10-Q 1 sphs20160823_10q.htm FORM 10-Q sphs20160823_10q.htm

UNITED STATES     

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

  


FORM 10-Q

   


(Mark One)

 

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

  

  

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016

  

  

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

  

  

FOR THE TRANSITION PERIOD FROM                      TO                     

 

Commission file number: 001-36054

  


Sophiris Bio Inc.

(Exact name of registrant as specified in its charter)

 

British Columbia

 

98-1008712

(State or Other Jurisdiction of Incorporation or Organization)

  

(I.R.S. Employer Identification No.)

  

  

  

1258 Prospect Street, La Jolla, California

  

92037

(Address of Principal Executive Offices)

  

(Zip Code)

 

858-777-1760

(Registrant’s Telephone Number, Including Area Code)

  



Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☒
   No  ☐   

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒    No  ☐

 

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

  

  

  

  

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

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

 

As of November 2, 2016, the registrant had 30,107,644 common shares (no par value) outstanding.

 

 

 
1

 

   

SOPHIRIS BIO INC.

TABLE OF CONTENTS

  

 

 

 

Page

PART I. FINANCIAL INFORMATION

3

 

Item 1.

Financial Statements (Unaudited)

 3

 

 

Condensed Consolidated Balance Sheets

 3

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

 4

 

 

Condensed Consolidated Statements of Cash Flows

 5

 

 

Notes to the Condensed Consolidated Financial Statements

 6

 

Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

27

 

Item 4.

Controls and Procedures

27

PART II. OTHER INFORMATION

28

 

Item 1A.

Risk Factors

28

 

Item 6.

Exhibits

54

SIGNATURES

56

 

 

 
2

 

   

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

Sophiris Bio Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share amounts)

(Unaudited)

 

   

September 30,

2016

   

December 31,

2015

 

Assets:

               

Current assets:

               

Cash and cash equivalents

  $ 31,055     $ 5,881  

Securities available-for-sale

    203       2,500  

Other receivables

    13       8  

Prepaid expenses

    490       467  

Total current assets

    31,761       8,856  

Property and equipment, net

    5       17  

Other long-term assets

          19  

Total assets

  $ 31,766     $ 8,892  
                 

Liabilities and shareholders’ equity:

               

Current liabilities:

               

Accounts payable

  $ 374     $ 909  

Accrued expenses

    1,588       566  

Current portion of promissory notes

          1,771  

Total current liabilities

    1,962       3,246  

Long-term promissory notes

          3,572  

Warrant liability

    15,035        

Stock-based compensation liability

    195       168  

Total liabilities

    17,192       6,986  
                 

Commitments and contingencies

               
                 

Shareholders’ equity:

               

Common shares, unlimited authorized shares, no par value; 30,107,644 and 17,244,736 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively

    131,245       113,880  

Contributed surplus

    23,604       17,683  

Accumulated other comprehensive gain

    99       99  

Accumulated deficit

    (140,374

)

    (129,756

)

Total shareholders’ equity

    14,574       1,906  

Total liabilities and shareholders’ equity

  $ 31,766     $ 8,892  

 

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

 

 

 
3

 

   

Sophiris Bio Inc. 

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except per share amounts)

(Unaudited)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2016

   

2015

   

2016

   

2015

 

Operating expenses:

                               

Research and development

  $ 624     $ 2,555     $ 2,531     $ 8,192  

General and administrative

    3,043       921       5,564       2,967  

Total operating expenses

    3,667       3,476       8,095       11,159  

Other income (expense):

                               

Interest expense

    (86

)

    (174

)

    (373

)

    (528

)

Interest income

    3       4       11       18  

Loss on revaluation of warrant liability

    (350

)

          (1,969

)

     

Loss on early extinguishment of debt

    (180

)

          (180

)

     

Other income (expense), net

    (4

)

    (9

)

    (11

)

    (29

)

Total other expense

    (617

)

    (179

)

    (2,522

)

    (539

)

Net loss

  $ (4,284

)

  $ (3,655

)

  $ (10,617

)

  $ (11,698

)

Basic and diluted loss per share

  $ (0.17

)

  $ (0.22

)

  $ (0.51

)

  $ (0.69

)

Weighted average number of outstanding shares – basic and diluted

    25,215       16,845       20,617       16,845  

Other comprehensive income:

                               

Unrealized gain on securities available-for-sale

                      1  

Total other comprehensive loss

  $ (4,284

)

  $ (3,655

)

  $ (10,617

)

  $ (11,697

)

 

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

 

 

 
4

 

   

 Sophiris Bio Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   

Nine Months Ended September 30,

 
   

2016

   

2015

 

Cash flows used in operating activities

               

Net loss for the period

  $ (10,617

)

  $ (11,698

)

Adjustments to reconcile net loss to net cash used by operating activities:

               

Stock-based compensation

    266       637  

Amortization of debt discount

    81       104  

Depreciation of property and equipment

    12       15  

Amortization of discount on securities available-for-sale

          3  

Foreign exchange transaction (gain) loss

    (1

)

    18  

Loss on the revaluation of warrant liability

    1,969        

Non cash portion of loss on early extinguishment of debt

    (159

)

     

Payment of original issue discount

    (124

)

     

Changes in operating assets and liabilities:

               

Other receivables

    (4

)

    (2

)

Prepaid expenses

    (4

)

    1,320  

Accounts payable

    (651

)

    (1,863

)

Accrued expenses

    1,007       (1,062

)

Net cash used in operating activities

    (8,225

)

    (12,528

)

Cash flows provided by investing activities

               

Maturities of securities available-for-sale

    2,750       21,669  

Purchases of securities available-for-sale

    (453

)

    (8,052

)

Net cash provided by investing activities

    2,297       13,617  

Cash flows provided by (used in) financing activities

               

Proceeds from the issuance of common shares and warrants, net of paid issuance costs

    33,665        

Proceeds from the exercise of warrants

    2,486        

Proceeds from the exercise of stock options

    92        

Principal payments on promissory notes

    (5,141

)

    (291

)

Net cash provided by (used in) financing activities

    31,102       (291

)

Effect of exchange rate changes on cash and cash equivalents

          (13

)

Net increase in cash and cash equivalents

    25,174       785  

Cash and cash equivalents at beginning of period

    5,881       4,123  

Cash and cash equivalents at end of period

  $ 31,055     $ 4,908  
                 

Supplemental disclosures of non-cash investing and financing activities:

               

Change in the fair value of stock-based compensation liability recorded to contributed surplus

  $ 27     $ 20  

Valuation of warrant liability upon issuance of warrants

  $ 18,747     $  

Valuation of exercised warrants reclassified from warrant liability to contributed surplus

  $ 5,681     $  

Equity issuance costs included in accounts payable and accrued expenses

  $ 132     $  

  

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

 

 

 
5

 

   

Sophiris Bio Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

1.                 Nature of the business

 

Sophiris Bio Inc., or the Company, or Sophiris, is a clinical-stage biopharmaceutical company currently developing topsalysin for treatment of the symptoms of for the treatment of localized low to intermediate risk prostate cancer and benign prostatic hyperplasia, or BPH, commonly referred to as an enlarged prostate. The Company is governed by the British Columbia Business Corporations Act. The Company’s operations were initially located in Vancouver, British Columbia until April 2011, when its core activities and headquarters relocated from Vancouver, British Columbia to San Diego, California.

 

The condensed consolidated financial statements include the accounts of Sophiris Bio Inc. and its wholly-owned subsidiaries, Sophiris Bio Corp. and Sophiris Bio Holding Corp., both of which are incorporated in the State of Delaware.

  

2.                 Summary of significant accounting policies

 

Significant accounting policies followed by the Company in the preparation of its condensed consolidated financial statements are as follows: 

 

Basis of consolidation

 

The consolidated financial statements include the accounts of the Company, Sophiris Bio Corp. and Sophiris Bio Holding Corp. All intercompany balances and transactions have been eliminated for purposes of consolidation.

 

  Basis of presentation and use of estimates

 

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States, or GAAP, for the interim financial information and the rules and regulations of the Securities and Exchange Commission, or SEC, related to quarterly reports on Form 10-Q. Accordingly, they do not include all of the information and disclosures required by GAAP for annual audited financial statements and should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, or Annual Report, filed with the SEC on March 29, 2016. The accompanying year-end condensed balance sheet data was derived from the audited consolidated financial statements, but does not include all disclosures required by GAAP. In the opinion of management, these condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented. The results of operations for the interim periods shown in this report are not necessarily indicative of the results that may be expected for any future period, including the full year.

  

GAAP requires the Company’s management to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. The Company bases estimates and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances. The significant estimates in these condensed consolidated financial statements include stock-based compensation expense, warrant liabilities and accrued research and development expenses, including accruals related to the Company’s clinical trials. The Company’s actual results may differ from these estimates. The Company evaluates its estimates on an ongoing basis. Changes in estimates are reflected in reported results in the period in which they become known by the Company’s management. 

 

 Foreign currency   

 

Historically gains and losses resulting from foreign currency translation were recorded in accumulated other comprehensive gain (loss), which is a separate component of shareholders’ equity. Foreign currency transaction gains and losses are recognized as a component of other expense.

 

 

 
6

 

 

Cash and cash equivalents

 

Cash equivalents are short-term, highly liquid investments with an original maturity of three months or less at the date of purchase.

 

Securities Available-for-Sale

 

Investments with an original maturity of more than three months when purchased have been classified by management as securities available-for-sale. Such investments are carried at fair value, with unrealized gains and losses included as a component of accumulated other comprehensive gain (loss) in shareholders’ equity. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in interest income. No other-than-temporary impairments were identified for the investment securities held by the Company as of September 30, 2016 and December 31, 2015. The cost of investment securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest income. The cost of securities sold is based on the specific-identification method. The Company has classified all of its investment securities as available-for-sale, including those with maturities beyond one year, as current assets on the consolidated balance sheets based on the highly liquid nature of the investment securities and because these investment securities are considered available for use in current operations.

 

Revenue recognition

 

The Company may enter into product development agreements with collaborative partners for the research and development of products for the treatment of urological diseases. The terms of the agreements may include nonrefundable signing and licensing fees, milestone payments and royalties on any product sales derived from collaborations. These multiple element arrangements are analyzed to determine whether the deliverables can be separated or whether they must be accounted for as a single unit of accounting. License fees are recognized as revenue when persuasive evidence of an arrangement exists, the fee is fixed or determinable, delivery or performance has substantially completed and collection is reasonably assured.

 

The Company recognizes up front license payments as revenue upon delivery of the license only if the license has stand-alone value to the customer and if the agreement includes a general right of return, the delivery or performance of undelivered items is considered probable and within the control of the Company. The payment is generally allocated to the separate units of accounting based on their relative selling prices. The selling price of each deliverable is determined using vendor specific objective evidence of selling prices, if it exists; otherwise, third-party evidence of selling prices. If neither vendor specific objective evidence nor third-party evidence exists, the Company uses its’ best estimate of the selling price for each deliverable. The payment allocated is limited to the amount that is not contingent on the delivery of additional items or fulfillment of other performance conditions.

 

Whenever the Company determines that an arrangement should be accounted for as a single unit of accounting, it must determine the period over which the performance obligations will be performed and revenue recognized. If the Company cannot reasonably estimate the timing and the level of effort to complete its performance obligations under the arrangement, then revenue under the arrangement is recognized on a straight-line basis over the period the Company is expected to complete its performance obligations.

 

The Company evaluates milestone payments on an individual basis and recognizes revenue from non-refundable milestone payments when the earnings process is complete and the payment is reasonably assured. Non-refundable milestone payments related to arrangements under which the Company has continuing performance obligations are recognized as revenue upon achievement of the associated milestone, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement and (ii) the amount of the milestone payment is reasonable in relation to the effort expended or the risk associated with the milestone event. Any amounts received under agreements in advance of performance, if deemed substantive, are recorded as deferred revenue and recognized as revenue as the Company completes its performance obligations. A milestone event is considered substantive if (i) the milestone is commensurate with either (a) the Company’s performance to achieve the milestone or (b) the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the Company’s performance to achieve the milestone; (ii) it relates solely to past performance and (iii) it is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement. If any portion of the milestone payment does not relate to the Company’s performance, does not relate solely to past performance or is refundable or adjustable based on future performance, the milestone is not considered to be substantive. Milestone payments are not bifurcated into substantive and non-substantive components. Payments related to the achievement of non-substantive milestones is deferred and recognized over the Company’s remaining performance period.

 

Royalty revenue will be recognized upon the sale of the related products provided the Company has no remaining performance obligations under the arrangement.

 

 

 
7

 

 

Research and development expenses

 

Research and development costs are charged to expense as incurred. Research and development expenses comprise costs incurred in performing research and development activities, including personnel-related costs, stock-based compensation, facilities, research-related overhead, clinical trial costs, contracted services, manufacturing, license fees and other external costs. The Company accounts for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been consumed rather than when the payment is made.

 

Accrued research and development expenses

 

Clinical trial costs are recorded as a component of research and development expenses. The Company accrues and expenses clinical trial activities performed by third parties based upon estimates of the percentage of work completed of the total work over the life of the individual study in accordance with agreements established with clinical research organizations and clinical trial sites. The Company determines the estimates through discussions with internal clinical personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services based on facts and circumstances known to the Company as of each balance sheet date. However, actual costs and timing of clinical trials are highly uncertain, subject to risks and may change depending upon a number of factors, including the Company’s clinical development plan.

 

If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Adjustments to prior period estimates have not been material.

  

Examples of estimated accrued research and development expenses include:

 

 

fees to clinical research organizations in connection with clinical studies;

 

 

• 

fees to investigative sites in connection with clinical studies;

 

 

• 

fees to vendors in connection with preclinical development activities;

 

 

• 

fees to vendors associated with the development of companion diagnostics; and

 

 

• 

fees to vendors related to product manufacturing, development and distribution of clinical supplies.

 

Nonrefundable advance payments for goods and services that will be used or rendered in future research and development activities, are recorded as a prepaid expense and recognized as expense in the period that the related goods are consumed or services are performed.

 

Stock-based compensation

 

The Company expenses the fair value of employee stock options over the vesting period. Compensation expense is measured using the fair value of the award at the grant date, net of estimated forfeitures, and is adjusted annually to reflect actual forfeitures. The fair value of each stock-based award is estimated using the Black-Scholes pricing model and is expensed using graded amortization over the vesting period.  

  

The Company accounts for stock options granted to non-employees, which primarily consist of consultants of the Company, using the fair value approach. Stock options granted to non-employees are subject to revaluation each reporting period over their vesting terms.

 

Prior to the Company’s initial public offering, or IPO, the Company had issued its stock options with a Canadian dollar denominated exercise price. Subsequent to the Company’s IPO, the Company issues its stock options with a U.S. dollar denominated exercise price.

 

Effective November 13, 2013, the Company voluntarily delisted from the Toronto Stock Exchange, or TSX. As a result of the delisting from the TSX and the change in the Company’s functional currency to the U.S. dollar, the stock options granted with exercise prices denominated in Canadian dollars are considered dual indexed as defined in Accounting Standards Codification, or ASC, topic 718, “Compensation, Stock Compensation”. As a result, the Company is required to account for these stock options as a liability. Historically these options had been accounted for as equity. The estimated fair value is determined using the Black-Scholes pricing model based on the estimated value of the underlying common shares at the valuation measurement date, the remaining service period of the stock options, risk-free interest rates, expected dividends and expected volatility of the price of the underlying common shares. The fair value of the stock-based compensation liability was $195,000 at September 30, 2016. As the calculated fair value of the stock options at September 30, 2016 was less than the original grant date fair value no additional compensation expense was recorded in the consolidated statement of operations and comprehensive loss. The change in the fair value of the stock-based compensation liability was recorded as an adjustment to Contributed Surplus of $93,000 and $27,000 for the three and nine months ended September 30, 2016, respectively, and ($12,000) and $20,000 for the three and nine months ended September 30, 2015, respectively.

  

 

 
8

 

 

Fair value of financial instruments

 

The Company measures certain financial assets and liabilities at fair value based on the exchange price that would be received for an asset or paid for to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The carrying amounts of the Company’s financial instruments, including cash, cash equivalents, accounts payable and accrued expenses, approximate fair value due to their short maturities.

 

The Company follows ASC 820-10, “Fair Value Measurements and Disclosures,” which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

 

Level 2 – Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life and; 

 

Level 3 – Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

  

 Recent accounting pronouncements

 

In May 2014, the FASB issued new guidance related to revenue recognition (ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606)). Subsequently the FASB has issued additional guidance (ASU Nos. 2015-14; 2016-08; 2016-10; 2016-12 Revenue from Contracts with Customers (Topic 606)). The guidance establishes principles for reporting information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Two methods of adoption are permitted: (a) full retrospective adoption, meaning the standard is applied to all periods presented or (b) modified retrospective adoption, meaning the cumulative effect of applying the new guidance is recognized as an adjustment to the opening retained earnings balance. The Company does not intend to adopt the new guidance early and is in the process of determining the adoption method as well as the effects the adoption will have on its consolidated financial statements.  

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” or ASU 2014-15. ASU 2014-15 will require management to assess, at each annual and interim reporting period, the entity’s ability to continue as a going concern. The amendments in ASU 2014-15 do not have any application to an entity’s financial statements, but only to disclosure in the related notes. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and early application is permitted. The Company intends to apply ASU 2014-15 in the first quarter of 2017 and for the annual period ending December 31, 2016.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. This guidance requires lessees to recognize a lease liability and a right-of-use asset with the exception of short-term leases. In addition, lessees are required to classify leases as either operating or finance based on current criteria of whether or not the lease is effectively a financed purchase by the lessee. The new standard is effective for the annual reporting period beginning after December 15, 2018 and early adoption is permitted. The Company is in the process of evaluating the impact of this guidance on our consolidated financial statement disclosures.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. This guidance is intended to simply the accounting for stock compensation. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences, (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The new standard is effective for annual periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018 and early adoption is permitted. The Company is in the process of evaluating the impact of this guidance on our consolidated financial statements.  

 

 

 
9

 

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”, addressing eight specific cash flow issues in an effort to reduce diversity in practice. The amended guidance is effective for fiscal years beginning after December 31, 2017, and for interim periods within those years. Early adoption is permitted. The Company is in the process of evaluating the impact of this guidance on our consolidated financial statements.

  

3.                 Reduction in workforce 

 

The Company completed a reduction in workforce in May 2016 through which five of its ten employees were terminated. The Company incurred a charge of approximately $81,000 during May 2016, which is included in operating expenses, related to cash severance and continuation of benefits in connection with the workforce reduction. No additional cash payments are expected to be made related to this reduction in workforce. In addition, the Company incurred a non-cash stock-based compensation charge of approximately $76,000 during May 2016 associated with the modification of stock options for individuals included in the reduction in workforce. See additional discussion regarding the modification of stock options for terminated employees at Note 12.

 

4.                 Net loss per common share

 

 Basic net loss per share is calculated by dividing the net loss attributable to common shareholders by the weighted-average number of common shares outstanding during the period, without consideration for common shares equivalents. Diluted net loss per share is computed by dividing the net loss attributable to common shareholders by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method.

 

The following diluted securities have been excluded from the computation of diluted weighted-average shares outstanding as of September 30, 2016 and 2015 as the Company recorded a net loss in all periods and therefore they would be anti-dilutive (in thousands):  

 

   

September 30, 2016

   

September 30, 2015

 

Options to purchase common shares

    1,978       1,677  

Common share purchase warrants

    6,206       878  

 

 

5.                 Securities available-for-sale

 

Securities available-for-sale consisted of the following as of September 30, 2016 (in thousands):

 

   

September 30, 2016

 
   

Amortized

   

Unrealized

   

Estimated

 
   

Cost

   

Gain

   

Loss

   

Fair Value

 

U.S. government sponsored enterprise securities

  $ 203     $     $     $ 203  
    $ 203     $     $     $ 203  

 

Securities available-for-sale consisted of the following as of December 31, 2015 (in thousands):

 

   

December 31, 2015

 
   

Amortized

   

Unrealized

   

Estimated

 
   

Cost

   

Gain

   

Loss

   

Fair Value

 

Commercial paper

  $ 750     $     $     $ 750  

U.S. government sponsored enterprise securities

    1,750                   1,750  
    $ 2,500     $     $     $ 2,500  

 

 

 
10

 

  

 The amortized cost and estimated fair value of the Company securities available-for-sale by contractual maturity as of September 30, 2016 are shown below (in thousands):

  

   

September 30, 2016

 
   

Amortized

   

Unrealized

   

Estimated

 
   

Cost

   

Gain

   

Loss

   

Fair Value

 

Within one year

  $ 203     $     $     $ 203  

After one year

                       
    $ 203     $     $     $ 203  

 

 

 The amortized cost and estimated fair value of the Company securities available-for-sale by contractual maturity as of December 31, 2015 are shown below (in thousands):

 

   

December 31, 2015

 
   

Amortized

   

Unrealized

   

Estimated

 
   

Cost

   

Gain

   

Loss

   

Fair Value

 

Within one year

  $ 2,500     $     $     $ 2,500  

After one year

                       
    $ 2,500     $     $     $ 2,500  

  

6.                 Fair value measurement and financial instruments

 

As of September 30, 2016, the Company had $3.5 million of securities consisting of money market funds and U.S. government sponsored enterprise securities with maturities that range from five days to approximately 4.5 months with an overall average time to maturity of approximately 1.1 months. The Company has the ability to liquidate these investments without restriction. The Company determines fair value for securities with Level 1 inputs through quoted market prices. The Company determines fair value for securities with Level 2 inputs through broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. The Company’s Level 2 securities have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, typically utilizing third party pricing services or other observable market data. The pricing services utilize industry standard valuation models, including both income and market based approaches and observable market inputs to determine value. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, and other industry and economic events. The Company’s Level 3 inputs are unobservable inputs based on the Company’s assessment that market participants would use in pricing the instruments.

 

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis for the periods presented (in thousands):

 

   

September 30,

2016

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                               

Money market funds

  $ 49     $ 49     $     $  

U.S. government sponsored enterprise securities

    3,440             3,440        

Total assets

  $ 3,489     $ 49     $ 3,440     $  

Liabilities:

                               

Warrant liability

  $ 15,035     $     $     $ 15,035  

Stock-based compensation liability

    195                   195  

Total liabilities

  $ 15,230     $     $     $ 15,230  

 

   

December 31,

2015

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                               

Money market funds

  $ 87     $ 87     $     $  

Commercial paper

    1,850             1,850        

U.S. government sponsored enterprise securities

    5,549             5,549        

Total assets

  $ 7,486     $ 87     $ 7,399     $  

Liabilities:

                               

Stock-based compensation liability

  $ 168     $     $     $ 168  

Total liabilities

  $ 168     $     $     $ 168  

  

 

 
11

 

   

Stock-based compensation liability

 

 The Company calculates the fair value of the stock-based compensation liability for those stock options with exercise prices denominated in Canadian Dollars (level 3) at each reporting period utilizing a Black-Scholes pricing model. The following inputs were utilized in the Black-Scholes pricing model:

 

   

September 30,

2016

   

December 31,

2015

 

Stock price at the end of each reporting period

  $ 3.11     $ 1.78  

Weighted average exercise price

  $ 11.42     $ 13.12  

Risk-free interest rate

    0.61

%

    0.91

%

Volatility

    167.17

%

    182.74

%

Dividend yield

    0.00

%

    0.00

%

Expected life in years

    1.05       1.53  

Calculated fair value per stock option

  $ 1.07     $ 0.74  

 

The following table presents a reconciliation of the stock-based compensation liability measured at fair value using unobservable inputs (Level 3) (in thousands):

 

   

Nine Months Ended September 30,

 
   

2016

   

2015

 

Liabilities:

               

Balance at beginning of period

  $ 168     $ 22  

Change in fair value of stock-based compensation liability recorded as an adjustment to contributed surplus

    27       20  

Balance at end of period

  $ 195     $ 42  

 

Warrant liability

 

 In connection with the offering completed on May 11, 2016, the Company issued 1,785,714 warrants to purchase its common shares. These warrants may require the Company to pay the warrant holder cash under certain provisions of the warrant and therefore the Company is accounting for these warrants as a liability. As a result of these warrants being classified as a liability, the Company is required to calculate their fair value at each reporting date. The fair value of these warrants is calculated utilizing a Black-Scholes pricing model. The Company calculated the initial fair value of these warrants on May 11, 2016, the date the warrants were issued. On various dates from May 11, 2016 through September 30, 2016, warrant holders exercised 1,775,714 warrants and as a result the Company revalued the fair value of the underlying warrants on the various exercise dates. The fair value of the exercised warrants was reclassified from the warrant liability to contributed surplus upon exercise. As of September 30, 2016, only 10,000 warrants remain outstanding from the May 11, 2016 offering for which fair value was remeasured as of September 30, 2016. The following inputs were utilized in the Black-Scholes pricing model during the nine months ended September 30, 2016:

 

   

Initial Fair Value

Assessment

May 11, 2016

   

Weighted Average

Values Utilized on

the Various Exercise

Dates

   

September 30, 2016

 

Stock price

  $ 1.12     $ 3.50     $ 3.11  

Exercise price

  $ 1.40     $ 1.40     $ 1.40  

Risk-free interest rate

    1.2

%

    1.1

%

    1.1

%

Volatility

    130.64

%

    132.05

%

    141.72

%

Dividend yield

    0.00

%

    0.00

%

    0.00

%

Expected life in years

    5.00       4.85       4.61  

Calculated fair value per warrant

  $ 0.95     $ 3.20     $ 2.86  

 

 

 
12

 

 

In connection with the offering completed on August 26, 2016, the Company issued 5,606,250 warrants to purchase its common shares. These warrants may require the Company to pay the warrant holder cash under certain provisions of the warrant and therefore the Company is accounting for these warrants as a liability. As a result of these warrants being classified as a liability, the Company is required to calculate the fair value of these warrants at each reporting date. The fair value of these warrants is calculated utilizing a Black-Scholes pricing model. The Company calculated the initial fair value of these warrants on August 26, 2016, the date the warrants were issued. As of September 30, 2016, the fair value was remeasured. The following inputs were utilized in the Black-Scholes pricing model during the nine months ended September 30, 2016:

 

   

Initial Fair Value

Assessment

       
   

August 26,

2016

   

September 30,

2016

 

Stock price

  $ 3.52     $ 3.11  

Exercise price

  $ 4.00     $ 4.00  

Risk-free interest rate

    1.2

%

    1.0

%

Volatility

    135.04

%

    138.13

%

Dividend yield

    0.00

%

    0.00

%

Expected life in years

    5.00       4.90  

Calculated fair value per warrant

  $ 3.04     $ 2.68  

 

The following table presents a reconciliation of the warrant liability measured at fair value using unobservable inputs (Level 3) (in thousands):  

 

   

Nine Months Ended September 30, 2016

 

Liabilities:

       

Balance at beginning of period

  $  

Calculated fair value of warrants on May 11, 2016, date of issuance

    1,687  

Calculated fair value of warrants on August 26, 2016, date of issuance

    17,060  

Fair value of warrants exercised and recorded as an adjustment to contributed capital

    (5,681

)

Increase in the fair value of warrant liability

    1,969  

Balance at end of period

  $ 15,035  

 

The Company recognizes transfers into and out of levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstances that caused the transfer occurs. There were no transfers of assets or liabilities between the fair value measurement classifications.  

   

7.                 Prepaid expenses

 

Prepaid expenses as of September 30, 2016 and December 31, 2015 consisted of the following (in thousands):

 

   

September 30,

2016

   

December 31,

2015

 

Prepaid insurance

  $ 369     $ 261  

Prepaid research and development expenses

    54       176  

Other prepaid expenses

    67       30  
    $ 490     $ 467  

  

8.                 Accrued expenses

 

Accrued expenses as of September 30, 2016 and December 31, 2015 consisted of the following (in thousands):

 

   

September 30,

2016

   

December 31,

2015

 

Accrued personnel related costs

  $ 928     $ 224  

Accrued interest

          42  

Accrued research and development expenses

    98       78  

Accrued audit and tax services

    258       182  

Other accrued expenses

    304       40  
    $ 1,588     $ 566  

 

 

 
13

 

 

9.                 Promissory notes

 

On June 30, 2014, the Company entered into a $6.0 million Loan and Security Agreement with Oxford Finance LLC, or Oxford. The principal borrowed under the loan included fixed interest of 9.504% per annum. The Company had the option to prepay the outstanding balance of the loan in full, subject to a prepayment fee of 1% to 3% depending upon when the prepayment occurred. Upon the final repayment of the loan on the maturity date, by prepayment, or upon acceleration, the Company was required to pay Oxford an additional fee of $300,000. This additional fee was recorded as a debt discount and was recognized as interest expense over the life of the loan utilizing the effective interest method.  

 

On September 2, 2016, the Company repaid the outstanding principal balance of the Oxford loan. The total payoff was approximately $4.2 million, which included the final payment of $300,000, a prepayment fee of $39,000, accrued interest of $2,000 and legal fees of $4,000. The Company had $159,000 of unamortized debt premium as of the date of the payoff. The debt repayment was accounted for as an extinguishment as per ASC 470-50, “Debt: Modification and Extinguishments, and a loss on early extinguishment of the debt totaling $180,000 was recorded for the three and nine months ended September 30, 2016, consisting of the final payment and prepayment fee which was offset by the unamortized debt premium.

 

 10.              Share issuance

 

Public offering

 

On August 26, 2016, the Company completed a public offering whereby it issued 7,475,000 common shares at a price of $4.00 per share. The Company received $27.4 million, net of underwriters’ discounts, commissions and offering cost. Additionally, for each common share purchased, the investors received a warrant to purchase 0.75 of a common share of the Company at an exercise price of $4.00 per full share for a period of five years from August 26, 2016. 

 

In connection with this offering, the Company entered into a Purchase Agreement with Piper Jaffray & Co., as representative of the several underwriters named therein, or the August Purchase Agreement. For a period of 90 days after August 26, 2016, the August Purchase Agreement prohibits the Company from entering into any agreement to issue or announce the issuance or proposed issuance of any common shares of common share or common share equivalents, subject to certain exceptions.

 

For a period of two years after August 26, 2016, the August Purchase Agreement also prohibits the Company from entering into a variable rate transaction (as defined in the agreement and which includes the issuance of securities under the Company’s common share purchase agreement with Aspire Capital Fund LLC) and prohibits the Company from issuing any securities which have a price that will be determined at a future date.

 

The common share warrants are recorded as a liability and then marked to market each period through earnings in other income (expense) each period as the warrants included in this transaction contain a “fundamental change” provision, which may in certain circumstances allow the common share warrants to be redeemed for cash at an amount equal to the Black-Scholes Value, as defined by the warrant agreements. In addition, the warrants include a “failure to timely deliver shares” provision, which may require the Company to pay cash to the warrant holder in certain circumstances as defined by the warrant agreements. See a discussion on the calculation of the fair value associated with these warrants at Note 6.

 

In connection with this offering the Company incurred offering costs of approximately $2.5 million. The Company allocated these offering costs between the estimated fair value of the common shares and the fair value of the warrants on the date of their issuance. The Company allocated approximately $1.1 million to the common shares which was recorded as a reduction to equity. The remaining $1.4 million was allocated to the warrants. The amount allocated to the warrants was expensed and included as a component of general and administrative expenses for the three and nine months ended September 30, 2016 as the warrants are classified as liabilities.

 

Registered direct transaction

 

On May 11, 2016, the Company completed an offering in which net proceeds of approximately $4.6 million was raised by selling 3,571,428 common shares at a price of $1.40 per share. Additionally, for each common share purchased, the investors received a warrant to purchase one-half of a common share of the Company at an exercise price of $1.40 per full share for a period of five years from May 11, 2016. During June 2016, 600,000 of these warrants were exercised which generated proceeds of $0.8 million. During July 2016, an additional 1,175,714 warrants were exercised which generated proceeds of $1.6 million.

 

In connection with this offering, the Company entered into a Securities Purchase Agreement with certain purchasers, or the Securities Purchase Agreement. For a period of two years after May 11, 2016, the Securities Purchase Agreement also prohibited the Company from entering into a variable rate transaction (as defined in the agreement and which includes the issuance of securities under the Company’s common share purchase agreement with Aspire Capital Fund LLC) and prohibits the Company from issuing any securities which have a price that will be determined at a future date.

 

 

 
14

 

 

The common share warrants are recorded as a liability and then marked to market each period through earnings in other income (expense) each period as the warrants included in this transaction contain a “fundamental change” provision, which may in certain circumstances allow the common share warrants to be redeemed for cash at an amount equal to the Black-Scholes Value, as defined by the warrant agreements. In addition, the warrants include a “failure to timely deliver shares” provision, which may require the Company to pay cash to the warrant holder in certain circumstances as defined by the warrant agreements. See a discussion on the calculation of the fair value associated with these warrants at Note 6.

 

In connection with this offering the Company incurred offering costs of approximately $0.4 million. The Company allocated these offering costs between the estimated fair value of the common shares and the fair value of the warrants on the date of their issuance. The Company allocated approximately $0.3 million to the common shares which was recorded as a reduction to equity. The remaining $0.1 million was allocated to the warrants. This amount was expensed and included as a component of general and administrative expenses for the nine months ended September 30, 2016 as the warrants are classified as liabilities.

 

11.               Common stock purchase agreement with Aspire Capital

 

In connection with the offerings completed on May 11, 2016 and August 26, 2016, the Company entered into the Securities Purchase Agreement and the August Purchase Agreement, respectively, each of which prohibit the Company from entering into or effecting a transaction under any agreement which includes the issuance of securities at a future determined price for a period of two years from May 11, 2016 and August 26, 2016, respectively. The common share purchase agreement, or the Aspire Purchase Agreement, with Aspire Capital Fund LLC relies on issuing securities at a future determined price and therefore the Company is prohibited from issuing securities under the Aspire Purchase Agreement. The Aspire Purchase Agreement is set to expire prior to the end of such two-year period and therefore the Company will be unable to issue any additional securities under the Aspire Purchase Agreement prior to its expiration. The Company did not issue any securities under the Aspire Purchase Agreement during the nine months ended September 30, 2016.

 

12.               Stock-based compensation plan

 

The Company’s Amended and Restated 2011 Stock Option plan, or the Plan, provides for the granting of options for the purchase of common shares of the Company at the fair value of the Company’s common shares on the date of the option grant. Options are granted to employees, directors and non-employees. The board of directors or a committee appointed by the board of directors administers the Plan and has discretion as to the number, vesting period and expiry date of each option award. Historically the Company granted options to residents of the United States with an exercise price denominated in Canadian dollars, the functional currency of the Company prior to the Company’s IPO. Subsequent to the Company’s IPO, the Company grants options with an exercise prices denominated in U.S. dollars.

 

 As of September 30, 2016, the Company had 103,225 registered common shares which were available for issuance under the Plan. As of September 30, 2016, the Company has available an additional 929,149 shares which can be granted under the Plan which have not been registered with the SEC. The Company plans to register these additional shares prior to the issuance of the stock as a result of the exercise of stock option under the Plan.

  

  The Company recognized stock-based compensation expense as follows (in thousands):

  

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2016

   

2015

   

2016

   

2015

 

Research and development

  $ 25     $ 57     $ 93     $ 211  

General and administrative

    56       126       173       426  

Total

  $ 81     $ 183     $ 266     $ 637  

 

In connection with the Company’s May 2016 completed reduction in workforce, the Company’s Board of Directors approved certain modifications to the outstanding stock options of terminated employees. All outstanding vested stock options were modified so that the expiration date of the vested options at the time of each employee’s termination would be extended to the remaining life of the stock options. As a result of this modification, the Company recorded non-cash stock-based compensation expense of approximately $76,000 during the nine months ended September 30, 2016. In addition, all outstanding unvested stock options were modified so that the expiration date of the unvested options on the date of each employee’s termination would be extended for one year from the termination date and the unvested options would automatically vest if a change of control occurred prior to the modified option expiration date. An additional stock-based compensation charge associated with the modification of the unvested options will be recorded if a change in control occurs prior to the expiration of the unvested options.

 

 

 
15

 

 

As of September 30, 2016 there was $0.2 million of total unrecognized compensation expense related to non-vested stock awards, which is expected to be recognize over a weighted average period of approximately 1.3 years.  

 

The following table summarizes stock option activity, including options issued to employees, directors and non-employees (in thousands, except per share):

 

   

Options
Outstanding

   

Weighted

Average
Exercise Price

 

Outstanding at January 1, 2016

    1,677     $ 5.52  

Options granted

    390       0.99  

Options exercised

    (41

)

    2.04  

Options expired

    (45

)

    31.63  

Options forfeited

    (3

)

    4.41  

Outstanding at September 30, 2016

    1,978     $ 4.10  

 

The total amount of options outstanding at September 30, 2016 include options with exercise prices denominated in Canadian dollars and U.S. dollars. The Canadian dollar amounts have been converted to U.S. dollars for purposes of the weighted average exercise price calculation using the grant date exchange rate for each Canadian dollar denominated option.

 

The fair values of options granted during the nine months ended September 30, 2016 and 2015 were estimated at the date of grant using the following weighted-average assumptions:

 

   

Nine Months Ended September 30,

 
   

2016

   

2015

 

Expected life of the option term (years)

    3.8       3.5  

Risk-free interest rate

    1.19

%

    0.99

%

Dividend rate

    0

%

    0

%

Volatility

    147.8

%

    128.4

%

 

 

 
16

 

 

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

 

You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and notes included below in this Quarterly Report on Form 10-Q (this Quarterly Report) and the audited consolidated financial statements and notes as of and for the year ended December 31, 2015 included with our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on March 29, 2016. Operating results are not necessarily indicative of results that may occur in future periods.

 

This discussion and analysis contains forward-looking statements that involve a number of risks, uncertainties and assumptions. Actual events or results may differ materially from our expectations. Important factors that could cause actual results to differ materially from those stated or implied by our forward-looking statements include, but are not limited to, those set forth in “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us as of the time we file this Quarterly Report on Form 10-Q and, except as required by law, we undertake no obligation to update publicly or revise any forward-looking statements.

 

All dollar amounts are expressed in U.S. dollars unless otherwise noted. All amounts that are expressed on an as-converted from Canadian dollar to U.S. dollar basis are calculated using the conversion rate as of September 30, 2016 unless otherwise noted.

 

Overview

 

Background

 

We are a clinical-stage biopharmaceutical company focused on developing innovative products for the treatment of urological diseases. We are headquartered in San Diego, California and our common shares currently trade on The NASDAQ Capital Market, or the NASDAQ. We are currently developing topsalysin (PRX302) as a treatment for localized low to intermediate risk prostate cancer and as a treatment for the lower urinary tract symptoms of benign prostatic hyperplasia, or BPH, commonly referred to as an enlarged prostate. In 2004, we licensed exclusive rights to topsalysin from UVIC Industry Partnerships Inc., or UVIC, and The Johns Hopkins University, or Johns Hopkins, for the treatment of prostate cancer and in 2009, we licensed exclusive rights to topsalysin from UVIC and Johns Hopkins for the treatment of the symptoms of BPH. In April 2010, we entered into an exclusive license agreement with Kissei Pharmaceuticals Co., Ltd., or Kissei, pursuant to which we granted Kissei the right to develop and commercialize topsalysin in Japan for the treatment of the symptoms of BPH, prostate cancer, prostatitis or other diseases of the prostate.

 

 

 
17

 

 

Topsalysin, a genetically modified recombinant protein, is delivered via ultrasound-guided injection directly into the prostate. This membrane-disrupting protein is selectively activated by enzymatically active prostate specific antigen, or PSA, which is only present in the prostate, leading to localized cell death and tissue disruption without damage to neighboring tissue and nerves. This method of administration limits the circulation of the drug in the body, and we believe that this limited systemic exposure to the drug, together with how the drug is activated in the prostate, greatly diminishes the risk of side effects.

 

In May 2015, we initiated a single-center, open-label Phase 2a proof of concept clinical trial of topsalysin for the treatment of localized low to intermediate risk prostate cancer. We believe that the highly targeted mechanism by which topsalysin selectively destroys prostate tissue in BPH makes topsalysin a potential targeted focal treatment for localized prostate cancer. The clinical trial utilizes previously obtained magnetic resonance imaging, or MRI, images of each patient’s prostate mapped to real time 3D ultrasound to target the delivery of topsalysin directly into and around a pre-identified clinically significant tumor. A clinically significant tumor was defined in our study as, either a Gleason score 6 (pattern 3+3) and >3mm Maximum Cancer Core Length, or MCCL, or Gleason score 7 (pattern 3+4 or 4+3) < 10 mm MCCL, which is thought to have the potential to progress and would therefore warrant treatment. (A Gleason pattern is a grading system utilized to describe how aggressive a prostate tumor is and how likely it is to spread. Generally, there are five recognized Gleason histological patterns and a higher Gleason pattern indicates a more aggressive tumor.) Patients received a transperineal administration of topsalysin under general anesthesia at a dose higher than used in our completed Phase 3 BPH PLUS-1 trial but less than the highest dose used in our previous prostate cancer trial. The primary objective of the trial was to assess the safety and tolerability of topsalysin when used to selectively target and focally ablate a clinically significant tumor. The potential efficacy was evidenced by histological changes, indicating tumor ablation at six months following treatment. The clinical trial was conducted at a single center, the University College London, which is well known for the focal treatment of prostate cancer in the United Kingdom.

 

A total of 18 patients with clinically significant, localized low to intermediate risk prostate cancer were enrolled in the Phase 2a proof of concept clinical trial. On June 9, 2016, we announced the biopsy results from all 18 patients enrolled in the Phase 2a proof-of-concept study of topsalysin for the treatment of localized prostate cancer. The one-time administration of topsalysin was well tolerated with no serious adverse events and no new safety signals being reported. Topsalysin demonstrated an ability to ablate tumor cells in 50 percent of patients (9/18 patients) six months after treatment in a patient population with pre-identified, clinically significant prostate cancer. We believe that the results support advancing topsalysin into an additional Phase 2 study to confirm dosing and optimize delivery.

 

All 18 patients enrolled completed the study. Biopsy data at six months following treatment showed that:

 

 

Two men experienced complete ablation of their targeted tumor with no evidence of any tumor remaining at six months;

 

Seven men experienced a partial response, defined as either a reduction in the maximum cancer core length or a reduction in Gleason pattern; and

 

Nine patients had no response to treatment.

 

Detailed results from this study will be presented at a future medical conference.

 

We plan to conduct a second Phase 2 clinical trial to confirm the dose and optimize the delivery of topsalysin for the treatment of localized prostate cancer. This study will utilize previously obtained MRI images of each patient’s prostate mapped to real time 3D ultrasound to target the delivery of topsalysin directly into and around a pre-identified clinically significant tumor. The primary objective of the trial will be safety and tolerability of topsalysin when used to selectively target and focally ablate a clinically significant tumor with potential efficacy assessed by histological and MRI changes. We expect that this clinical trial will enroll approximately 40 patients at two or more trial sites. We expect to enroll our first patient in this study in the first quarter of 2017.

 

We have also completed the first of two Phase 3 clinical trials that we believe would be required to obtain marketing approval for topsalysin for the treatment of the symptoms of BPH. In October 2013 we initiated our first Phase 3 clinical trial, which we refer to as the “PLUS-1” trial, of topsalysin for the treatment of the lower urinary tract symptoms of BPH. The Phase 3 “PLUS-1” trial was an international, multicenter, randomized, double-blind, and vehicle-controlled trial to assess the efficacy and safety of a single intraprostatic administration of topsalysin (0.6 µg/g prostate) for the treatment of the lower urinary symptoms of BPH. Patients were randomized on a 1:1 ratio to either topsalysin or vehicle-only injection, and then monitored for one year. A total of 479 patients with moderate to severe BPH were enrolled and randomized by September 2014. On November 10, 2015, we announced final results from this trial. Topsalysin demonstrated a statistically significant improvement in International Prostate Symptom Score, IPSS, total score from baseline over 12 months compared to the vehicle-only control group (7.60 vs. 6.58 point overall improvement; p = 0.043), the primary endpoint of the trial. (IPSS is a patient recorded, composite assessment that takes into account factors such as ability to empty the bladder, frequency of urination, intermittency of urination, urgency of urination, weak strength of urine stream, straining while urinating, and having to urinate at night after going to bed.) Topsalysin continues to demonstrate a favorable safety profile, with no evidence of any treatment related sexual or cardiovascular side effects.

  

 

 
18

 

 

We are currently not planning on pursuing a second Phase 3 trial in BPH, unless we secure a development partner to fund such new clinical trial or obtain other financing. There can be no assurance that such funding or a development partner will be available on acceptable terms or at all. For that reason, we cannot currently estimate when the clinical development required to seek the regulatory approvals needed to commercialize topsalysin for the treatment of the symptoms of BPH will be completed. 

  

On August 26, 2016, we completed a public offering in which we issued 7,475,000 common shares at a price of $4.00 per share. We received $27.4 million, net of underwriters’ discounts, commissions and offering costs. Additionally, for each common share purchased, the investors received a warrant to purchase 0.75 of a common share at an exercise price of $4.00 per full share, exercisable during a five-year period. We intend to use the net proceeds of this offering to fund our second Phase 2 clinical trial for the treatment of localized prostate cancer. In addition, we used approximately $4.2 million of the proceeds to retire debt and will use the remaining proceeds of this offering for working capital and general corporate purposes, which may include research and development expenses, general and administrative expenses and manufacturing expenses.

 

On May 11, 2016, we completed an offering in which we raised net proceeds of approximately $4.6 million by selling 3,571,428 common shares at a price of $1.40 per share. Additionally, for each common share purchased, the investors received a warrant to purchase one-half of a common share at an exercise price of $1.40 per full share, exercisable for a five-year period. During June 2016, 600,000 of these warrants were exercised which generated proceeds of $0.8 million. During July 2016, an additional 1,175,714 warrants were exercised which generated proceeds of $1.6 million. In addition, we will use the proceeds of this offering for working capital and general corporate purposes.

 

We completed a reduction in workforce in May 2016 through which five of our ten employees were terminated. We incurred a charge of approximately $81,000 during the three and nine months ended September 30, 2016, which is included in operating expenses, related to cash severance and continuation of benefits in connection with the workforce reduction. No additional cash payments are expected to be made related to this reduction in workforce. In addition, we incurred a non-cash stock-based compensation charge of approximately $76,000 associated with the modification of stock options for individuals included in the reduction in workforce.

 

On May 12, 2016, we announced that we had engaged Oppenheimer & Co. Inc. as our financial advisor to assist with the evaluation of various strategic alternatives.

 

Financial Operations Overview

 

Revenues

 

Our cumulative revenues to date consist of a $3.0 million up-front payment received from Kissei in 2010 and a $5.0 million non-refundable milestone payment for our achievement of certain development activities in 2013. We have no products approved for sale, and we have not generated any revenues from product sales.

 

Other than potential development milestones from Kissei, we do not expect to receive any revenues from topsalysin until we obtain regulatory approval and commercialize such product or until we potentially enter into additional collaborative agreements with third parties for the development and commercialization of topsalysin, which additional agreements will not likely occur until we complete the development of topsalysin. If our development efforts for topsalysin, or the efforts or Kissei or any future collaborator, result in clinical success and regulatory approval or collaboration agreements with other third parties, we may generate revenues from topsalysin. However, we may never generate revenues from topsalysin as we or any collaborator may never succeed in obtaining regulatory approval or commercializing this product.

 

 

 
19

 

 

Research and Development Expenses

 

Research and development expenses can be driven by a number of factors including: (a) the scope of clinical development and research programs pursued; (b) the type and size of clinical trials undertaken; (c) the number of clinical trials that are active during a particular period of time; (d) the rate of patient enrollment; (e) regulatory activities to support the clinical programs; and (f) Chemistry, Manufacturing and Controls, or CMC, activities associated with process development, scale-up and manufacture of drugs used in clinical trials; and such expenses are ultimately a function of decisions made to continue the development and testing of a product candidate based on supporting safety and efficacy results from clinical trial.

 

The majority of our operating expenses to date have been incurred in research and development activities related to topsalysin. Research and development expenses include:

 

 

external research and development expenses incurred under agreements with clinical research organizations, or CROs, and investigative sites and clinical trial costs, as well as payments to consultants;

 

 

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

 

 

• 

third-party manufacturing expenses; and

 

 

facilities, depreciation and other allocated expenses.

 

We expense research and development costs as incurred. We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been consumed.

 

At this time, due to the risks inherent in the clinical trial process and given the stage of our product development program, we are unable to estimate with any certainty the costs we will incur in the continued development of topsalysin for potential approval and commercialization in two indications. Clinical development timelines, the probability of success and development costs can differ materially from expectations. However, we do expect our research and development expenses to continue for the foreseeable future as we advance topsalysin through clinical development. The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. Any failure by us or delay in completing clinical trials, or in obtaining regulatory approvals, could lead to increased research and development expense and, in turn, have a material adverse effect on our results of operations.

 

Essentially all of our research and development expenses related to topsalysin during the three and nine months ended September 30, 2016 and 2015. We recognized research and development expenses as follows (in thousands):

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2016

   

2015

   

2016

   

2015

 

Clinical research and development

  $ 510     $ 2,396     $ 2,243     $ 7,509  

Pre-clinical research and development

          1             1  

Manufacturing

    89       101       195       471  

Stock-based compensation expense

    25       57       93       211  
    $ 624     $ 2,555     $ 2,531     $ 8,192  

 

 General and Administrative Expenses

 

General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive, finance, business development, market research and support functions. Other general and administrative expenses include allocated facility-related costs not otherwise included in research and development expenses, travel expenses, market research expenses and professional fees for auditing, tax, investor relations and legal services. We expect general and administrative expenses to remain fairly consistent over the next year, excluding certain transactions costs that occurred in the second quarter of 2016, but if we were to move our drug candidate towards commercialization in future periods we do expect that general and administrative expenses would increase.

  

Interest Expense

 

Interest expense primarily represents interest payable to Oxford Finance, LLC, or Oxford and amortization of our debt discount associated with Oxford related financings. In September 2016, we paid off the outstanding principal balance on our loan with Oxford.

 

 

 
20

 

 

Interest Income

 

We earn interest income from interest-bearing cash and investment accounts.

 

Warrant Liability

 

 In connection with the offering we completed on May 11, 2016, we issued 1,785,714 warrants to purchase common shares were issued. These warrants may require us to pay the warrant holder cash under certain provisions of the warrant and therefore we are accounting for these warrants as a liability. As a result of these warrants being classified as a liability, we are required to calculate the fair value of these warrants at each reporting date. The fair value of these warrants is calculated utilizing a Black-Scholes pricing model. We calculated the initial fair value of these warrants on May 11, 2016, the date the warrants were issued. On various dates, warrant holders exercised 1,775,714 warrants and as a result we were required to revalue the fair value of the underlying warrants on the various exercise dates. The calculated fair value for the exercised warrants was reclassified from the warrant liability to contributed surplus. A remeasured fair value for the warrants was calculated on September 30, 2016. The following inputs were utilized in the Black-Scholes pricing model during the nine months ended September 30, 2016:

 

   

Initial Fair Value

May 11, 2016

   

Weighted Average at

Various Exercise Dates

   

September 30, 2016

 

Stock price

  $ 1.12     $ 3.50     $ 3.11  

Exercise price

  $ 1.40     $ 1.40     $ 1.40  

Risk-free interest rate

    1.2

%

    1.1

%

    1.1

%

Volatility

    130.64

%

    132.05

%

    141.72

%

Dividend yield

    0.00

%

    0.00

%

    0.00

%

Expected life in years

    5.00       4.85       4.61  

Calculated fair value per warrant

  $ 0.95     $ 3.20     $ 2.86  

 

In connection with the offering we completed on August 26, 2016, we issued 5,606,250 warrants to purchase common shares. These warrants may require us to pay the warrant holder cash under certain provisions of the warrant and therefore we are accounting for these warrants as a liability. As a result of these warrants being classified as liabilities, we are required to calculate the fair value of these warrants at each reporting date. The fair value of these warrants are calculated utilizing a Black-Scholes pricing model. We calculated the initial fair value of these warrants on August 26, 2016, the date the warrants were issued. A remeasured fair value for the warrants was calculated on September 30, 2016. The following inputs were utilized in the Black-Scholes pricing model during the nine months ended September 30, 2016:

 

   

August 26,

2016

   

September 30,

2016

 

Stock price

  $ 3.52     $ 3.11  

Exercise price

  $ 4.00     $ 4.00  

Risk-free interest rate

    1.2

%

    1.0

%

Volatility

    135.04

%

    138.13

%

Dividend yield

    0.00

%

    0.00

%

Expected life in years

    5.00       4.90  

Calculated fair value per warrant

  $ 3.04     $ 2.68  

   

 Loss on the Early Extinguishment of Debt

 

On September 2, 2016, we repaid the outstanding balance of the Oxford Loan and Security Agreement in full. We made a total payoff payment of $4.2 million to Oxford, which included the final payment of $300,000, a prepayment fee of $39,000, accrued interest of $2,000 and legal fees of $4,000. We had $159,000 of unamortized debt premium as of the date of the payoff. The debt repayment was accounted for as an extinguishment as per ASC 470-50, “Debt: Modification and Extinguishments, and a loss on early extinguishment of the debt totaling $180,000 was recorded for the three and nine months ended September 30, 2016, consisting of the final payment and the prepayment fee which was offset by the unamortized debt premium.

 

Other Income (Expense), Net

 

Other income (expense), net consists primarily of foreign exchange gains and losses and on occasion income or expense of an unusual nature. Foreign exchange gains and losses result from the settlement of foreign currency transactions and from the remeasurement of monetary assets and liabilities denominated in currencies other than our functional currency.

 

 

 
21

 

 

Critical Accounting Policies and Significant Judgments and Estimates

 

The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the revenues and expenses incurred during the reported periods. We believe that the estimates, assumptions and judgments involved in the accounting policies described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. There were no material changes to our critical accounting policies and estimates during the quarter ended September 30, 2015, except as outlined below.

 

   Warrant Liability

  

In connection with the offerings we completed in the nine months ended September 30, 2016, we issued warrants to purchase common shares. These warrants may require us to pay the warrant holder cash under certain provisions of the warrant and therefore we are accounting for these warrants as a liability in accordance with ASC 480 “Distinguishing Liabilities from Equity”. As a result of these warrants being classified as liabilities, we are required to calculate the fair value of these warrants at each reporting date. The fair value of these warrants are calculated utilizing a Black-Scholes pricing model. We calculated the initial fair value of these warrants at the date the warrants were issued. At each reporting date we are required to remeasure the fair value of the warrant liability and any corresponding increase or decrease to the warrant liability is recorded as a component of other income or expense in our consolidated statement of operations and comprehensive loss. In addition, if a warrant holder exercises warrants we are required to revalue the fair value of the underlying warrants on the date of exercise and reclassify the change in the fair value from the warrant liability to contributed surplus.

 

Certain inputs utilized in our Black-Scholes fair value calculation may fluctuate in future periods based upon factors which are outside of the Company’s control. A significant change in one or more of these inputs used in the calculation of the fair value may cause a significant change to the fair value of our warrant liability which could also result in material non-cash gain or loss being reported in our consolidated statement of operations and comprehensive loss. A 10% change in our closing stock price on September 30, 2016 would result in a $1.6 million change to the fair value of our warrant liability at September 30, 2016. A 10% change in our stock price volatility at September 30, 2016 would result in a change of $0.6 million to our warrant liability at September 30, 2016. A 10% change in the risk-free interest rate at September 30, 2016 would not have a material effect on the fair value of our warrant liability at September 30, 2016.

  

 Results of Operations

 

Comparison of the three months ended September 30, 2016 and 2015

 

The following table summarizes the results of our operations for the three months ended September 30, 2016 and 2015, together with the changes in those items in dollars (in thousands):

 

   

Three Months Ended September 30,

   

Change

 
   

2016

   

2015

   

2016 vs. 2015

 

Research and development expenses

    624       2,555       (1,931

)

General and administrative expenses

    3,043       921       2,122  

Interest expense

    (86

)

    (174

)

    88  

Interest income

    3       4       (1

)

Loss on revaluation of warrant liability

    (350

)

          (350

)

Loss on early extinguishment of debt

    (180

)

          (180

)

Other expense

    (4

)

    (9

)

    5  

 

Research and development expenses. Research and development expenses were $0.6 million in the three months ended September 30, 2016 compared to $2.6 million in the three months ended September 30, 2015. The decrease in research and development costs is attributable to the following:

 

 

a $1.6 million decrease in clinical costs associated with our completed Phase 3 PLUS-1 clinical trial of topsalysin, specifically a $1.1 million decrease in cost associated with our clinical research organizations, a $0.3 million decrease for patient visits to our clinical site investigators and $0.2 million decrease primarily in costs associated with the data tracking, consulting, site inspections and travel for our Phase 3 PLUS-1 clinical trial and,

  

  

  

 

a $0.3 million decrease in clinical cost associated with our Phase 2a proof of concept clinical trial for the low to intermediate risk prostate cancer, primarily for payments to the clinical site.

  

 

 
22

 

 

Research and development expenses included stock-based compensation expenses of $24,000 for the three months ended September 30, 2016 as compared to $57,000 for the three months ended September 30, 2015. We expect research and development expenses to start to increase in the fourth quarter of 2016 as we prepare to commence a Phase 2b trial of topsalysin for the treatment of localized low to intermediate risk prostate cancer.

 

General and administrative expenses. General and administrative expenses were $3.0 million in the three months ended September 30, 2016 compared to $0.9 million for the three months ended September 30, 2015. The increase from the three months ended September 30, 2015 as compared to the three months ended September 30, 2016 is primarily due to the inclusion of $1.4 million in closing costs which were allocated to the warrants issued in our public offering completed in August 2016, $0.4 million increase in personnel related costs and $0.4 million increase in professional and consulting services. General and administrative expenses included stock-based compensation expenses of $56,000 for the three months ended September 30, 2016 as compared to $0.1 million for the three months ended September 30, 2015.

 

Interest expense. Interest expense was $0.1 million in the three months ended September 30, 2016 compared to $0.2 million in the three months ended September 30, 2015.

 

Interest income. Interest income of $3,000 was for the three months ended September 30, 2016 compared to $4,000 in the three months ended September 30, 2015. The decrease is due to the decrease in the average balances of the interest-bearing cash and investment accounts from period to period.

 

Loss on revaluation of warrant liability. Loss on revaluation of the warrant liability was $0.3 million for the three months ended September 30, 2016. The non-cash loss is associated with the change in the fair value of our warrant liability.

 

Loss on early extinguishment of debt. Loss on early extinguishment of debt was $0.2 million for the three months ended September 30, 2016. This consists of the final payment and prepayment fee offset by the unamortized debt premium resulting from the payoff of our loan with Oxford.

 

Other expense. Other expense was $4,000 for the three months ended September 30, 2016 compared to $9,000 for the three months ended September 30, 2015. This change was due to a decrease in foreign exchange losses associated with foreign currency transactions.  

  

Comparison of the nine months ended September 30, 2016 and 2015

 

The following table summarizes the results of our operations for the nine months ended September 30, 2016 and 2015, together with the changes in those items in dollars (in thousands):

 

   

Nine Months Ended September 30,

   

Change

 
   

2016

   

2015

   

2016 vs. 2015

 

Research and development expenses

    2,531       8,192       (5,661

)

General and administrative expenses

    5,564       2,967       2,597  

Interest expense

    (373

)

    (528

)

    155  

Interest income

    11       18       (7

)

Loss on revaluation of warrant liability

    (1,969

)

          (1,969

)

Loss on early extinguishment of debt

    (180

)

          (180

)

Other expense

    (11

)

    (29

)

    18  

   

Research and development expenses. Research and development expenses were $2.5 million in the nine months ended September 30, 2016 compared to $8.2 million in the nine months ended September 30, 2015. The decrease in research and development costs is attributable to the following:

 

 

a $5.2 million decrease in clinical costs associated with our completed Phase 3 PLUS-1 clinical trial of topsalysin, specifically a $3.3 million decrease in cost associated with our clinical research organizations, a $1.2 million decrease for patient visits to our clinical site investigators and $0.7 million decrease primarily in costs associated with the data tracking, consulting, site inspections and travel for our Phase 3 PLUS-1 clinical trial,

 

 

a $0.3 million decrease in the costs associated with our Phase 2a proof of concept clinical trial for the treatment of low to intermediate risk prostate cancer and, 

     
 

a $0.3 million decrease in the costs associated with manufacturing activities for topsalysin. 

 

 

 
23

 

 

These decreases are offset by increases of $0.1 million in personnel related costs and $0.1 million for a milestone payment due to UVIC and Johns Hopkins for the completion of Phase 1 clinical activities associated with topsalysin for the treatment of prostate cancer. Research and development expenses included stock-based compensation expenses of $0.1 million for the nine months ended September 30, 2016 as compared to $0.2 million for the nine months ended September 30, 2015.

 

General and administrative expenses. General and administrative expenses were $5.6 million in the nine months ended September 30, 2016 compared to $3.0 million for the nine months ended September 30, 2015. The increase from the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2016 is primarily due to the inclusion of $1.6 million in closing costs which were allocated to the warrants issued in our registered direct transaction and public offering, both completed in the nine months ending September 30, 2016, a $0.5 million increase in personnel related costs and $0.7 million in increases for legal, accounting, consulting and professional services. General and administrative expenses included stock-based compensation expenses of $0.2 million for the nine months ended September 30, 2016 as compared to $0.4 million for the nine months ended September 30, 2015.

 

Interest expense. Interest expense was $0.4 million in the nine months ended September 30, 2016 compared to $0.5 million in the nine months ended September 30, 2015.

 

Interest income. Interest income of $11,000 was for the nine months ended September 30, 2016 compared to $18,000 in the nine months ended September 30, 2015. The decrease is due to the decrease in the average balances of the interest-bearing cash and investment accounts from period to period.

 

Loss on revaluation of warrant liability. Loss on revaluation of the warrant liability was $2.0 million for the nine months ended September 30, 2016. The non-cash loss is associated with the change in the fair value of our warrant liability.

 

 Loss on early extinguishment of debt. Loss on early extinguishment of debt was $0.2 million for the nine months ended September 30, 2016. This consists of the final payment and prepayment fee offset by our unamortized debt premium resulting from the payoff of our loan with Oxford.

 

Other expense. Other expense was $11,000 for the nine months ended September 30, 2016 compared to $29,000 for the nine months ended September 30, 2015. This change was primarily due to a decrease in foreign exchange losses associated with foreign currency transactions.  

 

Liquidity and Capital Resources

 

Overview

 

Since our inception, our operations have been primarily financed through public and private equity sales, debt financings and payments from Kissei. Since inception, we have devoted our resources to funding and conducting research and development programs, including discovery research, preclinical studies and clinical trial activities.

  

At September 30, 2016, we had cash, cash equivalents and securities available-for-sale of $31.3 million, representing an increase of $22.9 million from December 31, 2015. We had working capital of $29.8 million at September 30, 2016, an increase of $24.2 million from December 31, 2015. The increase in working capital from December 31, 2015 to September 30, 2016 was the result of a completed public offering in August 2016, in which we issued 7,475,000 common shares at a price of $4.00 per share, and warrants to purchase 5,606,250 common shares and received proceeds of $27.4 million, net of underwriters’ discounts, commissions and offering costs and a completed public offering in May 2016, in which we issued 3,571,428 common shares at a price of $1.40 per share and warrants to purchase common shares, and received net proceeds of approximately $4.6 million. During the nine months ended September 30, 2016, 1,775,000 of common share purchase warrants were exercised which generated proceeds of $2.5 million. We expect that our cash, cash equivalents and securities available-for-sale will be sufficient to fund our operations into the second quarter of 2018. At this point in time we do not plan on pursuing a second Phase 3 trial in BPH unless we obtain additional financing. We could use dilutive funding options to fund a second Phase 3 trial in BPH such as an equity financing and non-dilutive funding options such as a partnering arrangement or royalty agreement. There can be no assurance that such funding will be available on acceptable terms or at all. 

  

 Future Operations

 

We have devoted substantial resources to developing topsalysin, protecting and enhancing our intellectual property and providing general and administrative support for these activities. We have not generated any revenue from product sales and, to date, have funded our operations primarily through public and private equity security sales, debt financings and payments from Kissei.

 

 

 
24

 

 

We will require significant additional capital to fund our operations and complete development of topsalysin and there is no assurance that we will obtain additional capital.  

 

Our future capital requirements will depend on, and could increase significantly as a result of, many factors, including:

 

 

• 

progress in, and the costs of, our clinical trials, including our planned additional Phase 2 clinical trial for localized prostate cancer and an additional Phase 3 clinical trial for BPH, preclinical studies and other research and development activities for topsalysin;

 

 

• 

the costs and timing of regulatory approvals;

 

 

our ability to maintain our strategic license with Kissei and its ability to achieve applicable milestones and establish and maintain additional strategic collaborations, including licensing and other arrangements;

 

 

• 

the costs involved in filing, prosecuting, enforcing and defending patent claims and other intellectual property rights;

 

 

• 

the costs of obtaining and securing manufacturing supply for clinical or commercial production of product candidates; and

 

 

the costs of establishing, or contracting for, sales and marketing capabilities if we obtain regulatory approvals to market topsalysin.

 

Until we can generate significant continuing revenues, we expect to satisfy our future cash needs through private and public sales of our securities, debt financings, by establishing additional strategic collaborations for topsalysin or from exercise of outstanding common share purchase warrants and stock options.

 

Cash Flows

 

The following table shows a summary of our cash flows for the nine months ended September 30, 2016 and 2015 (in thousands): 

 

   

Nine Months Ended September 30,

 
   

2016

   

2015

 

Net cash provided by (used in):

               

Operating activities

  $ (8,225

)

  $ (12,528

)

Investing activities

    2,297       13,617  

Financing activities

    31,102       (291

)

Effect of exchange rate changes on cash and cash equivalents

          (13

)

Net increase in cash and cash equivalents

  $ 25,174     $ 785  

   

Operating Activities 

 

Net cash used in operating activities decreased to $8.2 million for the nine months ended September 30, 2016 compared to $12.5 million for the nine months ended September 30, 2015. The decrease in net cash used in operating activities of $4.3 million was primarily due to the decrease in our net loss from period to period and decrease in funds used for the payment of accounts payable and accrued expenses in the nine month period ended September 30, 2016. The decrease in our net loss from the nine months ended September 30, 2015 to the nine months ended September 30, 2016 is primarily a result of the decrease in our research and development expenses associated with our completed Phase 3 clinical trial for the treatment of the symptoms of BPH and a decrease in costs associated with manufacturing activities of topsalysin offset by the non-cash loss recorded for the revaluation of our warrant. 

  

 Investing Activities

 

Net cash provided by investing activities was $2.3 million for the nine months ended September 30, 2016, compared to $13.6 million net cash provided by investing activities for the nine months ended September 30, 2015. The net cash provided by investing activities during both the nine months ended September 30, 2016 and September 30, 2015 represents the usage of the proceeds from the maturity of securities classified as available-for-sale to fund our operations and, to a lesser extent, to purchase securities with maturities less than 90 days which are classified as cash and cash equivalents.  

 

 

 
25

 

 

Financing Activities

 

Net cash provided by financing activities was $31.1 million for the nine months ended September 30, 2016. The cash provided by financing activities primarily related to our completed common share offerings. We also received $2.6 million of proceeds from the exercise of warrants and stock options during the nine months ended September 30, 2016. These increases are offset by $5.1 million of principal payments and $0.3 million of other costs due upon the payoff of our loan with Oxford.

 

Off-balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements (as defined by applicable SEC regulations) that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.  

 

Recent accounting pronouncements

 

In May 2014, the FASB issued new guidance related to revenue recognition (ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606)). Subsequently the FASB has issued additional guidance (ASU Nos. 2015-14; 2016-08; 2016-10; 2016-12 Revenue from Contracts with Customers (Topic 606)). The guidance establishes principles for reporting information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Two methods of adoption are permitted: (a) full retrospective adoption, meaning the standard is applied to all periods presented or (b) modified retrospective adoption, meaning the cumulative effect of applying the new guidance is recognized as an adjustment to the opening retained earnings balance. We do not intend to adopt the new guidance early and is in the process of determining the adoption method as well as the effects the adoption will have on its consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” or ASU 2014-15. ASU 2014-15 will require management to assess, at each annual and interim reporting period, the entity’s ability to continue as a going concern. The amendments in ASU 2014-15 do not have any application to an entity’s financial statements, but only to disclosure in the related notes. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and early application is permitted. We plan to adopt ASU 2014-15 in the first quarter of 2017 and for the annual period ending December 31, 2016.

 

In February 2016, the FASB issued ASU, No. 2016-02, “Leases (Topic 842)”. This guidance requires lessees to recognize a lease liability and a right-of-use asset with the exception of short-term leases. In addition, lessees are required to classify leases as either operating or finance based on current criteria of whether or not the lease is effectively a financed purchase by the lessee. The new standard is effective for the annual reporting period beginning after December 15, 2018 and early adoption is permitted. We are in the process of evaluating the impact of this guidance on our consolidated financial statement disclosures. 

  

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. This guidance is intended to simply the accounting for stock compensation. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences, (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The new standard is effective for annual periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018 and early adoption is permitted. We are in the process of evaluating the impact of this guidance on our consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”, addressing eight specific cash flow issues in an effort to reduce diversity in practice. The amended guidance is effective for fiscal years beginning after December 31, 2017, and for interim periods within those years. Early adoption is permitted. We are in the process of evaluating the impact of this guidance on our consolidated financial statements.

 

 

 
26

 

 

Item  3.       Qualitative and Quantitative Disclosures About Market Risk 

 

Our primary market risk is the exposure to foreign currency exchange rate fluctuations. This risk arises from our holdings of foreign currency denominated accounts payable. Changes in foreign currency exchange rates can create foreign exchange gains or losses to us. We do not engage in foreign currency hedging arrangements for our accounts payable, and, consequently, foreign currency fluctuations may adversely affect our earnings. During the nine months ended September 30, 2016 and 2015, 5.0% and 10.8%, respectively, of our operating expenses were denominated in currencies other than the U.S. dollar. We have minimal direct exposure to interest rate risks as we do not have variable rate financial liabilities.

 

We invest our excess cash in investment-grade, interest-bearing securities. The primary objective of our investment activities is to preserve principal and liquidity. To achieve this objective, we invest in a money market fund and high quality marketable debt instruments of corporations, financial institutions and government sponsored enterprises with contractual maturity dates of generally less than three years. We do not have any direct investments in auction-rate securities or securities that are collateralized by assets that include mortgages or subprime debt. If a 10% change in interest rates were to have occurred on September 30, 2016 this change would not have had a material effect on the fair value of our investment portfolio as of that date.

 

Item  4.       Controls and Procedures 

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

As of September 30, 2016, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2016.  

 

Changes in Internal Control Over Financial Reporting

 

An evaluation was also performed under the supervision and with the participation of our management, including our chief executive officer and our principal financial officer, of any change in our internal control over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any change in our internal control over financial reporting that occurred during our latest fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

  

 

 
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PART II.-OTHER INFORMATION

 

Item 1A.        Risk Factors 

 

You should consider carefully the following risk factors, together with all of the other information included or incorporated in this Quarterly Report, before making your decision whether to purchase or sell our common shares. Each of these risk factors, either alone or taken together, could adversely affect our business, operating results, growth prospects and financial condition, as well as adversely affect the value of an investment in our common shares. If that were to happen, the trading price of our common shares could decline. There may be additional risks that we do not presently know of or that we currently believe are immaterial which could also impair our business and financial position. We have marked with an asterisk (*) those risk factors that reflect changes from the risk factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC on March 29, 2016.

 

Risks Related to Our Business and Industry

 

*We will require significant funding to complete the development and commercialization of topsalysin and we may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our development program or commercialization efforts or cease operations.

  

Our operations have consumed substantial amounts of cash since inception. Since inception, we have raised approximately $146 million from the sale of equity securities in private placements and public offerings, $21 million from the issuance of debt securities, and $11 million from the exercise of common share purchase warrants. We will need to continue to spend substantial amounts to continue clinical development of topsalysin. We are currently evaluating options to further advance the clinical development of topsalysin. We plan to conduct a second Phase 2 clinical trial to confirm the dose and optimize the delivery of topsalysin for the treatment of localized prostate cancer. We will require significant additional funding to advance topsalysin in clinical development outside of our planned second Phase 2 clinical trial. We could use dilutive funding options such as an equity financing and non-dilutive funding options such as a partnering arrangement or royalty agreement to fund future clinical development of topsalysin. Other than our planned second Phase 2 clinical trial, at this point in time we do not plan on pursuing new clinical trials, including a second Phase 3 trial in BPH, unless we obtain additional financing or secure a development partner to fund such new clinical trials.  There can be no assurance that such funding or a development partner will be available on acceptable terms or at all. 

 

We expect that our existing cash, cash equivalents and securities available-for-sale, together with interest thereon, will only be sufficient to fund our operations into the second quarter of 2018. However, changing circumstances may cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. Any clinical development efforts, including our planned second Phase 2 clinical trial and our ongoing operations will require significant funding.  

 

We expect to finance future cash needs through public or private equity offerings, debt financings or strategic partnerships and alliances and licensing arrangements. In addition, as part of our offering of common shares in August 2016, we agreed not to sell any equity securities for 90 days from the closing. We cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us we may need to significantly delay, scale back or discontinue the development or commercialization of topsalysin. We also could be required to:

 

 

• 

seek collaborators for one or more of our current or future product candidates on terms that are less favorable than might otherwise be available;

 

 

• 

relinquish or license on unfavorable terms our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves; or

 

  

• 

seek a third party to acquire us or our assets.

  

Any of the above events could significantly harm our business, prospects, financial condition and results of operations and cause the price of our common shares to decline.  

 

Our independent registered public accounting firm has included an explanatory paragraph relating to our ability to continue as a going concern in its report on our audited financial statements.

 

Our report from our independent registered public accounting firm for the year ended December 31, 2015 includes an explanatory paragraph stating that our losses and negative cash flows from operations and accumulated deficit at December 31, 2015 raise substantial doubt about our ability to continue as a going concern. If we are unable to obtain sufficient funding, our business, prospects, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our consolidated financial statements, and it is likely that investors will lose all or a part of their investment. Future reports from our independent registered public accounting firm may also contain statements expressing doubt about our ability to continue as a going concern. If we seek additional financing to fund our business activities in the future and there remains doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all.

 

 

 
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 *We are an early stage company with no approved products and no revenue from commercialization of our product candidate.

 

We have not completed the development of any product candidates and, accordingly, have not begun to commercialize, or generate any product revenues from any product candidate. We are at an early stage of development of our product candidate, topsalysin, for the treatment of the lower urinary tract symptoms of benign prostatic hyperplasia, or BPH and for the treatment of localized low to intermediate risk prostate cancer. Topsalysin requires significant additional clinical testing and investment prior to seeking marketing approval for either the treatment of the symptoms of BPH or the treatment of prostate cancer. On November 10, 2015, we announced final results from our Phase 3 "PLUS-1" study of topsalysin as a treatment for lower urinary tract symptoms of BPH. However, in order to seek regulatory approval for the treatment of the symptoms of BPH, we would be required to conduct a second Phase 3 clinical trial. At this point in time we do not plan on pursuing a second Phase 3 trial in BPH unless we obtain additional financing or secure a development partner to fund such new clinical trial. There can be no assurance that such funding or a development partner will be available on acceptable terms or at all. In May 2015, we initiated a Phase 2a proof of concept clinical trial of topsalysin for the treatment of localized low to intermediate risk prostate cancer and on June 9, 2016, we announced the biopsy data of all 18 patients. We plan to conduct a second Phase 2 clinical trial to confirm the dose and optimize the delivery of topsalysin for the treatment of localized prostate cancer, which would be conducted at two or more clinical trial sites. While we believe that we may be able to seek regulatory approval for topsalysin for the treatment of localized prostate cancer with one Phase 3 clinical trial, we have not discussed late-stage clinical development in this indication with the Food and Drug Administration, or FDA, or foreign regulatory authorities and these authorities may disagree with our assessment and require additional clinical trials or other studies before we can submit for regulatory approval. We will continue to refine our development plans for topsalysin for the treatment of localized prostate cancer based on the results of our planned second Phase 2 clinical trial and discussions with regulatory agencies and may change our assessment of required clinical trials and our development plan. A commitment of substantial resources by us and potential partners will be required to conduct additional clinical trials for topsalysin to meet applicable regulatory standards, obtain required regulatory approvals, and to successfully commercialize this product candidate for the treatment in either indication. Topsalysin is not expected to be commercially available for either indication for several years, if at all, and any projected timelines for commercialization are subject to a number of factors that are outside our control. There is no assurance that we will be able to commercialize topsalysin within the time periods we expect or that our clinical trials will support the regulatory approvals needed to commercialize topsalysin at all.

   

*We are highly dependent on the success of our sole product candidate, topsalysin and we may not be able to successfully obtain regulatory or marketing approval for, or successfully commercialize, this product candidate.

 

To date, we have expended significant time, resources and effort on the development of topsalysin for the lower urinary tract symptoms of BPH and for the treatment of localized low to intermediate risk prostate cancer, including conducting preclinical and clinical trials. We have no product candidates in our clinical development pipeline other than topsalysin, which we are developing for those two potential indications. Our ability to generate product revenues and to achieve commercial success in the near term will initially depend almost entirely on our ability to successfully raise capital to fund our development programs and to develop, obtain regulatory approval for and then successfully commercialize topsalysin for either of these indications in the United States and the European Economic Area, or EEA. Before we can market and sell topsalysin in the United States or foreign jurisdictions for any indication, we will need to commence and complete additional clinical trials, manage clinical, preclinical, and manufacturing activities, obtain necessary regulatory approvals from the Food and Drug Administration, or FDA, in the United States and from similar foreign regulatory agencies in other jurisdictions, obtain manufacturing supply, build a commercial organization or enter into a marketing collaboration with a third party, and in some jurisdictions, obtain reimbursement authorization, among other things. We cannot assure you that we will be able to successfully complete the necessary preclinical studies and clinical trials and/or obtain regulatory approvals and sufficient commercial manufacturing supply for topsalysin in either indication. If we do not receive regulatory approvals, our business, prospects, financial condition and results of operations will be adversely affected. Even if we obtain the regulatory approvals to market and sell topsalysin, we may never generate significant revenues from any commercial sales of topsalysin for several reasons, including because the market for topsalysin may be smaller than we anticipate, topsalysin may not be adopted by physicians and payors or because topsalysin may not be as efficacious or safe as other treatment options. If we fail to successfully commercialize topsalysin, we may be unable to generate sufficient revenues to sustain and grow our business and our business, prospects, financial condition and results of operations will be adversely affected.

 

 

 
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The clinical trial protocol and design for our completed and any additional future Phase 3 clinical trials of topsalysin may not be sufficient to allow us to submit a BLA to the FDA in the indication of lower urinary tract symptoms of BPH or demonstrate safety or efficacy at the level required by the FDA for product approval.

 

Our initial Phase 3 clinical trial in the treatment of lower urinary tract symptoms of BPH and any additional Phase 3 clinical trial of topsalysin in this indication use the International Prostate Symptom Score, or IPSS, outcome measure evaluated at total change from baseline over 52 weeks as the primary endpoint. Secondary endpoints include Qmax (maximum urine flow) change from baseline (maximum urine flow) over 52 weeks. The IPSS outcome measure, which is a validated primary efficacy endpoint used to assess the treatment benefit in BPH clinical trials, is a patient recorded, composite assessment that takes into account factors such as ability to empty the bladder, frequency of urination, intermittency of urination and the urgency of urination. The IPSS outcome measure is subjective in nature and requires patients in the trial to accurately and retroactively assess numerous symptoms. The subjective nature of the IPSS outcome measure may make efficacy more difficult to demonstrate than for clinical trials for therapies that can show objective measures of efficacy. 

 

 We have not requested a special protocol assessment, or SPA, which drug development companies sometimes use to obtain an agreement with the FDA concerning the design and size of a clinical trial intended to form the primary basis of an effectiveness claim. Without the concurrence of the FDA on an SPA or otherwise, we cannot be certain that the design, conduct and data analysis approach for our initial Phase 3 clinical trial and any future Phase 3 clinical trials has or will generate data sufficient to establish the effectiveness of topsalysin for treatment of BPH symptoms to the FDA’s satisfaction, and therefore allow us to submit or receive approval of a Biologics License Application, or BLA for topsalysin. If the FDA requires us, or we otherwise determine, to amend our protocols, change our clinical trial designs, increase enrollment targets or conduct additional clinical trials, our ability to obtain regulatory approval on the timeline we have projected would be jeopardized and we could be required to make significant additional expenditures related to clinical development.

 

Further, even if we achieve positive results on the endpoints for a clinical trial, the FDA may disagree with our interpretation of the data and deem the results insufficient to demonstrate efficacy at the level required by the FDA for product approval. It is possible that we may make modifications to the clinical trial protocols or designs of our future clinical trials that delay enrollment or completion of such clinical trials and could delay regulatory approval of topsalysin for the treatment of symptoms of BPH. Any failure to obtain approval for topsalysin on the timeline that we currently anticipate, or at all, would have a material and adverse impact on our business, prospects, financial condition and results of operations.

  

*Our clinical trials may fail to adequately demonstrate safety and efficacy of topsalysin for either indication being pursued. Failure to meet the safety or efficacy standards for the trial would prevent or delay regulatory approval and commercialization.

 

Clinical development is expensive, takes many years to complete and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process and topsalysin is subject to the risks of failure inherent in drug development. Success in early clinical trials does not mean that later clinical trials will be successful because product candidates in later-stage clinical trials may fail to demonstrate sufficient safety or efficacy despite having progressed through initial clinical testing, even at statistically significant levels. We will be required to demonstrate through well-controlled clinical trials of topsalysin that our product candidate is safe and effective for use in its target indication before we can obtain regulatory approvals for its commercial sale. Companies frequently suffer significant setbacks in late-stage clinical trials, even after earlier clinical trials have shown promising results. Any future clinical trials of topsalysin may not be successful for a variety of reasons, including faults in the clinical trial designs, the failure to enroll a sufficient number of patients, undesirable side effects and other safety concerns and the inability to demonstrate sufficient efficacy. If topsalysin fails to demonstrate sufficient safety or efficacy, we would experience potentially significant delays in, or be required to abandon our development of, topsalysin, which would have a material and adverse impact on our business, prospects, financial condition and results of operations.

 

On November 10, 2015, we announced the final results from our initial Phase 3 clinical trial of topsalysin for the treatment of lower urinary tract symptoms of BPH and we are currently considering an additional Phase 3 clinical trial for topsalysin to examine whether topsalysin will effectively relieve BPH symptoms as measured at 52 weeks following treatment, which second trial will be required by the FDA before we can seek marketing approval of topsalysin in this indication. The results of the initial Phase 3 clinical trial may not be predictive of the second required Phase 3 clinical trial in the same indication. Further, even if we meet the primary and secondary endpoints in both trials, if topsalysin is slow to achieve effectiveness, this may limit its commercial potential relative to therapies that demonstrate more immediate effect on the symptoms of BPH. The FDA has not agreed upon the amount of IPSS treatment effect that must be demonstrated in the required Phase 3 clinical trials in order for marketing approval to be granted; however, historically the oral medications approved for the treatment of BPH have shown approximately a 2 point improvement in IPSS between active and control. There is no assurance that the FDA will not require that we demonstrate a 2 point improvement, which was not seen in the PLUS-1 clinical trial.

 

 

 
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On June 9, 2016, we announced the biopsy data at six months on all 18 patients enrolled in our Phase 2a proof of concept clinical trial of topsalysin for the treatment of localized low to intermediate prostate cancer. The results of the Phase 2a proof of concept clinical trial may not be predictive of the results of our next Phase 2 study to confirm dosing and optimize delivery.

 

 If any of the clinical trials of topsalysin fail to demonstrate sufficient safety and efficacy, we would experience potentially significant delays in, or be required to abandon our development program, which would have a material and adverse impact on our business, prospects, financial condition and results of operations.

 

*We may seek a partner for the continued development and commercialization of topsalysin for the treatment of the symptoms of BPH. If we seek a partner and are unable to find a partner or such partnership is unsuccessful, we may be unable to commercialize topsalysin for this indication.

 

We may seek a third-party partner for financial and scientific resources for the further clinical development and commercialization of topsalysin for the treatment of the symptoms of BPH, including the required second Phase 3 clinical trial. There is no assurance that we will be able to find such a partner and, if we do, we may have to relinquish a significant portion of the future economic value of topsalysin to such partner. Also, a partner will likely significantly limit our control over the course of clinical development of topsalysin. Our ability to recognize revenue from a successful partnering arrangement of the sort we are contemplating may be impaired by several factors, including:

 

 

a partner may shift its priorities and resources away from topsalysin due to many reasons, including a change in business strategy, a merger, acquisition, sale or downsizing of its company or business unit;

 

 

successfully identifying a new partner and negotiating an agreement could be more difficult or the terms less advantageous because we have already established a partnership for Japan;

 

 

a partner may have the ability to unilaterally cease development of topsalysin;

 

 

a partner may change the success criteria for topsalysin as a treatment for the symptoms of BPH thereby delaying or ceasing clinical development of topsalysin;

 

 

a partner could develop a product that competes, either directly or indirectly, with topsalysin;

 

 

a partner with commercialization obligations may not commit sufficient financial or human resources to the marketing, distribution or sale of topsalysin;

 

 

a partner could terminate our agreement;

 

 

a dispute could arise between us and a partner concerning the research, development or commercialization of topsalysin which could delay or terminate development and, possibly, result in costly litigation or arbitration which may divert management attention and resources; and

 

 

a partner may use our proprietary information or intellectual property in such a way as to invite litigation from a third party or fail to maintain or prosecute intellectual property rights such that our rights are jeopardized.

 

In addition, any adverse developments that occur during any clinical trials conducted by or under the supervision of a partner may affect our ability to obtain regulatory approval or commercialize topsalysin for the treatment of prostate cancer.

 

Further, if a partnership terminates or is otherwise unsuccessful, we may need to seek out and establish an alternative partnership. This may not be possible, or we may not be able to do so on terms which are acceptable to us, in which case, it may be necessary for us to cease the development of topsalysin for the treatment of symptoms of BPH or conduct the remaining clinical development on our own and with our own funds.

 

Any of these events would have a material adverse effect on our results of operations and financial condition.

  

Topsalysin is subject to extensive regulation, and we may not obtain regulatory approvals for topsalysin.

 

The clinical development, manufacturing, labeling, packaging, storage, tracking, recordkeeping, advertising, promotion, export, import, marketing and distribution and other possible activities relating to our product candidate are, and for any other biologic or drug candidate that we may develop will be, subject to extensive regulation by the FDA in the United States and other regulatory agencies in foreign jurisdictions. Topsalysin is subject to regulation in the United States as a biologic. Biologics require the submission of a BLA, and we are not permitted to market topsalysin in the United States until we obtain approval from the FDA of a BLA. To market topsalysin in the EEA, which includes the 27 member states of the European Union plus Norway, Liechtenstein and Iceland, we must submit a Marketing Authorization Application, or MAA, to the European Medicines Agency, or EMA, for approval under the EMA’s centralized procedure, which if the marketing authorization is granted, will enable us to market the product throughout the entire territory of the EEA. A BLA or MAA must be supported by extensive clinical and preclinical data, as well as extensive information regarding chemistry, manufacturing and controls, or CMC, sufficient to demonstrate the safety and effectiveness of the applicable product candidate to the satisfaction of FDA and EMA, respectively.

  

 

 
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Regulatory approval of a BLA or an MAA is not guaranteed, and the approval process is expensive and will take several years. The FDA and foreign regulatory entities also have substantial discretion in the approval process. The number and types of preclinical studies and clinical trials that will be required for BLA or MAA approval varies depending on the product candidate, the disease or the condition that the product candidate is designed to target and the regulations applicable to any particular product candidate. Despite the time and expense associated with preclinical studies and clinical trials, failure can occur at any stage, and we could encounter problems that cause us to repeat or perform additional preclinical studies or clinical trials or generate additional CMC data. The FDA, EMA and similar foreign authorities could delay, limit or deny approval of a product candidate for many reasons, including because they:

 

 

may not deem our product candidate to be adequately safe and effective;

 

 

• 

may not find the data from our preclinical studies and clinical trials or CMC data to be sufficient to support a claim of safety and efficacy;

 

 

• 

may not approve the manufacturing processes or facilities associated with our product candidate;

 

 

• 

may conclude that we have not sufficiently demonstrated long-term stability of the formulation of the drug product for which we are seeking marketing approval;

 

 

• 

may change approval policies (including with respect to our product candidate’s class of biologics) or adopt new regulations; or

 

 

• 

may not accept a submission due to, among other reasons, the content or formatting of the submission.

 

Obtaining approval of a BLA is a lengthy, expensive and uncertain process. As part of the U.S. Prescription Drug User Fee Act, the FDA has a goal to review and act on a percentage of all submissions in a given time frame. The general review goal for a BLA is 12 months from the submission date for a standard application and eight months from the submission date for a priority review application. The FDA’s review goals are subject to change, and it is unknown whether the review of a BLA for topsalysin will be completed within the FDA’s target timelines or will be delayed. Moreover, the duration of the FDA’s review may depend on the number and types of other BLAs that are submitted to the FDA around the same time period or are pending. Generally, public concern regarding the safety of drug products could delay or limit our ability to obtain regulatory approval, result in the inclusion of unfavorable information in our labeling, or require us to undertake other activities that may entail additional costs.

   

We have not submitted an application for approval or obtained FDA approval for any product. This lack of experience may impede our ability to obtain FDA approval in a timely manner, if at all, for topsalysin. In addition, failure to comply with FDA and other applicable U.S. and foreign regulatory requirements, either before or after product approval, may subject us to administrative or judicially imposed sanctions, including:

 

 

warning letters;

 

 

• 

civil and criminal penalties;

 

 

injunctions;

 

 

• 

withdrawal of approved products;

 

 

product seizure or detention;

 

 

• 

product recalls;

 

 

total or partial suspension of production; and

 

 

• 

refusal to approve pending BLAs or supplements to approved BLAs.

 

Even if we believe that data collected from our preclinical studies and clinical trials of our product candidate are promising, our data may not be sufficient to support marketing approval by the FDA or any foreign regulatory authority, or regulatory interpretation of these data and procedures may be unfavorable. In addition, the FDA’s regulatory review of BLAs for product candidates intended for widespread use by a large proportion of the general population is becoming increasingly focused on safety, which may lead to increased scrutiny of the safety data we submit in any BLA for topsalysin. Even if approved, a product candidate may not be approved for all indications requested and such approval may be subject to limitations on the indicated uses for which the biologic may be marketed, restricted distribution methods or other limitations. Our business and reputation may be harmed by any failure or significant delay in obtaining regulatory approval for the sale of our product candidate. We cannot predict when or whether regulatory approval will be obtained for any product candidate we develop.

 

 

 
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To market any biologics outside of the United States, we and current or future collaborators must comply with numerous and varying regulatory and compliance related requirements of other countries. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods, including obtaining reimbursement and pricing approval in select markets. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks associated with FDA approval as well as additional, presently unanticipated, risks. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others, including the risk that our product candidates may not be approved for all indications requested and that such approval may be subject to limitations on the indicated uses for which the drug may be marketed.

 

*Topsalysin may cause undesirable side effects or have other properties that may delay or prevent its regulatory approval or commercialization or limit its commercial potential.

 

Undesirable side effects caused by topsalysin could cause us or regulatory authorities to interrupt, delay, suspend or terminate clinical trials and could result in a more restrictive label or the delay or denial of marketing approval by the FDA or other regulatory authorities. This, in turn, could limit or prevent us from commercializing topsalysin and generating revenues from its sale. The most common adverse events observed in patients who received topsalysin in our initial Phase 3 clinical trial for the treatment of lower urinary tract symptoms of BPH that were potentially attributable to topsalysin included painful urination, the presence of red blood cells in urine, frequent urination and urinary urgency, fever, and perineal pain. Each of the foregoing adverse events occurred in greater than 5% of the topsalysin population. Further, the incidence of serious AEs, or SAEs, was similar in patients treated with topsalysin and vehicle. There were two SAEs assessed by the investigator as at least possibly related to treatment for topsalysin and one such SAE for vehicle. The topsalysin-related SAEs were moderate events of “acute non-infectious prostatitis” and “fever following prostate procedure” not unexpected manifestations of the intraprostatic cellular destruction and resultant inflammation integral to the topsalysin mechanism of action. The vehicle-related SAE was a mild event of “urinary tract infection.” The adverse events which occurred in our Phase 2a localized prostate cancer trial were similar in nature to the adverse events noted in our BPH program and no SAEs were reported. Although the SAEs were moderate and not unexpected, they may not be fully indicative of the adverse events that would be encountered in commercial use or in larger trials. Results from our future clinical trials could reveal a high and unacceptable severity and prevalence of these or other side effects. In such an event, our trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny approval of topsalysin for its targeted indication. Further, such side effects could affect patient recruitment or the ability of enrolled patients to complete a trial or result in potential product liability claims. Any of these occurrences may have a material and adverse impact on our business, prospects, financial condition and results of operations.

  

In addition, if topsalysin receives marketing approval for the treatment of the symptoms of BPH or prostate cancer, or both, and we or others later identify undesirable side effects caused by topsalysin, a number of significant negative consequences could result, including:

 

 

regulatory authorities may withdraw their approval of topsalysin;

 

 

• 

regulatory authorities may require that we demonstrate a larger clinical benefit by conducting additional clinical trials for approval to offset the risk;

 

 

• 

regulatory authorities may require the addition of labeling statements or warnings that could diminish the usage of the product or otherwise limit the commercial success of topsalysin;

 

 

• 

we may be required to change the way topsalysin is administered;

 

 

• 

we may choose to recall, withdraw or discontinue sale of topsalysin; 

 

 

• 

we could be sued and held liable for harm caused to patients;

 

 

• 

we may not be able to enter into collaboration agreements on acceptable terms and execute on our business model; and

 

 

• 

our reputation may suffer.

 

 

 
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Any one or a combination of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing topsalysin, which in turn could delay or prevent us from generating any revenues from the sale of the product, which could significantly harm our business, prospects, financial condition and results of operations.

 

*We may experience delays in the commencement or completion of our clinical trials, which could result in increased costs to us and delay our ability to pursue regulatory approval and generate product revenues.

 

Delays in the commencement or completion of clinical testing could significantly impact our product development costs and could result in the need for additional financing. Although we have completed the first of two required Phase 3 clinical trials of topsalysin for the treatment of the symptoms of BPH and completed a Phase 2a proof of concept clinical trial for the treatment of localized low to intermediate risk prostate cancer, and have plans to commence our next planned Phase 2 trial for the treatment of localized low to intermediate risk prostate cancer in the first quarter of 2017 for which we have funds, we do not know whether or when we will be able to fund any additional clinical trials for either the treatment of localized low to intermediate risk prostate cancer or the treatment of the symptoms of BPH, or if any future trials will be completed on time, or at all..

 

Further, the commencement or completion of clinical trials can be delayed for a variety of reasons, including delays in or related to:

 

 

raising sufficient capital or securing a development partner to fund the clinical trial;

 

 

• 

obtaining regulatory approval, or feedback on trial design necessary, to commence a clinical trial;

 

 

• 

identifying, recruiting and training suitable clinical investigators;

 

 

• 

identifying, recruiting and enrolling suitable patients to participate in a clinical trial;

 

 

• 

catastrophic loss of drug product due to shipping delays or delays in customs in connection with delivery of drug product to foreign countries for use in clinical trials;

 

 

• 

reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and clinical trial sites;

  

 

obtaining sufficient quantities of topsalysin and the diluent used with topsalysin for use in clinical trials and completing reformulation of topsalysin for commercial fill and finish for use in any future Phase 3 clinical trials;

 

 

having patients complete a trial or return for post-treatment follow-up;

 

 

• 

adding new clinical trial sites;

 

 

failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;

 

 

failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions;

 

 

• 

unforeseen safety issues or any determination that a clinical trial presents unacceptable health risks;

 

 

• 

obtaining institutional review board, or IRB, approval to conduct a clinical trial at a prospective site; and

 

 

• 

retaining patients who have initiated a clinical trial but may withdraw due to adverse side effects from the therapy, insufficient efficacy, fatigue with the clinical trial process or personal issues.

 

Any delays in the commencement or completion of our clinical trials will delay our timeline to obtain regulatory approval for our product candidate. In addition, many of the factors that cause, or lead to, a delay in the commencement of clinical trials may also ultimately lead to the denial of regulatory approval for a product candidate. We do not expect to commence enrollment of our second required Phase 3 clinical trial in this indication until we have raised the additional capital required to fund such second Phase 3 clinical trial.

 

 

 
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We may face competition to enroll prostate cancer and BPH patients in our future clinical trials from other clinical trials for other sponsors including potential competitors. Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating. Delays in enrollment in any future clinical trials of topsalysin would result in delays in our ability to pursue regulatory approval of topsalysin.

 

Changes in regulatory requirements and guidance also may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs for re-examination, which may impact the costs, timing and successful completion of a clinical trial. If we experience delays in the completion of, or if we must terminate, any clinical trial of topsalysin, our ability to obtain regulatory approval for that product candidate will be delayed and the commercial prospects, if any, for the product candidate may be harmed. If we ultimately commercialize topsalysin, other therapies for the same indications may have been introduced to the market during the period we have been delayed and such therapies may have established a competitive advantage over our product candidates.

 

*We rely on third parties to manufacture topsalysin and an ingredient used in the diluent used to administer topsalysin, and we intend to rely on third parties to manufacture commercial supplies of topsalysin, if and when it is approved. The development and commercialization of topsalysin could be stopped or delayed if any such third party fails to provide us with sufficient quantities of the product or the diluent or fails to do so at acceptable quality levels or prices or fails to maintain or achieve satisfactory regulatory compliance.

 

We do not currently have nor do we plan to acquire the infrastructure or capability internally to manufacture our clinical drug supplies for use in the conduct of our clinical trials, and we lack the resources and the capability to manufacture topsalysin on a clinical or commercial scale. Instead, we currently rely on our third-party manufacturing partner, Boehringer Ingelheim RCV GmbH & Co KG, or BI, located in Austria for the production of topsalysin and located in Germany for fill and testing services, pursuant to an agreement which we entered into in 2011. Although we have entered into an agreement for the manufacture of clinical supplies and initial commercial supplies of topsalysin, BI may not perform as agreed, may be unable to comply with these cGMP requirements and with FDA, state and foreign regulatory requirements or may terminate its agreement with us.

 

We have completed scale-up up to the commercial batch size for topsalysin drug substance, but the finalization of the commercial fill finish process for the production of drug product is still underway. In addition, we have decided to pursue the reformulation of topsalysin, including the diluent. Reformulation could result in significant delays in the commencement of future clinical trials. Moreover, we have not entered into a commercial supply agreement with BI and BI has not demonstrated that it will be capable of manufacturing the filled and finished topsalysin on a large commercial scale. If BI is unable or unwilling to manufacture the filled and finished topsalysin on a large commercial scale, we may be required to identify a new manufacturer which could cause significant delays in finalizing the current commercial fill finish process and could cause delays to future planned clinical trials.

 

BI currently procures an ingredient used in the current formulation of topsalysin from a multinational industrial biotech company which is a single source supplier, on a purchase order basis. If our single source provider is unable to or decides to no longer supply BI or us with an ingredient for the diluent, we could experience delays in obtaining product for clinical trials until we procured another source or until we reformulate the product and we may be required to contract with another source in order to assure adequate commercial supply. Reformulation could result in significant further delays as we would be required to conduct additional clinical trials.  

 

If our third-party manufacturer cannot successfully manufacture material that conforms to our specifications and the applicable regulatory authorities’ strict regulatory requirements, or pass regulatory inspection, they will not be able to secure or maintain regulatory approval for the manufacturing facilities. In addition, we have no control over the ability of any third-party manufacturer to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or any other applicable regulatory authorities do not approve these facilities for the manufacture of our products or if they withdraw any such approval in the future, or if our suppliers or third-party manufacturer decide they no longer want to supply our biologic or manufacture our products, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our products. We might be unable to identify manufacturers for long-term commercial supply on acceptable terms or at all. Manufacturers are subject to ongoing periodic unannounced inspection by the FDA and other governmental authorities to ensure strict compliance with government regulations. Currently, our contract manufacturer is located outside the United States and the FDA has recently increased the number of foreign drug manufacturers which it inspects. As a result, our third-party manufacturer may be subject to increased scrutiny.

 

The facilities used by our third-party manufacturer to manufacture topsalysin and any other potential product candidates that we may develop in the future must be approved by the applicable regulatory authorities, including the FDA, pursuant to inspections that will be conducted after we submit our BLA to the FDA. We do not control the manufacturing processes of BI and are currently completely dependent on BI for the production of topsalysin in accordance with cGMPs, which include, among other things, quality control, quality assurance and the maintenance of records and documentation.

 

 

 
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If we were to experience an unexpected loss of topsalysin supply, we could experience delays in our future clinical trials as BI would need to manufacture additional topsalysin and would need sufficient lead time to schedule a manufacturing slot. This is due to the fact that, given its nature, topsalysin cannot be manufactured in the BI facility at the same time as other biologics.

 

Topsalysin is manufactured by starting with cells which are stored in a cell bank. We have one master cell bank and multiple working cell banks and believe we would have adequate backup should any cell bank be lost in a catastrophic event. However, it is possible that we could lose multiple cell banks and have our manufacturing severely impacted by the need to replace the cell banks.

 

The manufacture of biopharmaceutical products is complex and requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. We and our contract manufacturers must comply with cGMP regulations and guidelines. Manufacturers of biopharmaceutical products often encounter difficulties in production, particularly in scaling up and validating initial production and contamination. These problems include difficulties with production costs and yields, quality control, including stability of the product, quality assurance testing, operator error, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Furthermore, if microbial, viral or other contaminations are discovered in our products or in the manufacturing facilities in which our products are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. We cannot assure you that any stability or other issues relating to the manufacture of any of our products will not occur in the future. Additionally, our manufacturer may experience manufacturing difficulties due to resource constraints or as a result of labor disputes or unstable political environments. If our manufacturer were to encounter any of these difficulties, or otherwise fail to comply with their contractual obligations, our ability to provide any product candidates to patients in clinical trials would be jeopardized. Any delay or interruption in the supply of clinical trial supplies could delay the completion of clinical trials, increase the costs associated with maintaining clinical trial programs and, depending upon the period of delay, require us to commence new clinical trials at additional expense or terminate clinical trials completely.  

 

 Any adverse developments affecting clinical or commercial manufacturing of our products may result in shipment delays, inventory shortages, lot failures, product withdrawals or recalls, the need to reformulate our product or other interruptions in the supply of our products. We may also have to take inventory write-offs and incur other charges and expenses for products that fail to meet specifications, undertake costly remediation efforts or seek more costly manufacturing alternatives. Accordingly, failures or difficulties faced at any level of our supply chain could materially adversely affect our business and delay or impede the development and commercialization of any of our products or product candidates and could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

*We have relied upon and expect to rely upon multiple CROs to conduct and oversee our completed and any future clinical trials for topsalysin. If any of our CROs does not meet our deadlines or otherwise conduct the trials as required or if any CRO experiences regulatory compliance issues we may not be able to obtain regulatory approval for or commercialize our product candidate when expected or at all.

 

We have used multiple CROs for our clinical trials of topsalysin and expect to rely upon CROs for any future clinical trials. We also rely upon medical institutions, clinical investigators and contract laboratories to conduct our trials in accordance with our clinical protocols and in accordance with applicable legal and regulatory requirements. These third parties play a significant role in the conduct of these trials and the subsequent collection and analysis of data from the clinical trials. There is no guarantee that any such third party will devote adequate time and resources to our clinical trial. If any of our CROs or any other third parties upon which we rely for administration and conduct of our clinical trials do not successfully carry out their contractual duties or obligations or fail to meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or if they otherwise perform in a substandard manner, our clinical trials may be extended, delayed, suspended or terminated, and we may not be able to complete development of and ultimately obtain approval for and successfully commercialize topsalysin. We will rely heavily on these third parties for the execution of our future clinical trials and will control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on CROs does not relieve us of our regulatory responsibilities.

 

We and our CROs are required to comply with current Good Clinical Practice, or GCP, which are regulations and guidelines enforced by the FDA, the competent authorities of the Member States of the EEA and comparable foreign regulatory authorities for products in clinical development. Regulatory authorities enforce these GCP regulations through periodic inspections of clinical trial sponsors, principal investigators and clinical trial sites. If we or any of our CROs fail to comply with applicable GCP regulations, the clinical data generated in our clinical trials may be deemed unreliable and our submission of marketing applications may be delayed or the FDA may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply or complied with applicable GCP regulations. In addition, our clinical trials must be conducted with product produced under the current Good Manufacturing Practice, or cGMP, regulations enforced by the FDA, and our clinical trials require a large number of test subjects. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process. Moreover, our business may be implicated if any of our CROs violates federal or state fraud and abuse or false claims laws and regulations or healthcare privacy and security laws.

  

 

 
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Switching or adding CROs can involve substantial cost and require extensive management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays may occur, which can materially impact our ability to meet our desired clinical development timelines. Though we carefully manage our relationship with our CROs, there can be no assurance that we will not encounter such challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, prospects, financial condition or results of operations. 

 

Any adverse developments that occur during any clinical trials conducted by Kissei may affect our ability to obtain regulatory approval or commercialize topsalysin.

 

Kissei Pharmaceutical Co., Ltd., or Kissei, retains the rights to develop and commercialize topsalysin in Japan for the treatment of the symptoms of BPH, prostate cancer, prostatitis or other diseases of the prostate. If serious adverse events occur during any other clinical trials Kissei decides to conduct with respect to topsalysin, the FDA and other regulatory authorities may delay, limit or deny approval of topsalysin or require us to conduct additional clinical trials as a condition to marketing approval, which would increase our costs. If we receive FDA approval for topsalysin and a new and serious safety issue is identified in connection with clinical trials conducted by Kissei, the FDA and other regulatory authorities may withdraw their approval of the product or otherwise restrict our ability to market and sell our product. In addition, treating physicians may be less willing to administer our product due to concerns over such adverse events, which would limit our ability to commercialize topsalysin.

  

* We face significant competition from other pharmaceutical and biotechnology companies and from minimally invasive surgical therapies and surgical alternatives, and our operating results will suffer if we fail to compete effectively.

 

The biotechnology and pharmaceutical industries are intensely competitive. We have competitors both in the United States and international markets, including major multinational pharmaceutical companies, biotechnology companies and universities and other research institutions. Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staff, experienced marketing and manufacturing organizations and well-established sales forces. Additional mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or licensing on an exclusive basis, products that are more effective, easier to administer and/or less costly than topsalysin.

 

We expect that topsalysin will compete with the current treatment options for the treatment of localized low to intermediate risk prostate cancer, which include surgical options such as laparoscopic and radical prostatectomy or radiation. In addition, there are other focal targeted therapies which are gaining traction that are currently in clinical development or have been recently approved which include: brachytherapy, cryotherapy, high focused ultrasound, cyber knife, radio frequency ablation and laser ablation. In addition, in 2016, Nymox Pharmaceuticals announced the clinical trial results from 18 months with the intraprostatic administration of their investigational therapy NX-1207 (fexapotide triflutate) in patients with low grade localized (T1c) prostate cancer, and, in January 2016, Steba Biotechnology submitted a Marketing Authorization Application to the European Medicine Agency for the focal treatment of patients with low risk localized prostate cancer, with their vascular –targeted photodynamic therapy TOOKAD.

 

We expect that topsalysin will compete with the current treatment options for the symptoms of BPH, which include oral drug therapy and surgery. Oral drug therapies include (a) alpha-blockers, such as tamsulosin (marketed under various trade names by numerous companies, including as Flomax® by Astellas Pharma), alfuzosin (marketed in the United States by Sanofi as Uroxatral®), doxazosin (marketed by Pfizer as Cardura® and Cardura® XL) and silodosin (marketed by Watson Pharmaceuticals as Rapaflo® in the United States), (b) 5-alpha reductase inhibitors, such as dutasteride (marketed by GlaxoSmithKline plc as Avodart®) and finasteride (marketed by Merck & Co., Inc. as Proscar®), (c) combinations of a-blockers and 5-alpha reductase inhibitors such as tamsulosin and dutasteride (marketed by GSK as Jalyn®) and (d) tadalafil (marketed as Cialis® by Eli Lilly), a PDE5 inhibitor which obtained FDA approval for the treatment of the symptoms of BPH in October 2011. Several minimally invasive surgical therapies, or MIST, are available, including transurethral microwave thermotherapy, or TUMT, transurethral needle ablation, or TUNA, photo-selective vaporization of prostate, holmium laser enucleation of the prostate, transurethral electrovaporization of the prostate, interstitial laser coagulation, and the UroLift® system (marketed by NeoTract, Inc.), which is an implant delivered into the body via a small needle and designed to hold prostate tissue out of the way of the blocked urethra. Currently, the most commonly used MIST procedures are laser ablations of the prostate, TUMT, and TUNA. Surgery for BPH treatment is usually considered in patients who fail drug therapy as a result of side effects or inadequate relief of symptoms, have refractory urinary retention, or have recurrent urinary tract infections. Alternatively, surgery may be the initial treatment in patients with severe urinary symptoms. Surgical procedures for BPH include transurethral resection of the prostate, as well as other procedures such as transurethral incision of the prostate and transurethral vaporization of the prostate. In addition, there are other treatments that are currently in clinical development for the treatment of the symptoms of BPH. Light Sciences Oncology Inc.’s AptocineTM is currently in Phase 2 clinical trials; in 2015, Nymox Pharmaceuticals announced that the injectable NX-1207 for the treatment of the symptoms of BPH met its primary endpoint in its pivotal Phase 3 extension trial; and in late 2015, Procept BioRobotics announced the first patients had been treated in a Phase 3 clinical trial to evaluate the AquaBeam System, a waterjet ablation therapy for endoscopic resection of prostate tissue.

 

 

 
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The availability and price of our competitors’ products and procedures could limit the demand, and the price we are able to charge, for topsalysin. We will not successfully execute on our business objectives if the market acceptance of topsalysin is inhibited by price competition, if physicians are reluctant to switch from existing products or procedures to topsalysin or if physicians switch to other new products or surgeries or choose to reserve topsalysin for use in limited patient populations. In addition, established pharmaceutical companies may invest heavily to accelerate discovery and development of novel compounds or to in-license and develop novel compounds that could make topsalysin obsolete.

  

Any new product that competes with an approved product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to be approved and overcome price competition and to be commercially successful. Accordingly, our competitors may succeed in obtaining patent protection, obtaining FDA approval or discovering, developing and commercializing products before we do, which would have a material adverse impact on our business. The inability to compete with existing products or subsequently introduced products would have a material adverse impact on our business, prospects, financial condition and results of operations.  

  

Even if we obtain and maintain approval for topsalysin from the FDA in either indication, we may never obtain approval for topsalysin outside of the United States, which would limit our market opportunities and adversely affect our business.

 

Sales of topsalysin outside of the United States will be subject to foreign regulatory requirements governing clinical trials and marketing approval. Even if the FDA grants marketing approval for a product candidate, comparable regulatory authorities of foreign countries must also approve the manufacturing and marketing of the product candidates in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the United States, including additional preclinical studies or clinical trials. In many countries outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that country. In some cases, the price that we intend to charge for our products is also subject to approval. We may decide to submit an MAA to the EMA for approval in the EEA. As with the FDA, obtaining approval of an MAA from the EMA is a similarly lengthy and expensive process and the EMA has its own procedures for approval of product candidates. Even if a product is approved, the FDA or the EMA, as the case may be, may limit the indications for which the product may be marketed, require extensive warnings on the product labeling or require expensive and time-consuming clinical trials or reporting as conditions of approval. Regulatory authorities in countries outside of the United States and the EEA also have requirements for approval of drug candidates with which we must comply prior to marketing in those countries. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. Further, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries and regulatory approval in one country does not ensure approval in any other country, while a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory approval process in others. Also, regulatory approval for any of our product candidates may be withdrawn. If we fail to comply with the regulatory requirements in international markets and/or receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of topsalysin will be harmed and our business will be adversely affected.

   

We will be, with respect to any product candidate for which we obtain FDA approval, subject to ongoing FDA obligations and continued regulatory review, which may result in significant additional expense.

 

Any regulatory approvals that we obtain for our product candidate may also be subject to limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including post-marketing studies and clinical trials and surveillance to monitor the safety and efficacy of the product candidate. In addition, if the FDA or a comparable foreign regulatory authority, like the EMA, approves a product candidate, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, import, export, tracking and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with cGMPs for marketed drugs and drugs used in clinical trials and GCPs for any clinical trials that we conduct post-approval. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:

 

 

restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatory product recalls;

 

 

 
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fines, warning letters or holds on clinical trials;

 

 

• 

refusal by the FDA to approve pending applications or supplements to approved applications filed by us or our strategic partners, or suspension or revocation of product license approvals;

 

 

• 

product seizure or detention, or refusal to permit the import or export of products; and

 

 

• 

injunctions, the imposition of civil or criminal penalties, or exclusions.

 

The FDA’s policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability, which would have a material adverse effect on our business, prospects, financial condition and results of operations.

 

 Moreover, the federal Drug Supply Chain Security Act, imposes obligations on manufacturers of pharmaceutical products, among others, related to product tracking and tracing. Among the requirements of this new federal legislation, manufacturers will be required to provide certain information regarding the drug product to individuals and entities to which product ownership is transferred, label drug product with a product identifier, and keep certain records regarding the drug product. Further, manufacturers have drug product investigation, quarantine, disposition, and notification responsibilities related to counterfeit, diverted, stolen, and intentionally adulterated products, as well as products that are the subject of fraudulent transactions or which are otherwise unfit for distribution such that they would be reasonably likely to result in serious health consequences or death.  

 

If we fail to comply with health care laws, we could face substantial penalties and our business, operations and financial condition could be adversely affected.

 

Even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, certain federal and state healthcare laws and regulations, including those pertaining to fraud and abuse and patients’ rights, are and will be applicable to our business. We could be subject to healthcare regulation by both the federal government and the states in which we conduct our business. The health care laws and regulations that may affect our ability to operate include, without limitation: anti-kickback statutes, false claims statutes patient data privacy and security laws, and physician sunshine laws and regulations, many of which may become more applicable if our product candidates are approved and we begin commercialization. If our operations are found to be in violation of any of these laws or regulations, we may be subject to penalties, including administrative, civil and criminal penalties, damages, fines, disgorgement, imprisonment, and exclusion from participation in federal healthcare programs, as well as contractual damages, reputational harm, diminished profits and future earnings, and the curtailment or restructuring of our operations. Any such penalties could adversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws and regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with these laws and regulations may prove costly.

 

*We will need to increase the size of our organization and the scope of our outside vendor relationships, and we may experience difficulties in managing growth.

  

As of September 30, 2016 we had five full-time employees. In May 2016, we had a reduction in force of five employees to preserve our cash resources while we pursue strategic alternatives. If we obtain additional capital we may have to rehire these employees or identify and hire replacements. In addition, we have engaged part-time individual consultants to assist us with managing vendors and CROs, project management, regulatory compliance and business development. We will need to expand our managerial, operational, financial and other resources in order to manage our operations and clinical trials, continue our research and development activities, and commercialize our product candidate. Our management and scientific personnel, systems and facilities currently in place may not be adequate to support our future growth. Our need to effectively manage our operations, growth and various projects requires that we:

 

 

• 

manage our clinical trials effectively;

 

 

• 

manage our internal development efforts effectively while carrying out our contractual obligations to licensors, contractors and other third parties;

 

 

• 

continue to improve our operational, financial and management controls and reporting systems and procedures;

 

 

 
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attract and retain sufficient numbers of talented employees; and

 

 

• 

manage our regulatory compliance oversight and infrastructure.

 

To date, we have utilized the services of third-party vendors to perform tasks including clinical trial management, statistics and analysis, regulatory affairs, formulation development and other drug development functions. Our growth strategy may also entail expanding our group of contractors or consultants to implement these tasks going forward. Because we rely on numerous consultants, effectively outsourcing many key functions of our business, we will need to be able to effectively manage these consultants to ensure that they successfully carry out their contractual obligations and meet expected deadlines. However, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by consultants is compromised for any reason, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for our product candidate or otherwise advance our business. There can be no assurance that we will be able to manage our existing consultants or find other competent outside contractors and consultants on economically reasonable terms, or at all. If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we may be unable to successfully implement the tasks necessary to further develop and commercialize our product candidate and, accordingly, may not achieve our research, development and commercialization goals.

  

Our limited operating history makes evaluating our business and future prospects difficult.

 

Our predecessor, Protox Pharmaceuticals Inc., was incorporated in January 2002. We were formed in May 2003 under the predecessor to the British Columbia Business Corporations Act, or the BCBCA, by the amalgamation of Stratos Biotechnologies Inc., Nucleus BioScience Inc. and Brightwave Ventures Inc. under the name SNB Capital Corp. In July 2004, we acquired all the shares of Protox Pharmaceuticals Inc. in a plan of arrangement under the BCBCA and changed its name to Protox Therapeutics Inc. In 2011, we formed a wholly-owned U.S. subsidiary incorporated in Delaware, Protox Therapeutics Corp. In 2012, we changed our name to Sophiris Bio Inc. and changed the name of our subsidiary to Sophiris Bio Corp. In 2012, Sophiris Bio Corp. formed a wholly-owned subsidiary incorporated in Delaware, Sophiris Bio Holding Corp. We face considerable risks and difficulties as a company with limited operating history, particularly as a consolidated entity with an operating subsidiary that also has a limited operating history. If we do not successfully address these risks, our business, prospects, operating results and financial condition will be materially and adversely harmed. Our limited operating history makes it particularly difficult for us to predict our future operating results and appropriately budget for our expenses. In the event that actual results differ from our estimates or we adjust our estimates in future periods, our operating results and financial position could be materially affected. We have limited experience as a consolidated operating entity, and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the pharmaceutical or biotechnology areas.  

 

Our ability to generate revenues from topsalysin will be subject to attaining significant market acceptance among physicians, patients and healthcare payors.

 

Topsalysin, if approved in either indication for which we are currently pursuing development or any other indication, may not attain market acceptance among physicians, patients, healthcare payors or the medical community. We believe that the degree of market acceptance and our ability to generate revenues from topsalysin will depend on a number of factors, including:

 

 

• 

timing of market introduction of our products as well as competitive drugs;

 

 

• 

efficacy and safety of topsalysin;

 

 

the clinical indication(s) for which topsalysin is approved;

 

 

• 

continued projected growth of the urological disease markets, including incidence of BPH and prostate cancer;

 

 

• 

acceptance by patients, primary care specialists and key specialists, including urologists for BPH and urologists and oncologists for prostate cancer;

 

 

• 

potential or perceived advantages or disadvantages of topsalysin over alternative treatments, for BPH including cost of treatment and relative convenience and ease of administration and length of sustained benefits from treatment;

 

  

• 

potential or perceived advantages or disadvantages of topsalysin over alternative treatments, for BPH including cost of treatment and relative convenience and ease of administration and length of sustained benefits from treatment;

 

 

strength of sales, marketing and distribution support;

 

 

 
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the price of topsalysin, both in absolute terms and relative to alternative treatments;

 

 

• 

the effect of current and future healthcare laws;

 

 

availability of coverage and adequate coverage, reimbursement and pricing from government and other third-party payors; and

 

 

product labeling or product insert requirements of the FDA or other regulatory authorities.

 

 If topsalysin is approved in either or both indications but fails to attain market acceptance by physicians, patients, health care payors, or the medical community, we may not be able to generate significant revenue to achieve or sustain profitability, which would have a material adverse effect on our business, prospects, financial condition and results of operations.

   

Coverage and reimbursement may not be available, or may be available at only limited levels, for topsalysin, which could make it difficult for us to sell topsalysin profitably.

 

Market acceptance and sales of topsalysin will depend in large part on global reimbursement policies and may be affected by future healthcare reform measures, both in the United States and other key international markets. Patients who are prescribed medicine for the treatment of their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their prescription drugs. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products. Therefore, successful commercialization of our product will depend in part on the availability of governmental and third-party payor reimbursement for the cost of topsalysin and/or payment to the physician for administering topsalysin. In the United States, no uniform policy of coverage and reimbursement for drug products exists among third-party payors. Therefore, coverage and reimburseme