not issue any shares of common stock to satisfy stock option exercises
and issued 217,296 shares of common stock to satisfy and restricted stock unit settlements, respectively, compared with the issuance of 5,359 and 269,401 shares of common to satisfy stock option exercises and restricted stock unit settlements, respectively, for the years ended December 31, 2015. For the year ended December 31, 2014, we issued 10,000 and 203,148 shares of common stock to satisfy stock option exercises and restricted stock unit settlements, respectively.
[c] Stock options
As at December 31, 2016 we had reserved, pursuant to our 2010 Performance Incentive Plan, 3,634,058 common shares for issuance upon exercise of stock options and settlement of restricted stock units by employees, directors, officers and consultants of ours, of which 1,378,805 are reserved for options currently outstanding, 253,221 are reserved for restricted stock units currently outstanding and 2,002,032 are available for future equity award grants under our 2010 Performance Incentive Plan. As of December 31, 2015 3,876,151 shares were available for equity award grants under our 2010 Performance Incentive Plan.
2010 Performance Incentive Plan
At our 2013 Annual Meeting of Stockholders held on May 24, 2013, our stockholders approved an amendment to our 2010 Performance Incentive Plan, or the 2010 Plan. As a result of this amendment, the 2010 Plan was further amended to provide for an increase in the total shares of common stock available for issuance under the 2010 Plan from 1,050,000 to 2,050,000. At our 2014 Annual Meeting of Stockholders held on May 29, 2014, our stockholders approved an amendment to our 2010 Performance Incentive Plan. As a result of this amendment, the 2010 Plan was amended to provide for an increase in the total shares of common stock available for issuance under the 2010 Plan from 2,050,000 to 2,800,000.
At our 2015 Annual Meeting of Stockholders held on May 21, 2015, our stockholders approved an amendment to our 2010 Performance Incentive Plan. As a result of this amendment, the 2010 Plan was amended to provide for an increase in the total shares of common stock available for issuance under the 2010 Plan from 2,800,000 to 4,300,000.
Under the plan, we may grant options to purchase common shares or restricted stock units to our employees, directors, officers and consultants. The exercise price of the options is determined by our board of directors but will be at least equal to the fair value of the common shares at the grant date. The options vest in accordance with terms as determined by our board of directors, typically over three to four years for options issued to employees and consultants, and over one to three years for members of our board of directors. The expiry date for each option is set by our board of directors with a maximum expiry date of ten years from the date of grant. In addition, the 2010 Plan allows for accelerated vesting of outstanding equity awards in the event of a change in control. The terms for accelerated vesting, in the event of a change in control, is determined at our discretion and defined under the employment agreements for our officers and certain of our employees.
73
Options remain outstanding under a number of share option plans that had been approved by shareholders prior to the approval of the 2010
Per
formance Incentive Plan: (a)
the 2007 Performance Incentive Plan (2007 Plan).
ASC 718 Compensation – Stock Compensation
We recognize expense related to the fair value of our stock-based compensation awards using the provisions of ASC 718. We use the Black-Scholes option pricing model as the most appropriate fair value method for our stock options and recognize compensation expense for stock options on a straight-line basis over the requisite service period. In valuing our stock options using the Black-Scholes option pricing model, we make assumptions about risk-free interest rates, dividend yields, volatility and weighted average expected lives, including estimated forfeiture rates of the options.
The expected life was calculated based on the simplified method as permitted by the SEC’s Staff Accounting Bulletin 110, Share-Based Payment. We consider the use of the simplified method appropriate because we believe our historical stock option exercise activity may not be indicative of future stock option exercise activity based upon the structural changes to our business that may occur as a result of merger with Achieve Life Science, Inc. and the potential impact on future stock option exercise activity. The expected volatility of options granted was calculated based on the historical volatility of the shares of our common stock. The risk-free interest rate is based on a U.S. Treasury instrument whose term is consistent with the expected life of the stock options. In addition to the assumptions above, as required under ASC 718, management made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest. Forfeiture rates are estimated using historical actual forfeiture rates. These rates are adjusted on a quarterly basis and any change in compensation expense is recognized in the period of the change. We have never paid or declared cash dividends on our common stock and do not expect to pay cash dividends in the foreseeable future.
The estimated fair value of stock options granted in the respective periods was determined using the Black-Scholes option pricing model using the following weighted average assumptions:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Risk-free interest rates
|
|
|
1.51
|
%
|
|
|
1.76
|
%
|
|
|
1.83
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life
|
|
5.3 years
|
|
|
5.8 years
|
|
|
5.9 years
|
|
Expected volatility
|
|
|
72
|
%
|
|
|
63
|
%
|
|
|
82
|
%
|
The weighted average fair value of stock options granted during the year ended December 31, 2016, 2015 and 2014 was $0.53, $1.10 and $6.52 per share, respectively.
The results for the periods set forth below included stock-based compensation expense in the following expense categories of the consolidated statements of loss (in thousands):
|
|
Years ended
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Research and development
|
|
$
|
803
|
|
|
$
|
1,111
|
|
|
$
|
1,893
|
|
General and administrative
|
|
|
846
|
|
|
|
1,217
|
|
|
|
1,967
|
|
Total stock-based compensation
|
|
$
|
1,649
|
|
|
$
|
2,328
|
|
|
$
|
3,860
|
|
Options vest in accordance with terms as determined by our board of directors, typically over three or four years for employee and consultant grants and over one or three years for board of director option grants. The expiry date for each option is set by our board of directors with, which is typically seven to ten years. The exercise price of the options is determined by our board of directors but is at least equal to the fair value of the share at the grant date.
74
Stock option transactions and the number of stock options outstanding are summarized below:
|
|
Number of
|
|
|
Weighted
|
|
|
|
Optioned
|
|
|
Average
|
|
|
|
Common
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
Balance, January 1, 2014
|
|
|
1,007,491
|
|
|
$
|
11.39
|
|
Granted
|
|
|
382,097
|
|
|
|
8.97
|
|
Expired
|
|
|
(12,169
|
)
|
|
|
18.93
|
|
Exercised
|
|
|
(10,000
|
)
|
|
|
3.00
|
|
Forfeited
|
|
|
(84,000
|
)
|
|
|
12.14
|
|
Balance, December 31, 2014
|
|
|
1,283,419
|
|
|
$
|
10.55
|
|
Granted
|
|
|
502,047
|
|
|
|
1.91
|
|
Expired
|
|
|
(247,766
|
)
|
|
|
2.96
|
|
Exercised
|
|
|
(5,359
|
)
|
|
|
2.69
|
|
Forfeited
|
|
|
(53,120
|
)
|
|
|
14.37
|
|
Balance, December 31, 2015
|
|
|
1,479,221
|
|
|
$
|
8.78
|
|
Granted
|
|
|
1,635,250
|
|
|
|
0.86
|
|
Expired
|
|
|
(994,059
|
)
|
|
|
1.00
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
(741,607
|
)
|
|
|
1.96
|
|
Balance, December 31, 2016
|
|
|
1,378,805
|
|
|
$
|
8.62
|
|
The following table summarizes information about stock options outstanding at December 31, 2016 regarding the number of ordinary shares issuable upon: (1) outstanding options and (2) vested options.
(1) Number of common shares issuable upon exercise of outstanding options:
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Contractual
|
|
|
|
|
|
|
|
Average
|
|
|
Life
|
|
Exercise Prices
|
|
Number of Options
|
|
|
Exercise Price
|
|
|
(in years)
|
|
$1.00 - $1.54
|
|
|
122,010
|
|
|
$
|
1.00
|
|
|
|
9.36
|
|
$1.55 - $1.88
|
|
|
337,298
|
|
|
|
1.86
|
|
|
|
7.96
|
|
$1.89 - $3.40
|
|
|
118,874
|
|
|
|
2.62
|
|
|
|
6.98
|
|
$3.41 - $11.70
|
|
|
78,447
|
|
|
|
7.70
|
|
|
|
5.72
|
|
$11.71 - $11.86
|
|
|
185,105
|
|
|
|
11.79
|
|
|
|
6.66
|
|
$11.87 - $11.99
|
|
|
144,699
|
|
|
|
11.95
|
|
|
|
5.64
|
|
$12.00- $13.08
|
|
|
132,650
|
|
|
|
12.88
|
|
|
|
4.97
|
|
$13.09 - $16.40
|
|
|
135,576
|
|
|
|
15.64
|
|
|
|
3.54
|
|
$16.41 - $21.67
|
|
|
63,446
|
|
|
|
17.74
|
|
|
|
3.56
|
|
$21.68 - $22.28
|
|
|
60,700
|
|
|
|
22.28
|
|
|
|
2.67
|
|
|
|
|
1,378,805
|
|
|
$
|
8.62
|
|
|
|
6.30
|
|
75
(2) Number common shares issuable upon exercise of vested options:
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Contractual
|
|
|
|
|
|
|
|
Average
|
|
|
Life
|
|
Exercise Prices
|
|
Number of Options
|
|
|
Exercise Price
|
|
|
(in years)
|
|
$1.00 - $1.54
|
|
|
510
|
|
|
$
|
1.21
|
|
|
|
0.42
|
|
$1.55 - $1.88
|
|
|
184,008
|
|
|
|
1.86
|
|
|
|
7.74
|
|
$1.89 - $3.40
|
|
|
90,275
|
|
|
|
2.51
|
|
|
|
6.76
|
|
$3.41 - $11.70
|
|
|
75,217
|
|
|
|
7.69
|
|
|
|
5.78
|
|
$11.71 - $11.86
|
|
|
140,269
|
|
|
|
11.79
|
|
|
|
6.58
|
|
$11.87 - $11.99
|
|
|
141,951
|
|
|
|
11.95
|
|
|
|
5.64
|
|
$12.00- $13.08
|
|
|
132,650
|
|
|
|
12.88
|
|
|
|
4.97
|
|
$13.09 - $16.40
|
|
|
135,503
|
|
|
|
15.64
|
|
|
|
3.54
|
|
$16.41 - $21.67
|
|
|
63,446
|
|
|
|
17.74
|
|
|
|
3.56
|
|
$21.68 - $22.28
|
|
|
60,700
|
|
|
|
22.28
|
|
|
|
2.67
|
|
|
|
|
1,024,529
|
|
|
$
|
10.54
|
|
|
|
5.58
|
|
As at December 31, 2016, the total unrecognized compensation expense related to stock options granted was $0.6 million, which is expected to be recognized into expense over a period of approximately 1.3 years.
The estimated grant date fair value of stock options vested during the years ended December 31, 2016, 2015 and 2014 was $1.0 million, $1.3 million and $1.9 million, respectively.
The aggregate intrinsic value of options exercised was calculated as the difference between the exercise price of the stock options and the fair value of the underlying common stock as of the date of exercise. The aggregate intrinsic value of options exercised for the years ended December 31, 2016, 2015 and 2014 was zero, $2,787 and $51,100, respectively. At December 31, 2016, the aggregate intrinsic value of the outstanding options was zero and the aggregate intrinsic value of the exercisable options was zero.
[d] Restricted Stock Unit Awards
We grant restricted stock unit awards that generally vest and are expensed over a four year period. We also grant restricted stock unit awards that vest in conjunction with certain performance conditions to certain executive officers and key employees. At each reporting date, we are required to evaluate whether achievement of the performance conditions is probable. Compensation expense is recorded over the appropriate service period based upon our assessment of accomplishing each performance provision. For the years ended December 31, 2016, 2015 and 2014, $0.7 million, $1.1 million and $2.2 million, respectively, of stock based compensation expense was recognized related to these awards.
The following table summarizes our restricted stock unit award activity during the years ended December 31, 2016, 2015 and 2014:
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Average
|
|
|
|
of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Balance, January 1, 2014
|
|
|
356,589
|
|
|
$
|
12.06
|
|
Granted
|
|
|
814,800
|
|
|
|
6.48
|
|
Vested
|
|
|
(199,887
|
)
|
|
|
7.00
|
|
Forfeited or expired
|
|
|
(291,301
|
)
|
|
|
10.93
|
|
Balance, December 31, 2014
|
|
|
680,201
|
|
|
$
|
7.34
|
|
Granted
|
|
|
249,775
|
|
|
|
1.92
|
|
Vested
|
|
|
(269,401
|
)
|
|
|
8.08
|
|
Forfeited or expired
|
|
|
(19,816
|
)
|
|
|
7.27
|
|
Balance, December 31, 2015
|
|
|
640,759
|
|
|
$
|
4.92
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(217,296
|
)
|
|
|
5.23
|
|
Forfeited or expired
|
|
|
(170,242
|
)
|
|
|
5.07
|
|
Balance, December 31, 2016
|
|
|
253,221
|
|
|
$
|
4.56
|
|
76
As of December 31, 2016, we had approximately $0.8 million in total unrecognized compensation expense related to our restricted stock unit awards which is to be recognized over a weighted-average period of approximately 1.4 years.
[e] Stock Warrants
The following is a summary of outstanding warrants to purchase common stock at December 31, 2016:
|
|
Total
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercise
|
|
|
|
|
|
and
|
|
|
price per
|
|
|
|
|
|
Exercisable
|
|
|
Share
|
|
|
Expiration Date
|
(1) Series A Warrants issued in July 2014 financing
|
|
|
2,779,933
|
|
|
|
4.00
|
|
|
July 2019
|
(2) Series B Warrants issued in July 2014 financing
|
|
|
670,269
|
|
|
|
4.00
|
|
|
July 2019
|
(3) Series A-1 Warrants issued in April 2015 financing
|
|
|
239,234
|
|
|
|
2.40
|
|
|
October 2020
|
No warrants were exercised for the year ended December 31, 2016. For the year ended December 31, 2015, all the Pre-Funded Series B warrants were exercised at a per unit price of $0.01, a total of 1,340,538 shares of common stock were issued for proceeds of $13,405. No Series A and Series B warrants from the July 2014 financing were exercised in 2015.
The Series A and Series B warrants issued in the July 2014 financing are classified as liabilities. The estimated fair value of warrants issued and classified as liabilities is reassessed at each reporting date using the Black-Scholes option pricing model. The Series A-1 Warrants issued in the April 2015 financing are classified as equity and are not reassessed for their fair value at the end of each reporting date. The following assumptions were used to value the warrants that are classified as liabilities on the following reporting dates:
|
|
As of
|
|
|
|
December 31,
|
|
Series A and Series B Warrant Valuation Assumptions
|
|
2016
|
|
|
2015
|
|
Risk-free interest rates
|
|
|
1.33
|
%
|
|
|
1.42
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life
|
|
2.50 years
|
|
|
3.50 years
|
|
Expected volatility
|
|
|
95
|
%
|
|
|
77
|
%
|
[f] 401(k) Plan
We maintain a 401(k) plan. Following the Arrangement, the Board of Directors of OncoGenex amended and restated the 401(k) plan whereas our securities are no longer offered as an investment option. This amendment prohibits the inclusion of our shares in the 401(k) plan, as well as any match of our shares to employee contributions.
[g] Loss per common share
The following table presents the computation of basic and diluted net loss attributable to common stockholders per share (in thousands, except per share and share amounts):
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(20,129
|
)
|
|
$
|
(16,801
|
)
|
|
$
|
(26,240
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
29,949,432
|
|
|
|
26,147,344
|
|
|
|
18,098,799
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.67
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(1.45
|
)
|
As of December 31, 2016, 2015 and 2014 a total of 5.3 million, 5.8 million and 7.0 million options, restricted stock units and warrants, respectively, have not been included in the calculation of potential common shares as their effect on diluted per share amounts would have been anti-dilutive.
77
11. RELATED PARTY TRANSACTIONS
In January 2016, Scott Cormack, our Chief Executive Officer, married Michelle Griffin, a consultant to us. For the twelve months ended December 31, 2016, we paid Ms. Griffin approximately $0.5 million for consulting services pursuant to a consulting agreement entered into in 2013 and amended thereafter. We also granted Ms. Griffin options to purchase 135,000 shares of common stock in 2016. In addition, pursuant to the consulting agreement with Ms. Griffin, as at December 31, 2016, we had an accrued termination liability of approximately $0.4 million.
12. COMMITMENTS AND CONTINGENCIES
The following table summarizes our contractual obligations as of December 31, 2016 (in thousands):
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than 5 years
|
|
Bothell office operating lease
|
|
$
|
376
|
|
|
$
|
281
|
|
|
$
|
95
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Vancouver office operating lease
|
|
$
|
68
|
|
|
$
|
68
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
UBC license maintenance fees
|
|
$
|
26
|
|
|
$
|
4
|
|
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
4
|
|
Leased equipment
|
|
$
|
22
|
|
|
$
|
19
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
|
$
|
492
|
|
|
$
|
372
|
|
|
$
|
107
|
|
|
$
|
9
|
|
|
$
|
4
|
|
Teva Pharmaceutical Industries Ltd.
In December 2009, we, through our wholly-owned subsidiary, OncoGenex Technologies, entered into a Collaboration Agreement with Teva for the development and global commercialization of custirsen (and related compounds). In December 2014, we and Teva agreed to terminate the Collaboration Agreement upon entry into a Termination Agreement. In April 2015, we and Teva entered into the Termination Agreement, pursuant to which the Collaboration Agreement was terminated and we regained rights to custirsen. Pursuant to the Termination Agreement, Teva paid to us, as advanced reimbursement for certain continuing research and development activities related to custirsen, an amount equal to $27.0 million less approximately $3.8 million, which reduction represented a hold-back amount of $3.0 million and $0.8 million for certain third-party custirsen-related development expenses incurred by Teva between January 1, 2015 and the Closing Date. Pursuant to the Termination Agreement, we received a nominal amount from the remaining hold-back after deductions by Teva for certain costs incurred after the Closing Date. We do not expect to receive any additional amounts from Teva.
All licenses granted by us to Teva under the Collaboration Agreement were terminated as of the Closing Date.
In accordance with the Termination Agreement, Teva transferred certain third-party agreements for the ENSPIRIT study and custirsen development activities to us on the Closing Date. If any additional historical third-party agreements are discovered after the Closing Date and are used to conduct the ENSPIRIT study, then Teva will use commercially reasonable effort to assign such agreements to us and will be responsible for any costs invoiced under such agreements in excess of an aggregate of $0.1 million. We will be responsible for the initial $0.1 million of costs under such agreements.
Prior to the termination of the Collaboration Agreement, Teva made upfront payments in the aggregate amount of $50.0 million. Teva also acquired $10.0 million of our common stock at a premium under a separate Stock Purchase Agreement. We were required to contribute $30.0 million in direct and indirect costs towards the clinical development plan. We fulfilled our obligation to contribute $30.0 million towards the development of custirsen. Teva was required to and did fund all additional expenses under the clinical development plan through December 31, 2014, after which date we took over responsibility for future costs following termination of our Collaboration Agreement. We do not owe, to Teva, any development milestone payments or royalty payments on sales of custirsen, if any.
Ionis Pharmaceuticals Inc. and University of British Columbia
Custirsen
In November 2016, we provided the Notice of Discontinuance to Ionis and the Letter of Termination to UBC, notifying the parties that we have discontinued development of custirsen, resulting in termination of all licensing agreements related to custirsen. We believe that all financial obligations, other than continuing mutual indemnification obligations and our requirement to pay for out-of-pocket patent expenses incurred up to the date of termination and for abandoning the custirsen patents and patent applications, under all agreements with Ionis and UBC, including the Ionis settlement agreement, are no longer owed and no further payments are due.
Under the license agreements with Ionis and UBC, we were required to pay royalties to each of Ionis and UBC based on a percentage of net sales. We did not make any royalty payments to either Ionis or UBC in the nine months ended September 30, 2016. In addition,
78
pursuant to the terms of the agreements with Ionis, we were required to pay to Ionis up to 20% of all non-royalty revenue (defined to mean revenue not based on net sales of products) we receive from third parties.
In May and November 2015, we received communications from Ionis requesting payment of 30% of the $23.2 million paid by Teva under the Termination Agreement, as well as 30% of any amounts paid by Teva upon release of the $3.0 million holdback amount. In January 2016, Ionis filed a lawsuit and claimed that we were in breach of the license agreement for failing to pay Ionis a share of the advance reimbursement payment from Teva and other non-monetary consideration received from Teva in connection with the termination of the Collaboration Agreement. Ionis sought damages and a declaratory judgment that, based on our alleged breach, Ionis has the right to terminate the license agreement.
In August 2016, we and Ionis settled this lawsuit. Pursuant to the settlement, we paid to Ionis a $1.4 million upfront payment.
In addition, under the settlement agreement, we were required to pay to Ionis additional success-based payments of up to an amount
that does not exceed $5.0 million based on, (i) an additional 5% royalty on net sales of custirsen and (ii) 50% of any money we receive related to the sale, license or any other commercial transaction involving custirsen, subject to certain limitations.
As a result of the Notice of Discontinuance, we believe that all financial obligations under the settlement agreement are no longer owed and no further payments are due.
Apatorsen and OGX-225
We are obligated to pay milestone payments of up to CAD $1.6 million and $7.75 million pursuant to license agreements with UBC and Ionis, respectively, upon the achievement of specified product development milestones related to apatorsen and OGX-225 and low to mid-single digit royalties on future product sales.
Unless otherwise terminated, the Ionis agreements for apatorsen will continue until the later of 10 years after the date of the first commercial product sale, or the expiration of the last to expire of any patents required to be licensed in order to use or sell the product, unless we discontinue apatorsen and Ionis does not elect to unilaterally continue development. The Ionis agreement for OGX-225 will continue into perpetuity unless we discontinue development of the product and Ionis does not elect to unilaterally continue development.
Lease Arrangements
We have an operating lease agreement for office space being used in Vancouver, Canada, which expires in September 2017. Pursuant to the operating lease agreement, we have the option to terminate the lease early without penalty at any time after January 1, 2017 so long as we provide three months prior written notice to the landlord.
The future minimum annual lease payments under the Vancouver lease is $68,000 in 2017.
In February 2015, we entered into an office lease with Grosvenor International (Atlantic Freeholds) Limited, or Landlord, pursuant to which we leased approximately 11,526 square feet located at 19820 North Creek Parkway, Bothell, Washington, 98011, commencing on February 15, 2015. The initial term of this lease will expire on April 30, 2018, with an option to extend the term for one approximately three-year period. Our monthly base rent for the premises will start at approximately $18,000 commencing on May 1, 2015 and will increase on an annual basis up to approximately $20,000. We received a construction allowance, for leasehold improvements that we made, of approximately $0.1 million. We will be responsible for 17% of taxes levied upon the building during each calendar year of the term. We delivered to the Landlord a letter of credit in the amount of $0.2 million, in accordance with the terms if the lease, which the Landlord may draw upon for base rent or other damages in the event of our default under this lease. In August 2015 we exercised our expansion option for an additional 2,245 square feet of office space, which commenced on August 1, 2015.
The remaining future minimum annual lease payments under the terminated Bothell lease are as follows (in thousands):
2017
|
|
|
281
|
|
2018
|
|
|
95
|
|
Total
|
|
$
|
376
|
|
Consolidated rent and operating expense relating to both the Vancouver, Canada and Bothell, Washington offices for years ended December 31, 2016, 2015 and 2014 was $0.6 million, $0.9 million and $2.8 million, respectively.
79
In February 2015, we entered into a Lease Termination Agreement with BMR pursuant to which we and BMR agreed to terminate our lease, dated November 21, 2006, as amended, for the premises located at 1522 217th Place S.E. in Bothell, Washington, or Terminate
d Lease, effective March 1, 2015. Under the Lease Termination Agreement, we paid BMR a $2.0 million termination fee. BMR drew approximately $0.1 million on our letter of credit with respect to its payment of deferred state sales tax and terminated the rema
ining balance of $0.2 million. BMR returned to us the security deposit under the Terminated Lease, less amounts deducted in accordance with the terms of the Terminated Lease, of $0.5 million.
Pursuant to the Lease Termination Agreement, an additional termination fee of $1.3 million would have been payable to BMR if we had (i) met the primary endpoint for our phase 3 clinical trial for the treatment of second line metastatic castrate resistant prostate cancer, or CRPC, with custirsen, or the AFFINITY Trial, and if we had (ii) closed a transaction or transactions pursuant to which we received funding in an aggregate amount of at least $20.0 million. As at December 31, 2014 and subsequent annual and interim reporting periods up to June 30, 2016, we had assessed that the likelihood of meeting both contingent events was probable and as a result, recognized the $1.3 million in lease termination liability on our balance sheet as at the end of those reporting periods. In August 2016, final survival results of our AFFINITY trial did not meet the primary endpoint of a statistically significant improvement in overall survival in men with metastatic CRPC. As at September 30, 2016, we had re-assessed that the likelihood of meeting both contingent events is no longer possible due to not achieving the primary endpoint on our AFFINITY trial. As a result, we have reversed the $1.3 million in lease termination liability on our balance sheet as at September 30, 2016 and recognized a recovery on our statement of loss.
Change in Control and Severance Agreements
Our officers and certain employees have agreements which provide for payouts in the event that we consummate a change in control. In addition, our officers and certain employees are also entitled to full vesting of their outstanding equity awards. These agreements also provide for customary severance compensation. As of December 31, 2016 and 2015 we did not consummate any change in control transaction. See also Note 13.
Guarantees and Indemnifications
We indemnify our officers, directors and certain consultants for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at its request in such capacity. The term of the indemnification period is equal to the officer’s or director’s lifetime.
The maximum amount of potential future indemnification is unlimited; however, we have obtained director and officer insurance that limits our exposure and may enable us to recover a portion of any future amounts paid. We believe that the fair value of these indemnification obligations is minimal. Accordingly, we have not recognized any liabilities relating to these obligations as of December 31, 2016.
We have certain agreements with certain organizations with which it does business that contain indemnification provisions pursuant to which it typically agrees to indemnify the party against certain types of third-party claims. We accrue for known indemnification issues when a loss is probable and can be reasonably estimated. There were no accruals for or expenses related to indemnification issues for any period presented.
Material Changes in Financial Condition
|
|
December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Total Assets
|
|
$
|
27,470
|
|
|
$
|
58,209
|
|
Total Liabilities
|
|
|
8,504
|
|
|
|
20,769
|
|
Total Equity
|
|
|
18,966
|
|
|
|
37,440
|
|
The decrease in assets at December 31, 2016 compared with December 31, 2015 was due to a decrease in cash and cash equivalents as these assets have been used to fund operations and a decrease in prepaid assets related to the drawdown of our escrow payments to our clinical research organization vendors. The decrease in liabilities at December 31, 2016 compared with December 31, 2015 was due to a decrease in clinical trial accruals associated with patient treatment costs in the AFFINITY trial, ENSPIRIT trial and our investigator sponsored trials evaluating apatorsen, lower deferred revenue as these amounts were recognized into collaboration revenue on a dollar for dollar basis as costs were incurred as part of the continuing research and development activities related to custirsen, the reversal of the lease termination liability and decrease in accrued compensation liabilities. This was partially offset by higher accrued liabilities other as a result of the severance associated with the restructurings announced in fiscal 2016.
80
13. RESTRUCTURE
Restructure
In February 2016, we committed to a plan to reduce operating expenses, which included a workforce reduction of 11 employees, representing approximately 27% of our employees prior to the reduction. We incurred approximately $0.4 million in expenses as a result of the workforce reduction, substantially all of which were severance costs.
In October 2016
, we committed to a restructuring of an additional portion of our workforce in order to preserve our resources as we determine future strategic plans. As part of this restructuring, we eliminated 14 positions, representing approximately 48% of our workforce. We expect the restructuring to be substantially complete in the first quarter of 2017. As of December 31, 2016, we incurred approximately $1.1 million in restructuring costs, substantially all of which related to severance costs.
In November 2016, we committed to a further reduction in our workforce. We eliminated five positions and incurred approximately $0.7 million in expenses as a result of the workforce reduction, substantially all of which were severance costs.
|
|
Total
|
|
|
Amounts
|
|
|
Accrued at
|
|
|
|
estimated
|
|
|
settled
|
|
|
December 31,
|
|
|
|
costs
|
|
|
to date
|
|
|
2016
|
|
Restructuring Costs
|
|
$
|
2,206
|
|
|
$
|
(708
|
)
|
|
$
|
1,498
|
|
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table summarizes the unaudited statements of operations for each quarter of 2016 and 2015 (in thousands, except per share amounts):
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaboration revenue
|
|
$
|
2,940
|
|
|
$
|
2,122
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Research and development
|
|
|
4,642
|
|
|
|
4,662
|
|
|
|
3,782
|
|
|
|
1,702
|
|
General and administrative
|
|
|
2,299
|
|
|
|
2,475
|
|
|
|
1,864
|
|
|
|
2,295
|
|
Restructuring costs (recovery)
|
|
|
431
|
|
|
|
(8
|
)
|
|
|
(31
|
)
|
|
|
1,814
|
|
Recovery of lease termination loss
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,250
|
)
|
|
|
—
|
|
Litigation settlement
|
|
|
—
|
|
|
|
1,375
|
|
|
|
—
|
|
|
|
—
|
|
Asset impairment charge
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
202
|
|
Total expenses
|
|
|
7,372
|
|
|
|
8,504
|
|
|
|
4,365
|
|
|
|
6,013
|
|
Other income
|
|
|
725
|
|
|
|
(507
|
)
|
|
|
675
|
|
|
|
170
|
|
Net loss
|
|
|
(3,707
|
)
|
|
|
(6,889
|
)
|
|
|
(3,690
|
)
|
|
|
(5,843
|
)
|
Basic and diluted net loss per share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.19
|
)
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaboration revenue
|
|
$
|
1,374
|
|
|
$
|
4,025
|
|
|
$
|
6,737
|
|
|
$
|
6,024
|
|
Research and development
|
|
|
3,673
|
|
|
|
6,545
|
|
|
|
8,303
|
|
|
|
6,587
|
|
General and administrative
|
|
|
2,698
|
|
|
|
3,067
|
|
|
|
3,125
|
|
|
|
2,915
|
|
Total expenses
|
|
|
6,371
|
|
|
|
9,612
|
|
|
|
11,428
|
|
|
|
9,502
|
|
Other income
|
|
|
480
|
|
|
|
(423
|
)
|
|
|
141
|
|
|
|
1,756
|
|
Net loss
|
|
|
(4,517
|
)
|
|
|
(6,010
|
)
|
|
|
(4,550
|
)
|
|
|
(1,722
|
)
|
Basic and diluted net loss per share
|
|
$
|
0.20
|
|
|
$
|
0.26
|
|
|
$
|
0.16
|
|
|
$
|
0.06
|
|
15. SUBSEQUENT EVENTS
On January 5, 2017, we and Achieve entered into the Merger Agreement, pursuant to which Ash Acquisition Sub, Inc., a Delaware corporation and a wholly owned subsidiary of ours will merge with and into Achieve, or the First Merger, with Achieve becoming a wholly owned subsidiary of ours and the surviving company of the First Merger, or the Initial Surviving Corporation. Promptly following the First Merger, the Initial Surviving Corporation will merge with and into Ash Acquisition Sub 2, Inc., or Merger Sub 2, a Delaware corporation and a wholly owned subsidiary of ours, with Merger Sub 2 continuing as the surviving entity as a direct wholly owned subsidiary of ours. The two mergers taken together, are intended to qualify as a “reorganization” within the meaning of Section 368(a)(2)(D) of the Internal Revenue Code of 1986, as amended. The surviving company is expected to be renamed Achieve Life Sciences, Inc. and is referred to herein as the “combined company.” The Merger is expected to close mid-2017.
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Subject to the terms and conditions of the Merger Agreement, at the closing of the First Merger, each outstanding share of Achieve common stock will be converted into the right to receive
approximately
4,242.8904
shares of our common stock, subject to adjustment as provided in the Merger Agreement based on increases or decreases in Achieve’s fully-diluted capitalization, as well as the payment of cash in lieu of fractional shares. Immediate
ly following the effective time of the merger, our equityholders are expected to own approximately
25%
of the outstanding capital stock of the combined company on a fully diluted basis, and the Achieve stockholders are expected to own approximately
75%
of
the outstanding capital stock of the combined company on a fully diluted basis
.
Consummation of the merger is subject to certain closing conditions, including, among other things, approval by the stockholders of us and Achieve. The Merger Agreement contains certain termination rights for both us and Achieve, and further provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the other party a termination fee of $0.5 million. In addition, the Merger Agreement provides that if either party breaches certain covenants regarding alternative transactions to those contemplated by the Merger Agreement, the breaching party may be required to pay the other party a termination fee of $1.0 million. In connection with certain terminations of the Merger Agreement, either party may be required to pay the other party’s third party expenses up to $0.5 million.
At the effective time of the First Merger, our Board of Directors is expected to consist of seven members, three of whom will be designated by us and four of whom will be designated by Achieve. We are expected to designate Scott Cormack, Stewart Parker and Martin Mattingly. Achieve is expected to designate Richard Stewart, Anthony Clark and two other independent directors that have yet to be determined. Additionally, at the effective time of the First Merger, Rick Stewart, the current Chairman of Achieve, is expected to be the Chairman and Chief Executive Officer of the combined company; Anthony Clarke, the current Chief Scientific Officer of Achieve, is expected to be the Chief Scientific Officer of the combined company; and John Bencich, our Chief Financial Officer and Cindy Jacobs, our Chief Medical Officer, are expected to continue to serve the combined company in their respective roles.
In accordance with the terms of the Merger Agreement, (i) certain of our officers and directors, who collectively hold approximately 1.2 percent of the outstanding shares of our capital stock as of the close of business on January 4, 2017, have each entered into a support agreement with Achieve, or the OncoGenex Support Agreements, and (ii) certain officers, directors and stockholders of Achieve, who collectively hold approximately 78 percent of the outstanding shares of Achieve capital stock as of the close of business on January 4, 2017, have each entered into a support agreement with us, or the Achieve Support Agreements, and together with the OncoGenex Support Agreements, the Support Agreements. The Support Agreements include covenants as to the voting of such shares in favor of approving the transactions contemplated by the Merger Agreement and against actions that could adversely affect the consummation of the Merger.
The Support Agreements will terminate upon the earlier of the consummation of the First Merger or the termination of the Merger Agreement by its terms.
Concurrently and in connection with the execution of the Merger Agreement, (i) certain of our officers and directors, who collectively hold approximately 1.2 percent of the outstanding shares of our capital stock as of the close of business on January 4, 2017 and (ii) certain officers, directors and stockholders of Achieve, who collectively hold approximately 78 percent of the outstanding shares of Achieve capital stock as of the close of business on January 4, 2017, have each entered into lock-up agreements with us, pursuant to which, subject to certain exceptions, each stockholder will be subject to a 180-day, or the Lock-Up Period, lock-up on the sale of shares of our capital stock, which Lock-Up Period shall begin upon the consummation of the First Merger.
We expect to issue contingent value rights, or each, a CVR and collectively, the CVRs, to our existing stockholders prior to the completion of the First Merger. One CVR will be issued for each share of our common stock outstanding as of the record date for such issuance. Each CVR will be a non-transferable right to potentially receive certain cash, equity or other consideration received by the combined company in the event the combined company receives any such consideration during the five-year period after consummation of the First Merger as a result of the achievement of certain clinical milestones, regulatory milestones, sales-based milestones and/or up-front payment milestones relating to our product candidate apatorsen, or the Milestones, upon the terms and subject to the conditions set forth in a contingent value rights agreement to be entered into between us, Achieve and an as of yet unidentified third party, as rights agent, or the CVR Agreement. The aggregate consideration to be distributed to the holders of the CVRs, if any, will be equal to 80% of the consideration received by the combined company as a result of the achievement of the Milestones less certain agreed to offsets, as determined pursuant to the CVR Agreement. Under the CVR Agreement, for a period of six months beginning in February 2017, we will use certain defined efforts to enter into an agreement with a third party regarding the development and/or commercialization of apatorsen. At the expiration of this six-month period, if a third party has not entered into a term sheet for the development or commercialization of apatorsen, the combined company will no longer be contractually required to pursue an agreement regarding apatorsen and no consideration will be payable to the holders of CVRs.
We also entered into a letter agreement with Achieve, whereby we would pay, on behalf of Achieve, for transactions costs associated with the merger. In the event that the Merger Agreement is terminated and as a result of such termination we are required to pay to
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Achieve one or more termination fees, the total amount of termination fees we would owe is reduced by the amount of the trans
action costs we would have paid on behalf of Achieve.
In January 2017, we discontinued further development of OGX-225. We provided a notice of discontinuance to Ionis, notifying them that we have discontinued development of OGX-225 resulting in termination of the license agreement related to this product candidate. We intend to also terminate the UBC license agreement related to OGX-225 provided that Ionis does not exercise its reversion rights within 90 days of the notice of discontinuance.
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