Substantial Doubt About the Company's Ability to Continue as a Going Concern
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
1. NATURE OF BUSINESS, BASIS OF PRESENTATION, GOING CONCERN AND LIQUIDITY
Achieve Life Sciences, Inc. (referred to as “Achieve,” “we,” “us,” or “our”) is a clinical-stage pharmaceutical company committed to the global development and commercialization of cytisinicline for smoking cessation. We were incorporated in the state of Delaware, and operate out of Vancouver, British Columbia and Seattle, Washington.
On May 23, 2018, we effected a one-for-ten reverse stock split on our shares of common stock. Unless otherwise noted, impacted amounts and share information included in the financial statements and notes thereto have been retroactively adjusted for the stock split as if such stock split occurred on the first day of the first period presented. Certain amounts in the notes to the financial statements may be slightly different than previously reported due to rounding of fractional shares as a result of the reverse stock split.
On August 1, 2017, OncoGenex Pharmaceuticals, Inc., or OncoGenex, completed a transaction, or the Arrangement, with Achieve Life Science, Inc., or Achieve, as contemplated by the Merger Agreement between Achieve and OncoGenex dated January 5, 2017, or the Merger Agreement. Under the terms of the Merger Agreement, OncoGenex changed its name to Achieve Life Sciences, Inc., instituted an one-for-eleven reverse stock split, issued 821,011 shares of its common stock (after accounting for the elimination of resulting fractional shares) in exchange for all of the outstanding preferred shares, common shares and convertible debentures of Achieve, as a result Achieve became a wholly-owned subsidiary of OncoGenex, and is listed on the Nasdaq Capital Market under the ticker symbol ACHV.
These consolidated financial statements account for the Arrangement between OncoGenex and Achieve as a reverse merger, whereby Achieve is deemed to be the acquiring entity from an accounting perspective. The consolidated results of operations of the Company for the year ended December 31, 2017 include the results of operations of only Achieve for the time period of January 1, 2017 through August 1, 2017 and include the results of the combined company following the completion of the Arrangement on August 1, 2017. The consolidated results of operations for the year ended December 31, 2016 include only the consolidated results of operations of Achieve and do not include historical results of OncoGenex. This treatment and presentation is in accordance with ASC 805, “Business Combinations”. Information relating to the number of shares, price per share and per share amounts of common stock are presented on a post- reverse stock split basis, as a reverse stock split in the ratio of one-for-eleven was effected in connection with the Arrangement. The accompanying consolidated Balance Sheet at December 31, 2016 has been derived from the audited consolidated financial statements included in our Amendment No. 3 to the Registration Statement on Form S-4/A filed with the Securities and Exchange Commission, or SEC, on June 6, 2017. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Amendment No. 3 to the Registration Statement on Form S-4/A filed with the SEC on June 6, 2017.
Basis of Presentation
The consolidated financial statements include the accounts of Achieve and our wholly owned subsidiaries, Achieve Life Sciences Technologies Inc., Achieve Life Science, Inc., Extab Corporation, and Achieve Pharma UK Limited. All intercompany balances and transactions have been eliminated.
Liquidity
We have no products approved for commercial sale and have not generated any revenue from product sales to date. We have never been profitable and have incurred operating losses in each year since inception. Our net loss was $12.7 million, $10.6 million and $1.2 million for the years ending December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, we had an accumulated deficit of $25.4 million, cash, cash equivalents and short term investments balance of $14.6 million and a positive working capital balance of $12.3 million. Substantially all of our operating losses resulted from expenses incurred from general and administrative costs associated with our operations and research and development costs from our clinical development programs
.
The accompanying financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and liabilities and commitments in the normal course of business.
Substantial doubt exists as to our ability to continue as a going concern. Our ability to continue as a going concern is uncertain and dependent on our ability to obtain additional financing. There is no assurance that we will obtain additional financing from other sources. We have, thus far, financed our operations through the closing of the Arrangement
(Note 2—Reverse Merger) and equity financing (Note 12—Common Stock
).
Without additional funds, we may be forced to delay, scale back or eliminate some of our
61
research and development activities or other operations and potentially delay product developm
ent in an effort to provide sufficient funds to continue our operations. If any of these events occurs, our ability to achieve our development and commercialization goals would be adversely affected.
Our current capital resources are insufficient to fund our planned operations for the next 12 months. We will continue to require substantial additional capital to continue our clinical development activities. Accordingly, we will need to raise substantial additional capital to continue to fund our operations from the sale of our securities, partnering arrangements or other financing transactions in order to finance the commercialization of our product candidates. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our clinical development efforts. Failure to raise capital as and when needed, on favorable terms or at all, will have a negative impact on our financial condition and our ability to develop our product candidate. We expect our research and development expenses to substantially increase in connection with our ongoing activities, particularly as we advance our product candidate in clinical development
.
The consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that might be necessary should we be unable to continue as a going concern. Such adjustments could be material.
2. REVERSE MERGER
The consolidated financial statements account for the Arrangement between us and OncoGenex, whereby OncoGenex acquired all of our outstanding common shares, as a reverse merger wherein we are deemed to be the acquiring entity from an accounting perspective. The consolidated results of operations include our results of operations for the twelve months ended December 31, 2017 and the results of OncoGenex following the completion of the Arrangement on August 1, 2017. The consolidated results of operations for twelve months ended December 31, 2016 include only our consolidated results of operations and do not include historical results of OncoGenex.
On August 1, 2017, our stockholders approved the Arrangement described above and on the same date, OncoGenex stockholders approved the Arrangement and a one-for-eleven reverse stock split of its common stock. The reverse stock split occurred immediately prior to the closing of the Arrangement. Resulting fractional shares were eliminated. All information in the financial statements and the notes thereto relating to the number of shares, price per share, and per share amounts of common stock are presented on a post-split basis.
Under the purchase method of accounting, OncoGenex’s outstanding shares of common stock were valued using the closing price on NASDAQ of $46.20 as at August 1, 2017. There were 273,670 shares of common stock outstanding, as adjusted for the reverse stock split, on August 1, 2017, immediately prior to closing. The fair value of the OncoGenex outstanding stock options was determined using the Black-Scholes pricing model with the following assumptions: stock price of $46.20, volatility of 97.23% to 106.63%, risk-free interest rate of 1.31% to 1.54%, and expected lives ranging from 1.82 to 3.31 years. The fair value of the OncoGenex outstanding warrants was determined using the Black-Scholes pricing model with the following assumptions: stock price of $46.20, volatility of 90.33% to 106.08%, risk-free interest rate of 1.32% to 1.53%, and expected lives ranging from 1.91 to 3.24 years.
The final purchase price is summarized as follows (dollars in thousands, except per share amounts):
Shares of the combined company to be owned by OncoGenex equity holders
|
|
|
273,670
|
|
Multiplied by the price per share of OncoGenex stock
|
|
$
|
46.20
|
|
Value of shares of the combined company owned by OncoGenex equity holders
|
|
$
|
12,643
|
|
Fair value of options and warrants assumed
|
|
$
|
207
|
|
Fair value of contingent value rights assumed
|
|
$
|
200
|
|
Total purchase price
|
|
$
|
13,050
|
|
Under the purchase method of accounting, the total purchase price as shown in the table above is allocated to the OncoGenex net tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of the date of the completion of the Arrangement. The final purchase price allocation is as follows (in thousands):
62
Cash, cash equivalents and marketable securities
|
|
$
|
12,376
|
|
Prepaid expenses and other assets
|
|
|
518
|
|
Intangible assets license agreements
|
|
|
8,610
|
|
Accounts payable, accrued expenses and other liabilities
|
|
|
(4,054
|
)
|
Deferred tax liability
|
|
|
(2,928
|
)
|
Contingent value rights
|
|
|
(200
|
)
|
Excess negative goodwill
|
|
|
(1,272
|
)
|
Total purchase price
|
|
|
13,050
|
|
In accordance with ASC 805, “Business Combinations,” any excess of fair value of acquired net assets over purchase price (negative goodwill) has been recognized as a gain in the period the Arrangement was completed. We have reassessed whether all acquired assets and assumed liabilities have been identified and recognized and performed remeasurements to verify that the consideration paid, assets acquired, and liabilities assumed have been properly valued. The remaining excess has been recognized as a gain. There was no other impact to other comprehensive income.
OncoGenex issued contingent value rights, or each, a CVR and collectively, the CVRs, on July 31, 2017 to their existing stockholders as of July 27, 2017. One CVR was issued for each share of their common stock outstanding as of the record date for such issuance. Each CVR was a non-transferable right to potentially receive certain cash, equity or other consideration received by us in the event that we received any such consideration during the five-year period after consummation of the Arrangement as a result of the achievement of certain clinical milestones, regulatory milestones, sales-based milestones and/or up-front payment milestones relating to 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 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 would have been equal to 80% of the consideration received by us as a result of the achievement of the Milestones less certain agreed to offsets, as determined pursuant to the CVR Agreement.
The contingent value rights expired on August 17, 2017, as we did not enter into any term sheets or agreement with third parties for the development or commercialization of apatorsen. A recovery of $0.2 million was recognized on our Consolidated Statements of Loss and Comprehensive Loss.
Pro Forma Results of Operations
The results of operations of OncoGenex are included in our consolidated financial statements following the date of the completion of the transaction on August 1, 2017. The following table presents pro forma results of operations and gives effect to the business combination transaction as if the transaction was consummated at the beginning of the period presented. The unaudited pro forma results of operations are not necessarily indicative of what would have occurred had the business combination been completed at the beginning of the retrospective periods or of the results that may occur in the future.
|
|
For the year ended
|
|
|
For the year ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
Net loss applicable to common shareholders
|
|
$
|
(12,687
|
)
|
|
$
|
(20,111
|
)
|
Net loss per share-basic and diluted
|
|
$
|
(3.61
|
)
|
|
$
|
(41.95
|
)
|
Weighted average shares
|
|
|
3,510,217
|
|
|
|
479,442
|
|
3. 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
63
estimated compensation cost on performance restricted stock unit awards, clinical trial and manufacturing accruals, estimated useful lives of property, plant, equipment and intangible asset
s, 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, 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 and accrued compensation are carried at cost, which we believe approximates fair value because of the short-term maturities of these instruments.
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.
Intangible Assets
Our intangible assets are subject to amortization and are amortized using the straight-line method over their estimated period of benefit. We evaluate the carrying amount of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.
Goodwill
Goodwill acquired in a business combination is assigned to the reporting unit that is expected to benefit from the combination as of the acquisition date. Goodwill is tested for impairment on an annual basis or, more frequently, if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit.
Property and Equipment
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
|
|
3 years
|
Furniture and fixtures
|
|
5 years
|
Machinery and equipment
|
|
5 - 10 years
|
Leasehold improvements and equipment under capital lease
|
|
Over the term of the lease
|
Impairment of Long-Lived Assets
64
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.
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 advance 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 adjust 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.
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 cytisinicline for smoking cessation, 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.
65
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 comparable companies from a representative peer group selected based on industry and market capitalization. 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.
Reporting Currency and Foreign Currency Translation
Effective August 2, 2017, we changed the functional currency of our UK subsidiary from the Great British Pound to the U.S. dollar. As a result of the Arrangement, the UK subsidiary’s primary economic environment has now changed from the UK to the United States. This has resulted in significant changes in economic facts and circumstances that clearly indicate that the functional currency has changed. We accounted for the change in functional currency prospectively.
The consolidated financial statements for the years ended December 31, 2016 and 2015 and for the period of January 1, 2017 to August 2, 2017, are based on the UK subsidiary with a functional currency of GBP, and have been translated into the U.S. reporting currency using the current rate method as required by SFAS No. 52, “Foreign Currency Translation”, (“SFAS 52”) as follows: assets and liabilities using the rate of exchange prevailing at the balance sheet date; stockholders’ deficiency using the applicable historic rate; and revenue and expenses using the monthly average rate of exchange. Translation adjustments have been included as part of the accumulated other comprehensive income
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, or FASB, issued its new leases standard, ASU No. 2016-02, Leases (Topic 842). 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, 2019 and interim periods within that year. This standard is expected to have an impact on our accounting for our lease arrangements, particularly our current operating lease arrangements, as well as our disclosures
. We estimate that the right-of-use asset and lease liability from the adoption of this standard to be approximately $0.5 million.
In August 2018, the FASB issued Accounting Standards Update 2018-13, Fair Value Measurement, which both modifies and clarifies the disclosure requirements for fair value measurement. This update is effective for financial statements issued for fiscal years beginning after December 15, 2019, with early adoption permitted. The adoption of this standard is not expected to have a significant impact on our financial position or results of operations.
66
Recently Adopted Accounting Policies
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, Revenue 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 unless those contracts are within the scope of other standards. The core principle 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 the 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, estimating 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, including 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 have updated our policies and procedures to reflect the adoption of ASU No. 2014-09. The adoption of this standard did not have an impact on our financial position or results of operations.
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 June 2018, the FASB issued Accounting Standards Update 2018-07, Compensation - Stock Compensation - Improvements to Nonemployee Share-Based Payment Accounting, which both clarifies and modifies accounting requirements relating to nonemployee share-based payment transactions.
For public business entities, the amendments in this Update are effective for annual periods beginning after 15 December 2018, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after 15 December 2019, and interim periods within annual periods beginning after 15 December 2020. The adoption of this standard did not have a significant impact on our financial position or results of operations.
4. 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 and accrued compensation 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, 2018 the average days to maturity of our portfolio of cash equivalents and marketable securities was zero days. We do not use derivative instruments to hedge against any of these financial risks.
5. INTANGIBLES
All of our intangible assets are subject to amortization and are amortized using the straight-line method over their estimated useful life.
We acquired license agreements, related to OncoGenex’s product candidate apatorsen, upon the acquisition of OncoGenex. As at the date of the acquisition, the agreements were determined to have a fair value of $8.6 million with an estimated useful life of 6 years. (Note 2—Reverse Merger)
67
In August 2017, we discontinued further development of apatorsen. We provided a notice of discontinuance to our former development partners for apatorsen, Ionis Pharmaceuticals, I
nc., or Ionis, and a letter of termination to the University of British Columbia, or UBC, notifying them that we have discontinued development of apatorsen resulting in termination of all licensing agreements related to this product candidate. We believe t
hat 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 apatorsen patents and patent applications, un
der all apatorsen related agreements with Ionis and UBC, are no longer owed and no further payments are due. We recognized a loss on disposition of apatorsen of $8.6 million and a deferred income tax recovery of $2.9 million as a result of discontinuing th
e development program and providing a notice of discontinuance of the license agreements with Ionis.
We acquired license and supply agreements, in relation to cytisinicline, upon the acquisition of Extab Corporation, or Extab. The agreements were determined to have a fair value of $3.1 million with an estimated useful life of 14 years (Note 6— Extab Acquisition).
The components of intangible assets were as follows:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
License Agreements
|
|
$
|
3,117
|
|
|
$
|
(807
|
)
|
|
$
|
2,310
|
|
|
$
|
3,117
|
|
|
$
|
(585
|
)
|
|
$
|
2,532
|
|
For the year ended December 31, 2018 and 2017 we recorded license agreement amortization expense of $0.2 million and $0.2 million, respectively. The following table outlines the estimated future amortization expense related to intangible assets held as of December 31, 2018:
Year Ending December 31,
|
|
|
|
|
2019
|
|
|
223
|
|
2020
|
|
|
223
|
|
2021
|
|
|
223
|
|
2022
|
|
|
223
|
|
Thereafter
|
|
|
1,418
|
|
Total
|
|
$
|
2,310
|
|
We evaluate the carrying amount of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful life or that indicate the asset may be impaired. We conducted an impairment analysis for long lived assets, including the license and supply agreements for the active pharmaceutical ingredient cytisinicline, and concluded no impairment has occurred as of December 31, 2018.
6. EXTAB ACQUISITION
On May 14, 2015, we entered into a Share Purchase Agreement with Sopharma, AD, or Sopharma, a public pharmaceutical company located in Bulgaria, to acquire 75% of the outstanding shares of Extab.
Pursuant to the Share Purchase Agreement, we acquired a 75% controlling interest in Extab from Sopharma for $2.0 million in cash and $2.0 million in a deferred payment, contingent on regulatory approval of cytisinicline by the Food and Drug Administration, or FDA, or the European Medicines Agency, or EMA. In addition, as part of and in conjunction with the Share Purchase Agreement, we amended our existing license and supply agreements with Sopharma, extending their terms by five years and reducing the royalty rate payable by us. (Note 7—License Agreements) Subsequent to the acquisition, we paid to Sopharma $0.3 million to retire the balance of Extab’s outstanding loans with Sopharma.
The acquisition was accounted for using the acquisition method under ASC 805 business combinations. Results of operations have been included in the financial statements from the date of acquisition May 18, 2015, the date we assumed control of Extab. The fair value of the business combination was determined using level 3 inputs.
The purchase price of our 75% controlling interest in Extab was as follows:
68
Cash consideration
|
|
$
|
2,000
|
|
Contingent consideration
|
|
|
—
|
|
Purchase Price
|
|
$
|
2,000
|
|
As of the date of acquisition we assessed the likelihood of meeting the contingent event as unlikely and as a result have estimated its fair value at zero. We consider the best indicator of the fair value of net assets acquired to be the $2.0 million cash consideration paid to acquire our 75% controlling interest plus the $0.7 million fair value attributable to the non-controlling interest, or NCI, calculated on a proportionate basis.
Under the acquisition method of accounting, the total purchase price is allocated to the acquired tangible and intangible assets and assumed liabilities of Extab based on their estimated fair values as of the transaction closing date. The allocation of the purchase price based on the estimated fair values is as follows:
|
|
Fair Value
|
|
Cash
|
|
$
|
6
|
|
License agreements
|
|
$
|
3,117
|
|
Goodwill
|
|
$
|
1,034
|
|
Other current liabilities
|
|
$
|
(456
|
)
|
Deferred tax liability
|
|
$
|
(1,034
|
)
|
Non-controlling interest
|
|
$
|
(667
|
)
|
|
|
$
|
2,000
|
|
The license agreement expires May 26, 2029. As of the acquisition date, we estimated its useful life to be the same as the remaining 14 year contractual life. We also elected to amortize intangible assets on a straight line basis over its useful life, since there is no pattern of successful economic benefits available at the time to reliably determine a different amortization.
Subsequent to acquiring control of Extab, we entered into an agreement with the NCI stockholder of Extab to convert their shares in Extab into shares of our common stock. As of September 30, 2015, all of the NCI had converted their shares in Extab into shares of our common stock resulting in elimination of the Extab non-controlling interest and Extab becoming a wholly-owned subsidiary of us.
7. LICENSE AGREEMENTS
Sopharma License and Supply Agreements
In 2009 and 2010, we entered into a license agreement, or the Sopharma License Agreement, and a supply agreement, or the Sopharma Supply Agreement, with Sopharma, AD, or Sopharma. Pursuant to the Sopharma License Agreement, we were granted access to all available manufacturing, efficacy and safety data related to cytisinicline, as well as a granted patent in several European countries including Germany, France and Italy related to new oral dosage forms of cytisinicline providing enhanced stability. Additional rights granted under the Sopharma License Agreement include the exclusive use of, and the right to sublicense, the trademark Tabex in all territories—other than
certain countries in Central and Eastern Europe, Scandinavia, North Africa, the Middle East and Central Asia, as well as Vietnam
, where Sopharma or its affiliates and agents already market Tabex—in connection with the marketing, distribution and sale of products. Under the Sopharma License Agreement, we agreed to pay a nonrefundable license fee. In addition, we agreed to make certain royalty payments equal to a mid-teens percentage of all net sales of Tabex branded products in our territory during the term of the Sopharma License Agreement, including those sold by a third party pursuant to any sublicense which may be granted by us. We have agreed to cooperate with Sopharma in the defense against any actual or threatened infringement claims with respect to Tabex. Sopharma has the right to terminate the Sopharma License Agreement upon the termination or expiration of the Sopharma Supply Agreement. The Sopharma License Agreement will also terminate under customary termination provisions including bankruptcy or insolvency and material breach. To date, any amounts paid to Sopharma pursuant to the Sopharma License Agreement have been immaterial.
A cross-license exists between us and Sopharma whereby we grant to Sopharma rights to any patents or patent applications or other intellectual property rights filed by us in Sopharma territories.
On May 14, 2015, we and Sopharma entered into an amendment to the Sopharma License Agreement. Among other things, the amendment to the Sopharma License Agreement reduced the royalty payments payable by us to Sopharma from a percentage in the mid-teens to a percentage in the mid-single digits and extended the term of the Sopharma License Agreement until May 26, 2029.
69
On July 28, 2017, we and Sopharma entered into the amended and restated Sopharma Supply Agreement. Pursuant to the amended and restated Sopharma Supply Agreeme
nt, for territories as detailed in the licensing agreement, we will exclusively purchase all of our cytisinicline from Sopharma, and Sopharma agrees to exclusively supply all such cytisinicline requested by us, and we extended the term to 2037. In addition
, Achieve will have full access to the cytisinicline supply chain and Sopharma will manufacture sufficient cytisinicline to meet a forecast for a specified demand of cytisinicline for the five years commencing shortly after the commencement of the agreemen
t, with the forecast to be updated regularly thereafter. Each of us and Sopharma may terminate the Sopharma Supply Agreement in the event of the other party’s material breach or bankruptcy or insolvency
.
University of Bristol License Agreement
In July 2016, we entered into a license agreement with the University of Bristol, or the University of Bristol License Agreement. Under the University of Bristol License Agreement, we received exclusive and nonexclusive licenses from the University of Bristol to certain patent and technology rights resulting from research activities into cytisinicline and its derivatives for use in smoking cessation, including a number of patent applications related to novel approaches to cytisinicline binding at the nicotinic receptor level. Any patents issued in connection with these applications would be scheduled to expire on February 5, 2036 at the earliest.
In consideration of rights granted by the University of Bristol, we agreed to pay amounts of up to $3.2 million, in the aggregate, tied to a financing milestone and to specific clinical development and commercialization milestones resulting from activities covered by the University of Bristol License Agreement. Additionally, if we successfully commercialize product candidates subject to the University of Bristol License Agreement, we are responsible for royalty payments in the low-single digits and payments up to a percentage in the mid-teens of any sublicense income, subject to specified exceptions, based upon net sales of such licensed products.
On January 22, 2018, we and the University of Bristol entered into an amendment to the University of Bristol License Agreement. Pursuant to the amended University of Bristol License Agreement, we received exclusive rights for all human medicinal uses of cytisinicline across all therapeutic categories from the University of Bristol from research activities into cytisinicline and its derivatives. In consideration of rights granted by the amended University of Bristol License Agreement, we agreed to pay an initial amount of $37,500 upon the execution of the amended University of Bristol License Agreement, and additional amounts of up to $1.7 million, in the aggregate, tied to a financing milestone and to specific clinical development and commercialization milestones resulting from activities covered by the amended University of Bristol License Agreement, in addition to amounts under the original University of Bristol License Agreement of up to $3.2 million in the aggregate, tied to specific financing, development and commercialization milestones. Additionally, if we successfully commercialize any product candidate subject to the amended University of Bristol License Agreement or to the original University of Bristol License Agreement, we will be responsible, as provided in the original University of Bristol License Agreement, for royalty payments in the low-single digits and payments up to a percentage in the mid-teens of any sublicense income, subject to specified exceptions, based upon net sales of such licensed products. Up to December 31, 2018, we have paid the University of Bristol $125,000 pursuant to the University of Bristol License Agreement.
Unless otherwise terminated, the University of Bristol License Agreement will continue until the earlier of July 2036 or the expiration of the last patent claim subject to the University of Bristol License Agreement. We may terminate the University of Bristol License Agreement for convenience upon a specified number of days’ prior notice to the University of Bristol. The University of Bristol License Agreement will terminate under customary termination provisions including bankruptcy or insolvency or its material breach of the agreement. Under the terms of the University of Bristol License Agreement, we had provided 100 grams of cytisinicline to the University of Bristol as an initial contribution.
Ionis and UBC License Agreements
In August 2017, we discontinued further development of apatorsen. We provided a notice of discontinuance to our former development partners for apatorsen, Ionis Pharmaceuticals, Inc., or Ionis, and a letter of termination to the University of British Columbia, or UBC, notifying them that we have discontinued development of apatorsen resulting in termination of all licensing agreements related to this product candidate. 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 apatorsen patents and patent applications, under all apatorsen related agreements with Ionis and UBC, are no longer owed and no further payments are due.
8. 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.
70
ASC 820 “Fair Value Measurements and Disclosures,” specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with AS
C 820, these inputs are summarized in the three broad level listed below:
|
•
|
Level 1 – Quoted prices in active markets for identical securities.
|
|
•
|
Level 2 – Other significant inputs that are observable through corroboration with market data (including quoted prices in active markets for similar securities).
|
|
•
|
Level 3 – Significant unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability.
|
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, 2018, we recorded a value of zero for our 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 was based on the historical volatility of comparable companies from a representative peer group selected based on industry and market capitalization. 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.
71
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 valuati
on techniques we utilized to determine such fair value (in thousands):
December 31, 2018
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,070
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,070
|
|
Money market securities (cash equivalents)
|
|
|
8,445
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,445
|
|
Restricted cash (Note 12)
|
|
|
50
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
Corporate bonds and commercial paper (short term investments)
|
|
|
—
|
|
|
|
5,089
|
|
|
|
—
|
|
|
|
5,089
|
|
Total assets
|
|
$
|
9,565
|
|
|
$
|
5,089
|
|
|
$
|
—
|
|
|
$
|
14,654
|
|
December 31, 2017
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,262
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,262
|
|
Money market securities (cash equivalents)
|
|
|
4,022
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,022
|
|
Restricted cash (Note 12)
|
|
|
272
|
|
|
|
—
|
|
|
|
—
|
|
|
|
272
|
|
Total assets
|
|
$
|
5,556
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,556
|
|
Cash and cash equivalents and short term investments (in thousands):
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
December 31, 2018
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Cash
|
|
$
|
1,070
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,070
|
|
Money market securities
|
|
|
8,445
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,445
|
|
Total cash and cash equivalents
|
|
$
|
9,515
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,515
|
|
Money market securities (restricted cash)
|
|
|
50
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
Total restricted cash
|
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50
|
|
Corporate bonds and commercial paper
|
|
|
5,089
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,089
|
|
Total short-term investments
|
|
$
|
5,089
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,089
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
December 31, 2017
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Cash
|
|
$
|
1,262
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,262
|
|
Money market securities
|
|
|
4,022
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,022
|
|
Total cash and cash equivalents
|
|
$
|
5,284
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,284
|
|
Money market securities (restricted cash)
|
|
|
272
|
|
|
|
—
|
|
|
|
—
|
|
|
|
272
|
|
Total restricted cash
|
|
$
|
272
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
272
|
|
Our gross realized gains and losses on sales of available-for-sale securities were not material for the years ended December 31, 2018 and 2017.
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, 2018, given the quality of the investment portfolio, its short-term nature, and subsequent proceeds collected on sale of securities that reached maturity.
72
9. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
258
|
|
|
$
|
230
|
|
|
$
|
28
|
|
Furniture and fixtures
|
|
|
90
|
|
|
|
90
|
|
|
|
—
|
|
Leasehold improvements
|
|
|
55
|
|
|
|
53
|
|
|
|
2
|
|
Computer software
|
|
|
328
|
|
|
|
323
|
|
|
|
5
|
|
Equipment under capital lease
|
|
|
24
|
|
|
|
24
|
|
|
|
—
|
|
Total property and equipment
|
|
$
|
755
|
|
|
$
|
720
|
|
|
$
|
35
|
|
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.
10. OTHER ASSETS
Other assets include deferred share issues costs, prepaid amounts related to insurance 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.
11. INCOME TAX
[a] On August 2, 2017, OncoGenex completed a reverse takeover with Achieve. OncoGenex changed its name to Achieve Life Sciences, Inc. We are a Delaware incorporated company subject to blended US Federal and state statutory rates for December 31, 2018, 2017 and 2016 of 21%, 34% and 34%, respectively. For the purposes of estimating the tax rate in effect at the time that deferred tax assets and liabilities are expected to reverse, management uses the furthest out available future tax rate in the applicable jurisdictions.
Income tax expense consisted of the following (in thousands):
(In thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Income taxes at statutory rates (at a rate of 21% for 2018 and 34% for 2017 and 2016)
|
|
$
|
(2,664
|
)
|
|
$
|
(4,636
|
)
|
|
$
|
(504
|
)
|
Expenses not deducted for tax purposes
|
|
|
70
|
|
|
|
(174
|
)
|
|
|
—
|
|
Effect of tax rate changes on deferred tax assets and liabilities
|
|
|
(1,416
|
)
|
|
|
3,158
|
|
|
|
—
|
|
Rate differential on foreign earnings
|
|
|
(165
|
)
|
|
|
314
|
|
|
|
—
|
|
Reduction in benefit of operating losses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Reduction in the benefit of other tax attributes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Investment tax credits
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Change in valuation allowance
|
|
|
4,182
|
|
|
|
(1,683
|
)
|
|
|
—
|
|
Book to tax return adjustments
|
|
|
20
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
(27
|
)
|
|
|
(14
|
)
|
|
|
—
|
|
Income tax expense
|
|
$
|
—
|
|
|
$
|
(3,035
|
)
|
|
$
|
(504
|
)
|
73
[b] At December 31, 2018, we have investment tax credits of $2.6 million (2017—$2.6 million) available to reduce future Canadian income taxes otherwise payable. We also have non-capital loss carryforwards of $123.3 million (2017—$120.4 million) avai
lable to offset future taxable income in Canada, UK net operating loss carryforwards of $1.8 million (2017—$0.8 million) to offset future taxable income in the UK and federal net operating loss carryforwards of $17.6 million (2017—$9.9 million) to offset f
uture taxable income in the United States.
The investment tax credits and non-capital losses and net operating losses for income tax purposes expire as follows (in thousands):
|
|
|
|
|
|
US
|
|
|
Canadian
|
|
|
UK
|
|
|
|
Investment
|
|
|
Net Operating
|
|
|
Non-capital
|
|
|
Net Operating
|
|
|
|
Tax Credits
|
|
|
Losses
|
|
|
Losses
|
|
|
Losses
|
|
2022
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
2023
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
2024
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
2025
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
2026
|
|
|
244
|
|
|
|
—
|
|
|
|
7,364
|
|
|
|
—
|
|
2027
|
|
|
71
|
|
|
|
—
|
|
|
|
4,949
|
|
|
|
—
|
|
2028
|
|
|
148
|
|
|
|
—
|
|
|
|
8,020
|
|
|
|
—
|
|
2029
|
|
|
317
|
|
|
|
9
|
|
|
|
(9
|
)
|
|
|
33
|
|
2030
|
|
|
346
|
|
|
|
5
|
|
|
|
6,288
|
|
|
|
20
|
|
2031
|
|
|
486
|
|
|
|
17
|
|
|
|
12,121
|
|
|
|
34
|
|
2032
|
|
|
363
|
|
|
|
43
|
|
|
|
17,278
|
|
|
|
41
|
|
2033
|
|
|
193
|
|
|
|
2
|
|
|
|
23,240
|
|
|
|
53
|
|
2034
|
|
|
215
|
|
|
|
3
|
|
|
|
17,077
|
|
|
|
45
|
|
2035
|
|
|
122
|
|
|
|
654
|
|
|
|
3,112
|
|
|
|
27
|
|
2036
|
|
|
79
|
|
|
|
611
|
|
|
|
16,664
|
|
|
|
56
|
|
2037
|
|
|
19
|
|
|
|
8,763
|
|
|
|
4,254
|
|
|
|
633
|
|
2038
|
|
|
52
|
|
|
|
7,491
|
|
|
|
2,937
|
|
|
|
887
|
|
|
|
$
|
2,655
|
|
|
$
|
17,598
|
|
|
$
|
123,295
|
|
|
$
|
1,829
|
|
In addition, we have unclaimed tax deductions of approximately $14.5 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 $0.1 million available to reduce future taxes payable in the United States. The research and development tax credits expire in 2038.
[c] Significant components of our deferred tax assets as of December 31 are shown below (in thousands):
|
|
2018
|
|
|
2017
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Tax basis in excess of book value of assets
|
|
$
|
886
|
|
|
$
|
850
|
|
Non-capital loss carryforwards
|
|
|
37,332
|
|
|
|
33,524
|
|
Research and development deductions and credits
|
|
|
5,707
|
|
|
|
5,506
|
|
Stock options
|
|
|
171
|
|
|
|
51
|
|
§59(e) Capitalized R&D expenses
|
|
|
3,334
|
|
|
|
3,252
|
|
Accrued expenses
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
170
|
|
|
|
246
|
|
Total deferred tax assets
|
|
|
47,600
|
|
|
|
43,429
|
|
Valuation allowance
|
|
|
(47,123
|
)
|
|
|
(42,914
|
)
|
Net deferred assets
|
|
|
477
|
|
|
|
515
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(474
|
)
|
|
|
(513
|
)
|
Other
|
|
|
(3
|
)
|
|
|
(2
|
)
|
Total deferred tax liabilities
|
|
|
(477
|
)
|
|
|
(515
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
—
|
|
|
|
—
|
|
74
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 net deferred tax assets have been recognized in all jurisdictions as at December 31, 2018.
[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, 2018 is as follows (in thousands):
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Balance at January 1
|
|
$
|
715
|
|
|
$
|
715
|
|
|
$
|
699
|
|
Additions based on tax positions related to the current year
|
|
|
6
|
|
|
|
—
|
|
|
|
16
|
|
Deductions based on tax positions related to prior years
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
—
|
|
Balance at December 31
|
|
$
|
717
|
|
|
$
|
715
|
|
|
$
|
715
|
|
As of December 31, 2018, unrecognized benefits of approximately $0.7 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, 2018 and December 31, 2017 we had no accrued interest and penalties related to income taxes.
We are subject to taxes in Canada, the UK 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
|
|
2010 to 2018
|
United Kingdom
|
|
2011 to 2018
|
US
|
|
2010 to 2018
|
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to,
(1) reducing the U.S. federal corporate tax rate from 34 percent to 21 percent;
(2) eliminating the corporate alternative minimum tax;
(3) creating a new limitation on deductible interest expense; and
(4) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
As a result of when the Act was signed into law, our deferred tax assets and liabilities were required to be remeasured using the lower 21% federal rate as of December 31, 2017.
12. COMMON STOCK
[a] Authorized
150,000,000 authorized common voting shares, par value of $0.001, and 5,000,000 preferred shares, par value of $0.001.
[b] Issued and outstanding shares
Purchase Agreement and Financing with Lincoln Park Capital
75
On September 14, 2017 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 $11.0
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. On May 22, 2018 we obtained the requisite stockholder authorization to sell shares of our common stock to
LPC in excess of 20% of our outstanding shares of common stock (as of the date we entered into the purchase agreement) in order to be able to sell to LPC the full amount remaining under the purchase agreement.
Pursuant to the Purchase Agreement, LPC initially purchased 32,895 of our units, or the Units, at a purchase price of $30.40 per unit, with each Unit consisting of (a) one share of our Common Stock and (b) one warrant to purchase one-quarter of a share of Common Stock at an exercise price of $34.96 per share, or Warrant. Each 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 Warrants were issued only as part of the Units in the initial purchase of $1.0 million and no warrants shall be issued in connection with any other purchases of common stock under the Purchase Agreement.
After the initial purchase, if our stock price is above $1.00, as often as every other business day over the 30-month term of the Purchase Agreement, and up to an aggregate amount of an additional $10.0 million (subject to certain limitations) of shares of common stock, we have the right, from time to time, in our sole discretion and subject to certain conditions to direct LPC to purchase up to 8,000 shares of common stock with such amounts increasing as the closing sale price of our common stock as reported on The Nasdaq Capital Market increases. The purchase price of shares of common stock pursuant to the Purchase Agreement will be based on prevailing market prices of common stock at the time of sales without any fixed discount, and we will control the timing and amount of any sales of common stock to LPC. In addition, we may 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 $20.00 per share. As consideration for entering into the Purchase Agreement, we issued to LPC 12,352 shares of common stock; no cash proceeds were received from the issuance of these shares. The consideration of 12,352 shares of our common stock were fair valued based on the closing price of our common stock as at the transaction date and recognized as part of offering expenses.
From September 14, 2017 through
December 31, 2018
, we offered and sold 183,378 shares of our common stock pursuant to our Purchase Agreement with LPC, including the 32,895 shares that were part of the initial purchase of Units. These sales resulted in gross proceeds to us of approximately $3.6 million and offering expenses of $0.5 million.
June 2018 Public Offering
On June 19, 2018, we completed an underwritten registered public offering, pursuant to which we sold 710,500 Class A Units at a price per unit of $4.00 and 9,158 Class B Units at a price per unit of $1,000.
Each Class A Unit consisted of one share of our common stock and a warrant to purchase one share of common stock.
Each Class B Unit consisted of one share of Series A Convertible Preferred Stock par value $0.001 per share convertible at any time at the holder’s option into 250 shares of common stock and warrants to purchase 250 shares of common stock.
Each warrant was immediately exercisable, expires on the five year anniversary of the date of issuance and is exercisable at a price per share of common stock of $4.00. Additionally, subject to certain exceptions, if, after the June 19, 2018, (i) the volume weighted average price of our common stock for each of 30 consecutive trading days, or the Measurement Period, which Measurement Period commences on June 19, 2018, exceeds 300% of the exercise price (subject to adjustments for stock splits, recapitalizations, stock dividends and similar transactions), (ii) the average daily trading volume for such Measurement Period exceeds $500,000 per trading day and (iii) certain other equity conditions are met, and subject to a beneficial ownership limitation, then we may call for cancellation of all or any portion of the warrants then outstanding.
The Class A Units and Class B Units were not certificated and the shares of common stock, Series A Convertible Preferred Stock and warrants comprising such Units were immediately separable and were issued separately in the public offering. The Class A and B Units were offered by us pursuant to (i) the registration statement on Form S-1 (File No. 333-224840), and each amendment thereto, which was initially filed with the SEC, on May 10, 2018 and declared effective by the SEC on June 14, 2018 and the registration statement on Form S-1 (File No. 333- 225649) filed by the us with the SEC pursuant to Rule 462(b) of the Securities Act of 1933 on June 14, 2018.
In addition, pursuant to the Underwriting Agreement we entered into with Ladenburg Thalmann & Co. Inc., or the Underwriter, on June 15, 2018, we granted the Underwriter a 45 day option, or the Overallotment Option, to purchase up to 450,000 additional shares of common stock and/or warrants to purchase up to 450,000 shares of Common Stock solely to cover over-allotments. The Overallotment Option was exercised in full on June 18, 2018.
76
The public offering raised total gross proceeds of $13.8 million and after deducting $1.6 million in underwriting discounts and commissions and offering expenses, we received net
proceeds of $12.2 million
The underwriting discounts and commissions and offering expenses have been charged against the gross proceeds.
As
of December 31, 2018, 8,579 shares of the Series A Convertible Preferred Stock had been converted into 2,144,750 shares of common stock, and 579 shares of the Series A Convertible Preferred Stock remained outstanding.
October 2018 Registered Direct Offering
On October 3, 2018 we completed a registered direct offering, pursuant to which we sold 1,789,258 shares of common stock at a price of $3.1445. We also issued to the investors in a concurrent private placement unregistered warrants to purchase up to 0.5 shares of common stock for each share purchased in the registered direct offering with an exercise price of $3.1445 per share. The warrants were exercisable immediately upon issuance and will expire five years following the date of issuance.
The registered direct offering raised total gross proceeds of $5.6 million, and after deducting approximately $0.6 million in placement agent fees and offering expenses, we received net proceeds of $5.0 million.
The placement agent fees and offering expenses have been charged against the gross proceeds.
Equity Award Issuances and Settlements
During the year ended December 31, 2018, we did not issue any shares of common stock to satisfy stock option exercises
and issued 5,354 shares of common stock to satisfy restricted stock unit settlements, respectively, compared with the issuance of no shares of common to satisfy stock option exercises and 546 restricted stock unit settlements, respectively, for the year ended December 31, 2017.
[c] Stock options
2018 Equity Incentive Plan
As of December 31, 2018, we had reserved, pursuant to the 2018 Equity Incentive Plan, or the 2018 Plan, 1,000,000 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 386,650 were reserved for options currently outstanding and 613,350 were available for future equity grants.
Under the 2018 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 2018 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.
2017 Equity Incentive Plan
As of
December 31, 2018
, we had reserved, pursuant to the 2017 Equity Incentive Plan, or the 2017 Plan, 272,660 common shares for issuance upon exercise of stock options, currently outstanding, by employees, directors and officers of ours. Upon the effectiveness of our 2018 Plan, we ceased granting equity awards under our 2017 Plan.
Under the 2017 Plan, we granted options to purchase common shares or restricted stock units to our employees, directors, officers and consultants. The exercise price of the options was determined by our board of directors but was 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 was set by our board of directors with a maximum expiry date of ten years from the date of grant. In addition, the 2017 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.
77
2010 Performance Incentive Plan
As of
December 31, 2018
, we had reserved, pursuant to the 2010 Performance Incentive Plan, or the 2010 Plan, 21,065 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 5,923 were reserved for options currently outstanding and 15,142 were reserved for restricted stock units currently outstanding.
Under the 2010 Plan we granted options to purchase common shares and restricted stock units to our employees, directors, officers and consultants. The exercise price of the options was determined by our board of directors and was 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.
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 of the lack of sufficient historical exercise data following the reverse merger of OncoGenex. The computation of expected volatility was based on the historical volatility of comparable companies from a representative peer group selected based on industry and market capitalization. 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:
|
|
2018
|
|
|
2017
|
|
|
Risk-free interest rates
|
|
|
2.93
|
%
|
|
|
1.95
|
%
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Expected life
|
|
5.68 years
|
|
|
6.02 years
|
|
|
Expected volatility
|
|
|
88.23
|
%
|
|
|
86.06
|
%
|
|
The weighted average fair value of stock options granted during the year ended December 31, 2018 was $2.05.
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):
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Research and development
|
|
$
|
272
|
|
|
$
|
107
|
|
General and administrative
|
|
|
582
|
|
|
|
241
|
|
Total stock-based compensation
|
|
$
|
854
|
|
|
$
|
348
|
|
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.
78
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, 2018
|
|
|
111,578
|
|
|
$
|
80.01
|
|
Granted
|
|
|
554,400
|
|
|
|
2.81
|
|
Forfeited
|
|
|
(393
|
)
|
|
|
160.79
|
|
Balance, December 31, 2018
|
|
|
665,585
|
|
|
$
|
15.65
|
|
The following table summarizes information about stock options outstanding at December 31, 2018 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)
|
|
$2.56 - $2.97
|
|
|
386,650
|
|
|
$
|
2.56
|
|
|
|
9.72
|
|
$2.98 - $16.13
|
|
|
167,750
|
|
|
|
3.37
|
|
|
|
9.57
|
|
$16.14 - $69.45
|
|
|
104,910
|
|
|
|
28.90
|
|
|
|
8.58
|
|
$69.46 - $157.30
|
|
|
408
|
|
|
|
110.00
|
|
|
|
7.40
|
|
$157.31 - $206.25
|
|
|
1,782
|
|
|
|
204.60
|
|
|
|
6.38
|
|
$206.26 - $1,228.15
|
|
|
835
|
|
|
|
448.47
|
|
|
|
5.53
|
|
$1,228.16 - $1,305.70
|
|
|
907
|
|
|
|
1,296.49
|
|
|
|
5.15
|
|
$1,305.71 - $1,405.80
|
|
|
713
|
|
|
|
1,321.28
|
|
|
|
4.12
|
|
$1,405.81 - $1,659.35
|
|
|
605
|
|
|
|
1,443.12
|
|
|
|
3.21
|
|
$1,659.36 - $2,450.80
|
|
|
1,025
|
|
|
|
2,007.37
|
|
|
|
1.65
|
|
|
|
|
665,585
|
|
|
$
|
15.65
|
|
|
|
9.46
|
|
(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)
|
|
$2.56 - $2.97
|
|
|
35,417
|
|
|
$
|
2.56
|
|
|
|
9.72
|
|
$2.98 - $16.13
|
|
|
17,472
|
|
|
|
3.37
|
|
|
|
9.57
|
|
$16.14 - $69.45
|
|
|
37,488
|
|
|
|
28.90
|
|
|
|
8.58
|
|
$69.46 - $157.30
|
|
|
408
|
|
|
|
110.00
|
|
|
|
7.40
|
|
$157.31 - $206.25
|
|
|
1,745
|
|
|
|
204.60
|
|
|
|
6.38
|
|
$206.26 - $1,228.15
|
|
|
835
|
|
|
|
448.47
|
|
|
|
5.53
|
|
$1,228.16 - $1,305.70
|
|
|
907
|
|
|
|
1,296.49
|
|
|
|
5.15
|
|
$1,305.71 - $1,405.80
|
|
|
713
|
|
|
|
1,321.28
|
|
|
|
4.12
|
|
$1,405.81 - $1,659.35
|
|
|
605
|
|
|
|
1,443.12
|
|
|
|
3.21
|
|
$1,659.36 - $2,450.80
|
|
|
1,025
|
|
|
|
2,007.37
|
|
|
|
1.65
|
|
|
|
|
96,615
|
|
|
$
|
73.05
|
|
|
|
8.94
|
|
As at December 31, 2018, and December 31, 2017 the total unrecognized compensation expense related to stock options granted was $2.4 million and $2.0 million respectively, which is expected to be recognized into expense over a period of approximately 2.9 years.
The estimated grant date fair value of stock options vested during the years ended December 31, 2018, 2017 and 2016 was $1.0 million, $0.6 million and zero, respectively.
79
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, 2018, 2017 and 2016 was zero,
zero and zero, respectively. At December 31, 2018, 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, 2018, 2017 and 2016, $0.2 million, $0.1 million and zero, respectively,
of stock based compensation expense was recognized related to these awards.
The following table summarizes our restricted stock unit award activity during the year ended December 31, 2018:
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Average
|
|
|
|
of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Balance, January 1, 2018
|
|
|
21,066
|
|
|
$
|
38.87
|
|
Released
|
|
|
(5,354
|
)
|
|
|
56.25
|
|
Forfeited or expired
|
|
|
(570
|
)
|
|
|
97.03
|
|
Balance, December 31, 2018
|
|
|
15,142
|
|
|
$
|
30.53
|
|
As of December 31, 2018, we had approximately $0.4 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 2.58 years.
[e] Stock Warrants
The following is a summary of outstanding warrants to purchase common stock at December 31, 2018:
|
|
Total
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercise
|
|
|
|
|
|
and
|
|
|
price per
|
|
|
|
|
|
Exercisable
|
|
|
Share
|
|
|
Expiration Date
|
(1) Series A Warrants issued in July 2014 financing
|
|
|
25,272
|
|
|
$
|
440.00
|
|
|
July 2019
|
(2) Series B Warrants issued in July 2014 financing
|
|
|
6,093
|
|
|
$
|
440.00
|
|
|
July 2019
|
(3) Series A-1 Warrants issued in April 2015 financing
|
|
|
2,175
|
|
|
$
|
264.00
|
|
|
October 2020
|
(4) Warrants issued in September 2017 financing
|
|
|
8,224
|
|
|
$
|
34.96
|
|
|
March 2023
|
(5) Warrants issued in June 2018 financing
|
|
|
3,119,500
|
|
|
$
|
4.00
|
|
|
June 2023
|
(6) Warrants issued in October 2018 financing
|
|
|
894,626
|
|
|
$
|
3.14
|
|
|
October 2023
|
For the twelve months ended December 31, 2018, 330,500 of the warrants issued in the June 2018 financing were exercised at a per unit price of $4.00, for proceeds of $1.3 million. No warrants were exercised for the year ended December 31, 2017. The Series A-1 Warrants assumed by us as part of the Arrangement, the warrants issued in the September 2017 financing, the warrants issued in the June 2018 financing and the warrants issued in the October 2018 registered direct offering, are classified as equity. The Series A and Series B warrants assumed by us as part of the Arrangement are classified as liabilities. The estimated fair value of warrants classified as liabilities is reassessed at each reporting date using the Black-Scholes pricing model. As at December 31, 2018 and 2017, the fair value of the warrants was insignificant
.
80
|
|
As of
|
|
|
|
December 31,
|
|
Series A and Series B Warrant Valuation Assumptions
|
|
2018
|
|
|
2017
|
|
Risk-free interest rates
|
|
|
2.61
|
%
|
|
|
1.82
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life
|
|
0.50 years
|
|
|
1.50 years
|
|
Expected volatility
|
|
|
111
|
%
|
|
|
86
|
%
|
[f] 401(k) Plan
We maintain a 401(k) plan. Our securities are not offered as an investment option. Our shares are prohibited for inclusion our 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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,687
|
)
|
|
$
|
(10,583
|
)
|
|
$
|
(1,234
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
3,510,217
|
|
|
|
479,442
|
|
|
|
2,123
|
|
Basic and diluted net loss per common share
|
|
$
|
(3.61
|
)
|
|
$
|
(22.07
|
)
|
|
$
|
(581.25
|
)
|
As of December 31, 2018 a total of 4.7 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.
13. RELATED PARTY TRANSACTIONS
We entered into a consulting agreement with Ricanto, Ltd., or Ricanto, on September 17, 2015 to provide strategic consulting and advice concerning clinical development, regulatory matters and business planning. Richard Stewart and Anthony Clarke together own 100% of Ricanto. Richard Stewart is our Chief Executive Officer, or CEO, Chairman of the Board, and a principal stockholder. Anthony Clarke is our Chief Scientific Officer, President, a board director, and a principal stockholder. We incurred consulting fees from Ricanto of $0.1 million during the nine months ended September 30, 2016. The consulting agreement with Ricanto was terminated on August 1, 2017, immediately prior to the closing of the Arrangement. We did not incur any consulting fees from Ricanto in 2017. As of December 31, 2016, we recorded amounts payable to Ricanto of $0.6 million in accrued liabilities on our balance sheet. On July 18, 2017, Ricanto converted all amounts owed to it, totaling $0.6 million, into 475 shares of our common stock, prior to the closing of the Arrangement, par value $0.01. Pursuant to the terms of the Arrangement, each share was converted into, approximately 17,067 shares of common stock post-conversion. As of December 31, 2018 we had no outstanding amounts payable to Ricanto.
During 2016 we borrowed $0.2 million in total principal amount through two notes payable dated April 20, 2016 and December 8, 2016 from Richard Stewart. The notes mature and are payable upon demand one year from the date of issuance. Interest accrues at an annual rate of 3.5%. As of December 31, 2016 the outstanding principal, included in shareholder loans with related parties, was $0.2 million and accrued interest payable was $3,000. On July 24, 2017, Richard Stewart converted the $0.2 million, representing the entire amounts of principal and accrued interest owed, into 146 shares of our common stock, prior to the closing of the Arrangement, par value $0.01. Pursuant to the terms of the Arrangement, each share was converted into, approximately 5,246 shares of common stock post-conversion. As of December 31, 2018 we had no outstanding principal or accrued interest with the related party.
We borrowed $2.7 million on May 18, 2015, through a convertible promissory note payable to a Lender of ours. The note matures and is payable upon demand one year from the date of the note. Interest accrues at an annual rate of 3.5%. On September 30, 2015 the Lender converted $2.0 million in principal into 4,500 shares of our common stock, prior to the closing of the Arrangement, par value
81
$0.01, and became a principal stockholder. On March 7, 2017 we borrowed $20,000 through a note payable to the Lender. The note matures and is payable upon demand one year from the date of issuance. Interest accrues at an annual rate of 3.5%. As of
December 31, 2016, the outstanding principal balance, included in shareholder loans with related parties, was $0.7 million and had accrued interest payable of $35,000. On July 24, 2017, the Lender converted the remaining amounts in principal and accrued in
terest, totaling $0.8 million, into 586 shares of our common stock, prior to the closing of the Arrangement, par value $0.01. Pursuant to the terms of the Arrangement, each share was converted into, approximately 182,743 shares of common stock post-convers
ion. As of December 31, 2018 we had no outstanding principal or accrued interest with the related party.
We entered into an employment agreement on May 11, 2015 with one of our principal stockholders to serve as our CEO. We terminated the employment agreement on December 31, 2016. From May 11, 2015 to December 31, 2016, we had not paid any salary specified in the employment agreement. Salary otherwise payable as at December 31, 2016 was $0.7 million and was accrued on our balance sheet as Accrued compensation. On July 19, 2017 we entered into a separation agreement with our former CEO. Pursuant to the separation agreement, for settlement of all salaries owed, we paid 238 shares of our common stock, prior to the closing of the Arrangement, representing 50% of the total amounts owed as accrued compensation and paid $0.4 million for the remaining 50%, subsequent to the closing of the Arrangement. Pursuant to the terms of the Arrangement, each share was converted into, approximately 8,551 shares of common stock post-conversion. As of December 31, 2018 we had no outstanding principal or accrued interest with the related party.
We entered into an employment agreement on August 17, 2015 with one of our principal stockholders to serve as our Chief Financial Officer, or CFO. We terminated the employment agreement on December 31, 2016. From August 17, 2015 to December 31, 2016, we had not paid any salary specified in the employment agreement. Salary otherwise payable as at December 31, 2016 was $0.3 million and was accrued on our balance sheet as Accrued compensation. On July 20, 2017 we entered into a separation agreement with our former CFO. Pursuant to the separation agreement, for settlement of all salaries owed and as a separation payment, we paid 127 shares of our common stock, prior to the closing of the Arrangement, representing 50% of the total amounts owed as accrued compensation and paid $0.2 million for the remaining 50%, subsequent to the closing of the Arrangement. Pursuant to the terms of the Arrangement, each share was converted into, approximately 4,563 shares of common stock post-conversion. As of December 31, 2018 we had no outstanding principal or accrued interest with the related party.
Michelle Griffin, the spouse of Scott Cormack, OncoGenex’s former CEO and a current member of our board of directors, entered into a consulting agreement in 2013 with OncoGenex, which was amended thereafter. Immediately prior to the closing of the Arrangement, the consulting agreement was terminated. Pursuant to the consulting agreement, OncoGenex was obligated to pay to the consultant a termination fee of $0.6 million, which was accrued in OncoGenex’s accrued liabilities immediately prior to the closing of the Arrangement.
Subsequent to the closing of the Arrangement, we paid the full amount of the termination fees and no amounts were accrued on our balance sheet as at December 31, 2018.
14. COMMITMENTS AND CONTINGENCIES
The following table summarizes our contractual obligations as of December 31, 2018 (in thousands):
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than 5 years
|
|
Seattle office operating lease
|
|
$
|
317
|
|
|
$
|
144
|
|
|
$
|
173
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Vancouver office operating lease - expiring
|
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Vancouver office operating lease - new
|
|
$
|
250
|
|
|
$
|
56
|
|
|
$
|
125
|
|
|
$
|
69
|
|
|
$
|
—
|
|
Total
|
|
$
|
574
|
|
|
$
|
207
|
|
|
$
|
298
|
|
|
$
|
69
|
|
|
$
|
—
|
|
Lease Arrangements
We had an operating lease agreement for office space in Vancouver, Canada, which expired in January 2019. Pursuant to the operating lease agreement, we had 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. This lease was not renewed.
On November 19, 2018, we entered into a lease agreement for new office space in Vancouver, British Columbia, which commenced on February 1, 2019, and has a four year term. Pursuant to this lease, we rent approximately 2,367 square feet of office space. The annual rent is approximately $0.1 million.
The future minimum annual lease payments under the Vancouver lease are as follows (in thousands):
82
2019
|
|
$
|
56
|
|
2020
|
|
|
62
|
|
2021
|
|
|
63
|
|
2022
|
|
|
63
|
|
2023
|
|
|
5
|
|
Total
|
|
$
|
249
|
|
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 was set to 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 started at approximately $18,000 which commenced on May 1, 2015 and increased 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 were 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 of 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.
We did not exercise our renewal option under the lease agreement. We negotiated an early termination and the lease expired on March 31, 2018.
On December 11, 2017, we entered into a lease, or New Lease, with 520 Pike Street, Inc., or Pike, pursuant to which we leased approximately 3,187 square feet located at Suite 2250 at 520 Pike Tower, Seattle, Washington, 98101, which commenced on March 1, 2018. The initial term of the New Lease will expire at the end of the month on the third anniversary of the New Lease.
Our monthly base rent for the premises started at approximately $11,685 which commenced on March 1, 2018 and will increase on an annual basis up to approximately $12,397.
In addition, we paid a security deposit to Pike in the amount of $37,192, subject to periodic reductions in the amount of $12,397 after each of the first and second anniversaries of the New Lease, which Pike may retain for base rent or other damages, in the event of our default under the New Lease.
We may not assign or sublet all or any portion of the premises without the consent of Pike, and Pike shall be entitled to 50% of any profit which we may receive above and beyond the rental price of the New Lease. Upon receipt of notice of our intent to assign or sublease any portion of the leased premises, Pike may terminate that portion of the premises within 30 days, and provided, that if such portion constitutes 50% or more of the total square footage of the premises, Pike may terminate the New Lease in its entirety.
The future minimum annual lease payments under the New Lease are as follows (in thousands):
2019
|
|
$
|
144
|
|
2020
|
|
|
148
|
|
2021
|
|
|
25
|
|
Total
|
|
$
|
317
|
|
Consolidated rent and operating expense relating to both the Vancouver, Canada and Seattle, Washington, and Bothell, Washington offices for years ended December 31, 2018, 2017 and 2016 was $0.3 million, $0.6 million and $0.9 million, respectively.
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, 2018.
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
83
issues when a loss is probable and can be reasonably estimat
ed. There were no accruals for or expenses related to indemnification issues for any period presented.
Material Changes in Financial Condition
|
|
December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Total Assets
|
|
$
|
19,084
|
|
|
$
|
9,892
|
|
Total Liabilities
|
|
|
3,282
|
|
|
|
2,013
|
|
Total Equity
|
|
|
15,802
|
|
|
|
7,879
|
|
The increase in assets as at December 31, 2018 as compared to December 31, 2017 primarily relates to increase in cash and cash equivalents from the June 2018 public offering, the October 2018 registered direct offering and warrant exercises. The increase in liabilities as at December 31, 2018 compared to December 31, 2017 was primarily due to higher accruals related to employee expenses from a full year of operation after the reverse merger with OncoGenex that occurred in August 2017 and higher clinical trial accruals associated with ramp up of the repeat dose pharmacokinetics trial and toxicology studies initiated in late 2017 and initiation of our ORCA-1 trial, a Phase 2b optimization study in October 2018
.
15. SEVERANCE CHARGES
As a requirement for the closing of the Arrangement, OncoGenex terminated the employment of one senior executive. Severance payable at the date of the transaction was $1.2 million and has been accounted for as part of the purchase price allocation (Note 4—Intangibles). The severance payable was settled following the completion of the Arrangement and no amounts were owing as at December 31, 2018.
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table summarizes the unaudited statements of operations for each quarter of 2018 and 2017 (in thousands, except per share amounts):
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,201
|
|
|
|
1,045
|
|
|
|
1,541
|
|
|
|
2,081
|
|
General and administrative
|
|
|
1,813
|
|
|
|
1,751
|
|
|
|
1,753
|
|
|
|
1,628
|
|
Total operating expenses
|
|
|
3,014
|
|
|
|
2,796
|
|
|
|
3,294
|
|
|
|
3,709
|
|
Other income (expense)
|
|
|
(8
|
)
|
|
|
8
|
|
|
|
54
|
|
|
|
72
|
|
Net loss
|
|
|
(3,022
|
)
|
|
|
(2,788
|
)
|
|
|
(3,240
|
)
|
|
|
(3,637
|
)
|
Basic and diluted net loss per share
|
|
$
|
(2.43
|
)
|
|
$
|
(1.82
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
(0.55
|
)
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
61
|
|
|
|
62
|
|
|
|
825
|
|
|
|
2,153
|
|
General and administrative
|
|
|
260
|
|
|
|
96
|
|
|
|
1,546
|
|
|
|
1,629
|
|
Total operating expenses
|
|
|
321
|
|
|
|
158
|
|
|
|
2,371
|
|
|
|
3,782
|
|
Other income
|
|
|
(8
|
)
|
|
|
(11
|
)
|
|
|
(7,025
|
)
|
|
|
42
|
|
Recovery of deferred income taxes
|
|
|
124
|
|
|
|
—
|
|
|
|
2,927
|
|
|
|
—
|
|
Net loss
|
|
|
(205
|
)
|
|
|
(169
|
)
|
|
|
(6,469
|
)
|
|
|
(3,740
|
)
|
Basic and diluted net loss per share
|
|
$
|
(96.56
|
)
|
|
$
|
(79.60
|
)
|
|
$
|
(8.95
|
)
|
|
$
|
(3.17
|
)
|
84