20-F 1 tv507810_20f.htm 20-F

 

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 20-F

 

 

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

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

 

For the fiscal year ended September 30, 2018

 

OR

 

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

 

For the transition period from                      to                  

 

OR

 

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

 

Date of event requiring this shell company report                 

 

Commission file number:  001-37410 

 

 

 

ESSA Pharma Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Not Applicable

(Translation of Registrant’s name into English)

 

British Columbia, Canada

(Jurisdiction of incorporation or organization)

 

Suite 720, 999 West Broadway, Vancouver, British Columbia, Canada, V5Z 1K5

(Address of principal executive offices)

  

 

 

David Wood, Chief Financial Officer; Tel (778) 331-0962; Fax (604) 738-4080
Suite 720, 999 West Broadway, Vancouver, British Columbia, Canada, V5Z 1K5

(Name, Telephone, E-mail, and/or Facsimile number and Address of Company Contact Person)

 

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

 

 Title of Each Class   Name of each exchange on which registered
Common Shares   Nasdaq Capital Market

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 5,776,098 Common Shares (as at September 30, 2018).

 

Indicate by check mark whether Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act     Yes    ¨    No  x

 

If this report is an annual or transition report, indicate by check mark if Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.     Yes    ¨    No  x

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes   x    No   ¨

 

Indicate by check mark whether Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “accelerated filer”, “large accelerated filer”, and “emerging growth company” in Rule 12b-2 of the Exchange Act

 

Large accelerated Filer ¨ Accelerated Filer ¨ Non-accelerated Filer ¨ Emerging growth company x

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark which basis of accounting the Registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP ¨ International Financial Reporting Standards as issued by the International Accounting Standards Board x Other ¨

 

If “Other” has been check in response to the previous question, by check mark which financial statement item Registrant has elected to follow:    Item 17 ¨    Item 18 ¨

 

If this is an annual report, indicate by check mark whether Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨   No   x

 

 

  

 

 

 

TABLE OF CONTENTS

 

GENERAL MATTERS 1
   
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 1
   
GLOSSARY OF TERMS 6
   
PART I 10
     
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 10
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 10
ITEM 3. KEY INFORMATION 10
ITEM 4. INFORMATION ON THE COMPANY 48
ITEM 4A UNRESOLVED STAFF COMMENTS 69
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 69
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 79
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 100
ITEM 8. FINANCIAL INFORMATION 103
ITEM 9. THE OFFER AND LISTING 104
ITEM 10. ADDITIONAL INFORMATION 104
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 111
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 111
     
PART II   111
     
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 111
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 111
ITEM 15. CONTROLS AND PROCEDURES 111
ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT 112
ITEM 16B CODE OF ETHICS 112
ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES 112
ITEM 16D EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES 113
ITEM 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 113
ITEM 16F CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT 113
ITEM 16G CORPORATE GOVERNANCE 113
ITEM 16H MINE SAFETY DISCLOSURE 114
     
PART III   114
     
ITEM 17. FINANCIAL STATEMENTS 114
ITEM 18. FINANCIAL STATEMENTS 114
ITEM 19. EXHIBITS 114

 

 i 

 

 

GENERAL MATTERS

 

In this Annual Report on Form 20-F (“Annual Report”), all references to the “Company”, “ESSA”, “our”, “us” or “we” refer to ESSA Pharma Inc. and its subsidiary, unless the context clearly requires otherwise. Certain terms used herein are defined in the text and others are included in the glossary of terms. See “Glossary of Terms”.

 

ESSA uses the United States dollar as its reporting currency. All references to “$” or “US$” are to United States dollars and references to “C$” are to Canadian dollars. On December 12, 2018 the daily average exchange rate for the conversion of Canadian dollars into U.S. dollars as reported by the Bank of Canada was C$1.00 = US$0.7493. See also Item 3 - “Key Information” for more detailed currency and conversion information.

 

Effective April 25, 2018, ESSA consolidated its issued and outstanding common shares on the basis of one (1) post-consolidation common share for every twenty (20) pre-consolidation common shares (the “Consolidation”). Unless otherwise stated, all warrant, stock option, share and per share amounts have been restated retrospectively to reflect this share consolidation.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report includes certain statements that are “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act and applicable Canadian securities laws. All statements in this Annual Report, other than statements of historical facts, are forward-looking statements. These statements appear in a number of different places in this Annual Report and can be identified by words such as “anticipates”, “estimates”, “projects”, “expects”, “intends”, “believes”, “plans”, “will”, “could”, “may”, or their negatives or other comparable words. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. Examples of such forward-looking statements include, but are not limited to:

 

  · the Company’s ability to obtain funding for operations, including research funding, and the timing of potential sources of such funding;

  

  · the initiation, timing, cost, location, progress and success of, strategy and plans with respect to, ESSA’s research and development programs (including research programs and related milestones with regards to next-generation drug candidates and compounds), preclinical studies and clinical trials;

 

  · the therapeutic benefits, properties, effectiveness, pharmacokinetic profile and safety of the Company’s potential future product candidates, including the expected benefits, properties, effectiveness, pharmacokinetic profile and safety of the Company’s next-generation Aniten compounds;

 

  · the Company’s ability to advance its potential future product candidates into, and successfully complete, clinical trials;

 

  · the Company’s ability to achieve profitability;

 

  · the CPRIT Grant (as defined herein) and payments thereunder, including residual obligations;

 

  · the Company’s use of proceeds from funding and financings;

 

  · the Company’s ability to recruit sufficient numbers of patients for future clinical trials, and the benefits expected therefrom;

 

 1 

 

 

  · the Company’s ability to establish and maintain relationships with collaborators with acceptable development, regulatory and commercialization expertise and the benefits to be derived from such collaborative efforts;

 

  · the implementation of the Company’s business model and strategic plans, including strategic plans with respect to patent applications and strategic collaborations partnerships;

 

  · the Company’s ability to identify, develop and commercialize product candidates;

 

  · the Company’s commercialization, marketing and manufacturing capabilities and strategy;

 

  · the Company’s ability to protect its intellectual property and operate its business without infringing upon the intellectual property rights of others;

 

  · the Company’s expectations regarding federal, state, provincial and foreign regulatory requirements, including the Company’s plans with respect to anticipated regulatory filings;

 

  · whether the Company will receive, and the timing and costs of obtaining, regulatory approvals in the United States, Canada and other jurisdictions;

 

  · the accuracy of the Company’s estimates of the size and characteristics of the markets that may be addressed by the Company’s potential future product candidates;

 

  · the rate and degree of market acceptance and clinical utility of the Company’s potential future product candidates, if any;

 

  · the timing of, and the Company’s ability and the Company’s collaborators’ ability, if any, to obtain and maintain regulatory approvals for the Company’s potential future product candidates;

 

  · the Company’s expectations regarding market risk, including interest rate changes and foreign currency fluctuations;

 

  · the Company’s ability to engage and retain the employees required to grow its business;

 

  · the compensation that is expected to be paid to the Company’s employees;

 

  · the Company’s future financial performance and projected expenditures;

 

  · developments relating to the Company’s competitors and its industry, including the success of competing therapies that are or may become available; and

 

  · estimates of the Company’s financial condition, expenses, future revenue, capital requirements, its needs for additional financing and potential sources of capital and funding.

 

Such statements reflect ESSA’s current views with respect to future events, are subject to risks and uncertainties and are necessarily based upon a number of estimates and assumptions that are inherently subject to significant medical, scientific, business, economic, competitive, political and social uncertainties and contingencies. Many factors could cause ESSA’s actual results, performance or achievements to be materially different from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements. In making the forward-looking statements included in this Annual Report, the Company has made various material assumptions, including but not limited to:

 

  · the Company’s ability to identify a product candidate or product candidates;

 

 2 

 

 

  · the availability of financing on reasonable terms;

 

  · the Company’s ability to repay debt;

 

  · the Company’s ability to obtain regulatory and other approvals to commence a clinical trial involving future product candidates;

 

  · the Company’s ability to obtain positive results from its research and development activities, including clinical trials;

 

  · the Company’s ability to obtain required regulatory approvals;

 

  · the Company’s ability to protect patents and proprietary rights;

 

  · the Company’s ability to successfully out-license or sell its future products, if any, and in-license and develop new products;

 

  · favorable general business and economic conditions;

 

  · the Company’s ability to attract and retain skilled staff;

 

  · market competition; and

 

  · the products and technology offered by the Company’s competitors.

 

In evaluating forward-looking statements, current and prospective shareholders should specifically consider various factors, including the risks outlined herein under the heading “Risk Factors” in Item 3 of this Annual Report. Some of these risks and assumptions include, among others:

 

·uncertainty as to the Company’s ability to raise additional funding;

 

·

risks related to the Company’s ability to raise additional capital on favorable terms;

 

·uncertainty as to the Company’ ability to generate sufficient cash to service its indebtedness;

 

·risks related to the Company's ability to comply with residual obligations of the CPRIT Agreement;

 

·risks related to the Company’s ability to continue as a going concern;

 

·risks related to the Company’s incurrence of significant losses in every quarter since its inception and the Company’s anticipation that it will continue to incur significant losses in the future;

 

·risks related to the Company’s limited operating history;

 

·risks related to the Company’s ability to identify a product candidate through preclinical studies and obtain regulatory approval of an IND (as defined herein) application to commence a clinical trial;

 

·risks related to the Company’s future success being dependent primarily on identification through preclinical studies, regulatory approval, and commercialization of a single product candidate;

 

 3 

 

 

·risks related to the Company’s ability to continue to license its product candidates or technology from third parties;

 

·uncertainty related to the Company’s ability to obtain required regulatory approvals for ESSA’s proposed products;

 

·risks related to the Company’s ability to successfully identify and develop potential future product candidates in a timely manner;

 

·risks related to the Company's ability to successfully commercialize future product candidates;

 

·risks related to the possibility that the Company’s potential future product candidates may have undesirable side effects;

 

·risks related to clinical drug development;

 

·risks related to the Company’s ability to conduct a clinical trial or submit a future NDA/NDS or IND/CTA (each, as defined herein);

 

·risks related to the Company’s ability to enroll subjects in future clinical trials;

 

·risks that the FDA (as defined herein) may not accept data from trials conducted in such locations outside the United States;

 

·risks related to the Company’s ongoing obligations and continued regulatory review;

 

·risks related to potential administrative or judicial sanctions;

 

·the risk of increased costs associated with prolonged, delayed or terminated clinical trials;

 

·risks related to the Company’s failure to obtain regulatory approval in international jurisdictions;

 

·risks related to recently enacted and future legislation in the United States that may increase the difficulty and cost for the Company to obtain marketing approval of, and commercialize, its potential future products and affect the prices the Company may obtain;

 

·risks related to new legislation, new regulatory requirements, and the continuing efforts of governmental and third party payors to contain or reduce the costs of healthcare;

 

·the risk that third parties may not carry out their contractual duties;

 

·risks related to the possibility that the Company’s relationships with academic institutions or CROs (as defined herein) may terminate;

 

·risks related to the Company’s lack of experience manufacturing product candidates on a large clinical or commercial scale and its lack of manufacturing facility;

 

·the Company’s reliance on proprietary technology;

 

·the Company may not be able to protect its intellectual property rights throughout the world;

 

·risks related to claims by third parties asserting that the Company, or its employees have misappropriated their intellectual property, or claiming ownership of what the Company regards as its intellectual property;

 

 4 

 

 

·risks related to the Company’s ability to comply with governmental patent agency requirements in order to maintain patent protection;

 

·risks related to computer system failures or security breaches;

 

·risks related to business disruptions that could seriously harm the Company’s future revenues and financial condition and increase ESSA’s costs and expenses;

 

·risks related to the Company’s dependence on the use of information technologies;

 

·risks related to the Company’s ability to attract and maintain highly-qualified personnel;

 

·third-party coverage and reimbursement and health care cost containment initiatives and treatment guidelines may constrain the Company’s future revenues;

 

·risks related to potential conflicts of interest between the Company and its directors and officers;

 

·risks related to competition from other biotechnology and pharmaceutical companies;

 

·risks related to movements in foreign currency exchange rates;

 

·risks related to the Company’s ability to convince public payors and hospitals to include ESSA’s potential future products on their approved formulary lists;

 

·risks related to the Company’s ability to establish an effective sales force and marketing infrastructure, or enter into acceptable third-party sales and marketing or licensing arrangements;

 

·risks related to the Company's ability to manage growth;

 

·risks related to the Company’s ability to achieve or maintain expected levels of market acceptance for its products;

 

·risks related to the Company’s ability to realize benefits from acquired businesses or products or form strategic alliances in the future;

 

·risks related to collaborations with third parties;

 

·risks that employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could cause significant liability for ESSA and harm its reputation;

 

·risks related to product liability lawsuits;

 

·risks related to compulsory licensing and/or generic competition;

 

·risks related to the increased costs and effort as a result of ESSA being a public company;

 

·risks inherent in foreign operations;

 

·laws and regulations governing international operations may preclude the Company from developing, manufacturing and selling certain product candidates outside of the United States and Canada and require ESSA to develop and implement costly compliance programs;

 

·risks related to laws that govern fraud and abuse and patients' rights;

 

 5 

 

 

·risks related to the Company’s ability to comply with environmental, health and safety laws and regulations;

 

·risks related to the different disclosure obligations for a U.S. domestic reporting company and a foreign private issuer such as ESSA;

 

·risks relating to the Company’s ability to maintain its status as a foreign private issuer in the future;

 

·the risk that the Company could become a “passive foreign investment company;”

 

·risks related to the Company’s status as an emerging growth company;

 

·risks related to United States investors' ability to effect service of process or enforcement of actions against the Company;

 

·risks related to the Company’s ability to maintain compliance with Nasdaq listing requirements;

 

·risks related to market price and trading volume volatility;

 

·risks related to the Company's dividend policy;

 

·risks associated with future sales of the Company’s securities;

 

·risks related to the Company’s ability to implement and maintain effective internal controls;

 

·risks related to the Company's ability to maintain an active trading market for its Common Shares;

 

·risks related to share price volatility associated with the Company’s thinly traded common shares; and

 

·risks related to analyst coverage.

 

Should one or more of these risks or uncertainties, or a risk that is not currently known to ESSA, materialize, or should assumptions underlying those forward-looking statements prove incorrect, actual results may vary materially from those described herein. These forward-looking statements are made as of the date of this Annual Report and the Company does not intend, and does not assume any obligation, to update these forward-looking statements, except as required by applicable securities laws. Investors are cautioned that forward-looking statements are not guarantees of future performance and are inherently uncertain. Accordingly, investors are cautioned not to put undue reliance on forward-looking statements.

 

The Company advises you that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to the Company or persons acting on its behalf.

 

GLOSSARY OF TERMS

 

As used in this Annual Report, the following terms have the respective meaning as specified below:

 

ADME” means absorption, distribution, metabolism, and excretion;

 

Aniten” refers to the Company’s proprietary series of compounds, a unique name granted to the Company by the United States Adopted Names Council ("USAN");

 

AR” means androgen receptor;

 

Articles” means the Articles of the Company;

 

 6 

 

 

Astellas” means Astellas Pharma Inc.;

 

Audit Committee” means the Company’s audit committee;

 

Auditor” means Davidson & Company LLP;

 

BC Cancer Agency” means the British Columbia Cancer Agency;

 

Bloom Burton” means Bloom Burton & Co. Limited;

 

Bloom Burton Warrants” means the 1,250 warrants issued to Bloom Burton Healthcare Structured Lending Fund to purchase 1,250 Common Shares at an exercise price of C$40.00 per Common Share and expiring on April 15, 2019;

 

Board” means the board of directors of ESSA;

 

CBP” means CREB-binding protein;

 

CEO” means Chief Executive Officer;

 

CFO” means Chief Financial Officer;

 

CFPOA” means the Canadian Corruption of Foreign Public Officials Act;

 

cGMP” means current Good Manufacturing Practice;

 

CMO” means Chief Medical Officer;

 

CMS” means Centers for Medicare & Medicaid Services;

 

Common Shares” means the common shares in the capital of the Company;

 

COO” means Chief Operating Officer;

 

CPRIT” means the Cancer Prevention and Research Institute of Texas;

 

CPRIT Agreement” refers to the CPRIT Grant Agreement executed by the Chief Executive Officer of CPRIT on July 9, 2014;

 

CPRIT Grant” has the meaning given to it under the heading “History and development of the Company” in Item 4 of this Annual Report;

 

CRO” means Contract Research Organizations;

 

CRPC” means castration-resistant prostate cancer;

 

CTA” means Clinical Trial Application, the approval of which is the key step in obtaining Canadian regulatory approval to commence clinical trials in Canada. It is similar to the IND application submitted to the FDA in the United States;

 

EMA” means European Medicine Agency;

 

ESSA Texas” means ESSA Pharmaceuticals Corp., a corporation existing under the laws of the State of Texas;

 

FCPA” means the U.S. Foreign Corrupt Practices Act;

 

 7 

 

 

FDA” means the U.S. Food and Drug Administration;

 

GCP” means Good Clinical Practices;

 

GLP” means Good Laboratory Practices;

 

GMP” means Good Manufacturing Practices;

 

Guidelines” means National Policy 58-201 – Corporate Governance Guidelines;

 

HIPAA” means the U.S. Health Insurance Portability and Accountability Act of 1996;

 

IFRS” means International Financial Reporting Standards, as issued by the International Accounting Standards Board;

 

in vitro” means experimentation in a test tube, or, generally, in a controlled environment outside a living organism;

 

in vivo” means experimentation done in or on the living tissue of a whole, living organism as opposed to a partial or dead one;

 

IND” means Investigational New Drug;

 

IRB” means Institutional Review Boards;

 

January 2018 Financing” means the 4,321,000 common shares and 2,189,000 pre-funded warrants of the Company issued on January 9 and 16, 2018 at a price of US$4.00 per common share and pre-funded warrant for gross proceeds of US$26,040,000;

 

January 2016 Financing” means the 227,273 units of the Company issued in January 2016 at a price of $66.00 per unit for gross proceeds of approximately $15,000,000. Each unit consisted of one Common Share, one Seven-Year Warrant, and one-half of one Two-Year Warrant;

 

LBD” means the ligand-binding domain of the androgen receptor;

 

LHRH” means Luteinizing hormone releasing hormone;

 

License Agreement” means the licensing agreement between the Company and the Licensors dated December 22, 2010, and amended on February 10, 2011 and May 27, 2014, for certain patent rights and technology related to the Licensed IP, as further described under the heading “Patents and Proprietary Rights” in Item 4 of this Annual Report;

 

Licensed IP” has the meaning given to it under the heading “History and development of the Company - Patents and Proprietary Rights” in Item 4 of this Annual Report;

 

Licensors” means UBC and the BC Cancer Agency;

 

Liquidity Event” has the meaning given to it in the Articles;

 

March 2016 Financing” means the 83,333 common shares of the Company issued in March 2016 at a price of $66.00 per common share for gross proceeds of approximately $5,000,000;

 

MMA” means the U.S. Medicare Modernization Act;

 

Nasdaq” means one of the Nasdaq Global Select Market, the Nasdaq Global Market or the Nasdaq Capital Market market tiers of the Nasdaq Stock Market LLC (a U.S. national securities exchange);

 

 8 

 

 

NDA” means New Drug Application;

 

NDS” means New Drug Submission;

 

NEO” means Named Executive Officer;

 

NI 52-109” means National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings of the Canadian Securities Administrators;

 

NI 52-110” means National Instrument 52-110 – Audit Committees;

 

NI 58-101” means National Instrument 58-101 – Disclosure of Corporate Governance Practices;

 

NTD” means amino-terminal domain;

 

Options” means options to acquire Common Shares;

 

PARP” means poly ADP ribose polymerase;

 

Penalty Conversion Ratio” has the meaning given to it under the heading “Outstanding Security Data”;

 

PFIC” means a passive foreign investment company;

 

Preferred Shares” means the Class A preferred shares in the capital of the Company;

 

Project” means ESSA’s development of EPI-506 towards completion of Phase I/II clinical proof-of-concept;

 

PSA” means prostate-specific antigen;

 

QEF” means qualified electing fund;

 

R&D” means research and development;

 

Recognized Exchange” means, collectively, the Toronto Stock Exchange, the TSX-V, the Nasdaq Stock Market, the New York Stock Exchange, any other equity market based in North America having listing standards similar to those of the TSX-V as determined by the Board in its sole discretion, acting reasonably or any other equity market as may be approved by holders representing at least 66 and 2/3 % of the issued and outstanding Preferred Shares;

 

SAR” means structure-activity relationship;

 

Sarbanes-Oxley” means the Sarbanes-Oxley Act of 2002;

 

SCID” means Severe Combined Immunodeficiency;

 

SEDAR” means the System for Electronic Document Analysis and Retrieval;

 

SEC” means the U.S. Securities and Exchange Commission;

 

Special Warrant Agent” means Computershare Trust Company of Canada;

 

Stock Option Plan” means the stock option plan of the Company dated April 25, 2018;

 

TPD” means the Therapeutic Products Division of Health Canada;

 

TSX” means the Toronto Stock Exchange;

 

 9 

 

 

TSX-V” means the TSX Venture Exchange;

 

UBC” means the University of British Columbia;

 

USAN” means the United States Adopted Names Council;

 

U.S.” means the United States of America; and

 

U.S. Anti-Kickback Statute” refers to the federal Anti-Kickback Statute, which is a criminal statute that prohibits the exchange of anything of value in an effort to induce or reward the referral of federal health care program business.

 

PART I

 

ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

A.Directors and Senior Management

 

Not applicable.

 

B.Advisors

 

Not applicable.

 

C.Auditors

 

Not applicable.

 

ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE

 

A.Offer Statistics

 

Not applicable.

 

B.Method and Expected Timetable

 

Not applicable.

 

ITEM 3.KEY INFORMATION

 

A.Selected Financial Data

 

The following table sets forth selected consolidated financial information for the periods indicated, prepared in accordance with IFRS. The selected consolidated financial information as at and for the years ended September 30, 2018, September 30, 2017, September 30, 2016, September 30, 2015 and September 30, 2014 has been derived from ESSA’s audited financial statements and accompanying notes.

 

The selected consolidated financial information should be read in conjunction with the audited financial statements and accompanying notes thereto contained elsewhere in this Annual Report and discussions in Part I Item 5 “Operating and Financial Review and Prospects” included in this Annual Report. The selected consolidated financial information set out below may not be indicative of ESSA’s future performance.

 

 10 

 

 

Figures in US$
unless stated otherwise
  Year Ended
September 30,
2018
   Year Ended
September 30,
2017
   Year Ended
September 30,
2016
   Year Ended
September 30,
2015
   Year Ended
September 30,
2014
 
Operating Revenues                    
Total Operating Expenses   (11,713,965)   (11,651,870)   (19,642,164)   (10,328,202)   (1,824,537)
Net Loss for the Period   (11,629,440)   (4,499,012)   (13,139,788)   (9,676,587)   (1,823,929)
Comprehensive Loss for the Period   (11,629,440)   (4,499,012)   (13,477,551)   (11,341,799)   (1,895,667)
Basic and diluted loss per Common Share   (2.55)   (3.09)   (9.77)   (10.60)   (2.40)
Total Assets   16,017,074    5,607,044    10,402,562    7,539,773    4,201,833 
Net Assets   9,152,072    (4,274,003)   (536,857)   4,455,512    1,974,128 
Capital Stock (1)   40,205,997    25,980,117    25,974,742    19,419,004    4,193,735 
Number of Shares Adjusted to Reflect Changes in Capital   5,776,098    1,455,098    1,454,848    1,131,467    784,380 
Dividends Declared per Share                    

 

 
(1)Excluding long-term debt and redeemable preferred stock.

 

B.Capitalization and Indebtedness

 

Not applicable.

 

C.Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D.Risk Factors

 

An investment in ESSA involves a high degree of risk and should be considered highly speculative due to the nature and present early stage of the Company’s business. The following risks are the material risks that the Company faces; however, the risks below are not the only ones ESSA faces. Additional risks and uncertainties not presently known to us or that we believe to be immaterial may also adversely affect our business. If any of the following risks occur, the Company’s business, financial condition and results of operations could be seriously harmed and you could lose all or part of your investment. Before deciding to invest in any Common Shares, investors should carefully consider the risk factors described below.

 

Risks Related to ESSA’s Financial Position and Need for Additional Capital

 

ESSA will have significant additional future capital needs and there are uncertainties as to the Company’s ability to raise additional funding.

 

Management has forecasted that ESSA’s working capital will be sufficient to execute its planned expenditures for the coming fiscal year provided there are no significant changes in capital structure and debt obligations, but not sufficient to fund a Phase 1 study of a next-generation aniten compound. ESSA will require significant additional capital resources to continue and expand its business, including the development of its preclinical Aniten series of compounds (“Aniten”). Advancing ESSA’s novel and proprietary therapies or acquisition and development of any new products or product candidates will require considerable resources and additional access to capital. In addition, ESSA’s future cash requirements may vary materially from those now expected. For example, ESSA’s future capital requirements may increase if:

 

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  · the Company experiences setbacks in its progress with non-clinical studies or if future clinical trials are delayed;

 

  · the Company is required to perform additional non-clinical studies and clinical trials;

 

  · the Company elects to develop, acquire or license new technologies, products or businesses;

 

  · the Company experiences generic competition from other life sciences companies or in more markets than anticipated;

 

  · the Company experiences delays or unexpected increases in connection with obtaining regulatory approvals in the various markets where ESSA hopes to sell its products;

 

  · the Company experiences unexpected or increased costs relating to preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, or other lawsuits, brought by either ESSA or ESSA’s competition; or

 

  · the Company experiences scientific progress sooner than expected in its discovery and R&D projects, if ESSA expands the magnitude and scope of these activities, or if ESSA changes its focus as a result of ESSA’s discoveries.

 

ESSA could potentially seek additional funding through strategic collaborations, alliances and licensing arrangements, through public or private equity or debt financing, or through other transactions. However, if sales are slow to increase or if capital market conditions in general, or with respect to life sciences companies such as ESSA’s, are unfavorable, ESSA’s ability to obtain significant additional funding on acceptable terms, if at all, will be negatively affected. There is no certainty that any such financing will be provided or provided on favorable terms.

 

If sufficient capital is not available, ESSA may be required to delay or abandon its business expansion or R&D projects, either of which could have a material adverse effect on ESSA’s business, financial condition, prospects or results of operations.

 

ESSA may not be able to raise additional capital on favorable terms, which may result in dilution to ESSA’s existing shareholders, restrictions on ESSA’s operations or the requirement for ESSA to relinquish rights to technologies or any future product candidates.

 

Until the Company can generate substantial revenue from product sales, if ever, the Company expects to finance future cash needs through a combination of private and public equity offerings, debt financings, strategic collaborations and alliances and licensing arrangements. Additional financing that the Company may pursue may involve the sale of its Common Shares or financial instruments that are exchangeable for, or convertible into, its Common Shares, which could result in significant dilution to ESSA’s shareholders and the terms may include liquidation or other preferences that adversely affect the rights of existing shareholders. Additional capital may not be available on reasonable terms, if at all. Furthermore, these securities may have rights senior to those of ESSA’s Common Shares and could contain covenants that include restrictive covenants limiting ESSA’s ability to take important actions and potentially impair ESSA’s competitiveness, such as limitations on ESSA’s ability to incur additional debt, make capital expenditures, acquire, sell or license intellectual property rights or declare dividends. If ESSA raises additional funds through strategic collaborations and alliances or licensing arrangements with third parties, ESSA may have to relinquish valuable rights to technologies or future product candidates, or grant licenses on terms that are not favorable to ESSA. If the Company is unable to raise additional funds when needed, the Company may be required to delay, limit, reduce or terminate its product development or commercialization efforts or grant rights to develop and market product candidates that ESSA would otherwise prefer to develop and market ourselves.

 

ESSA may not be able to generate sufficient cash to service its indebtedness, which currently consists of its capital term loan facility with Silicon Valley Bank.

 

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On November 18, 2016, the Company entered into a loan and security agreement (the “SVB Term Loan”) with Silicon Valley Bank (“SVB”), providing for a capital term loan facility in the total amount of up to $10,000,000. The Company initially drew down $8,000,000 of the SVB Term Loan, and had a conditional option to draw down an additional $2,000,000 by July 31, 2017 upon (i) positive data for its ongoing Phase I clinical trial of EPI-506 and (ii) receipt of the third and final tranche of the CPRIT Grant of $5,422,000. As the Company is not proceeding with the development of EPI-506, the conditional option for the additional $2,000,000 has expired. The SVB Term Loan bears interest at a rate of the WSJ Prime Rate plus 3% per annum and will mature on September 1, 2020. The SVB Term Loan requires a final payment of 8.6% of the amount advanced, due upon the earlier of the maturity or termination of the SVB Term Loan. The Company was required to make interest only payments until December 31, 2017. The SVB Term Loan is secured by a perfected first priority lien on all of the Company’s assets, with a negative pledge on intellectual property. The SVB Term Loan does not contain any financial covenants.

 

ESSA’s ability to make scheduled payments or to refinance its debt obligations depends on numerous factors including, but not limited to, the amount of its cash reserves, capital requirements and its ability to raise additional capital. ESSA may be unable to maintain a level of cash reserves or cash flows sufficient to permit it to pay the principal, premium, if any, and interest on its existing or future indebtedness. If the Company’s cash flows and capital resources are insufficient to fund its debt obligations, the Company may be required to seek additional capital, restructure or refinance its indebtedness, or delay or abandon its business expansion, R&D projects or other capital expenditures, which could have a material adverse effect on ESSA’s business, financial condition, prospects or results of operations. There is no assurance that ESSA would be able to take any of such actions, or that such actions would permit the Company to meet its scheduled debt service obligations. In addition, since the Company is in the clinical development stage, and does not currently generate revenue, it expects to finance future cash needs through a combination of private and public equity offerings, debt financings, strategic collaborations and alliances and licensing arrangement. However, additional capital may not be available on reasonable terms, if at all. Even if the Company is able to commercialize a product candidate, there can be no assurance that the Company will generate sufficient revenues or cash flow to service its debt obligations.

 

Further, in the event of the Company’s breach of the agreement with SVB providing for the SVB Term Loan, the Company may be required to repay any outstanding amounts earlier than anticipated and the lenders may foreclose on their security interest in the Company’s assets.

 

SVB may also declare the Company to be in breach of the SVB Term Loan agreement in the event of a “Material Adverse Change”, which has been defined to include a material impairment in the Company’s assets acting as collateral under the SVB Term Loan, a material adverse change in the business, operations or condition (financial or otherwise) of the Company, or a material impairment of the prospect of repayment of any portion of its debt obligations. There can be no guarantee that the Company will not experience a “Material Adverse Change”.

 

The Company remains subject to the restrictions and conditions of the CPRIT Agreement. Failure to comply with the CPRIT Agreement may adversely affect ESSA’s financial condition and results of operations.

 

ESSA has relied on the CPRIT Grant to fund a portion of its preclinical and clinical development costs of clinical candidate EPI-506. The total of the CPRIT Grant was US$12 million, of which ESSA has received a total of US$11.7 million to date, as follows: US$2.8 million (on grant execution), US$3.7 million (upon the clearance of the IND of EPI-506, ESSA’s first-generation agent, by the FDA) and US$5.2 million (upon commencement of the Phase I clinical trial of EPI-506). The CPRIT Grant is subject to various requirements, including ESSA’s compliance with the scope of work outlined in the CPRIT Agreement and demonstration of its progress towards achievement of the milestones set forth in the CPRIT Agreement. If ESSA fails to comply with the terms of the CPRIT Agreement, is found to have used any grant proceeds for purposes other than intended, or fails to maintain the required level of operations in the State of Texas for three years following the final payment of grant funds, CPRIT could determine that ESSA is in default of its obligations under the CPRIT Agreement and could, among other things, seek reimbursement of all proceeds of the CPRIT Grant received by ESSA. ESSA has received and responded to a request for information from CPRIT regarding the nature and extent of the Company’s operations in Texas. Although the Company believes it has at all times acted in compliance with the CPRIT Agreement and believes its response to CPRIT’s request for information is satisfactory, there can be no assurance that CPRIT will agree with ESSA’s determination. If ESSA is found to be in default under the CPRIT Agreement and such default is not waived by CPRIT, the Company may not receive the remaining funds of the CPRIT Grant or could be required to reimburse all of the CPRIT Grant. ESSA cannot be certain that its assets or cash flows or ability to raise additional capital will be sufficient to fully repay the CPRIT Grant. Being required to reimburse all or a portion of the CPRIT Grant would impact ESSA’s ongoing operations, which could materially and adversely affect its financial condition and results of operations.

 

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ESSA’s 2018 year-end financial statements state that its recurring losses and limited cash resources raise substantial doubt as to its ability to continue as a going concern.

 

ESSA’s financial statements for the year ended September 30, 2018 were prepared on a “going concern basis” and the audit report contains a “going concern qualification” (see the Audit Report on the Financial Statements for the year ended September 30, 2018 and Note 1 to those Financial Statements). ESSA’s financial statements assume it will continue as a going concern, but to be able to do so it will need to raise additional capital to fund its operations until positive operating cash flow is achieved, if ever. As at September 30, 2018, ESSA had working capital of $12,252,309, which the Company anticipates will fund operations through September 2019, provided there are no significant changes in capital structure and debt obligations. There can be no assurance that ESSA will be able to raise sufficient additional capital at terms commercially acceptable, if at all, to continue its operations.

 

The Company has incurred significant losses in every quarter since its inception and anticipates that it will continue to incur significant losses in the future and may never generate profits from operations or maintain profitability.

 

ESSA is a preclinical stage pharmaceutical company with a limited operating history. Investment in pharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval or become commercially viable. ESSA does not have any products approved by regulatory authorities for marketing or commercial sale and has not generated any revenue from product sales, or otherwise, to date. Furthermore, ESSA continues to incur significant research, development and other expenses related to its ongoing operations. As a result, ESSA is not profitable and has incurred losses in every reporting period since inception in 2009. For the years ended September 30, 2018, September 30, 2017 and September 30, 2016, ESSA reported net losses of $11,629,440, $4,499,012 and $13,139,788, respectively. As of September 30, 2018, ESSA had an accumulated deficit since inception of $44,369,086.

 

The Company expects to continue to incur significant expenses and operating losses for the foreseeable future. ESSA anticipates these losses will increase as it continues the research and development of, and seeks regulatory approvals for, any of its potential future product candidates and potentially begins to commercialize any products that may achieve regulatory approval. ESSA may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect its financial condition. The size of ESSA’s future net losses will depend, in part, on the rate of future growth of ESSA’s expenses and ESSA’s ability to generate revenues. The Company’s prior losses and expected future losses have had and will continue to have an adverse effect on the Company’s financial condition.

 

Even if the Company is able to commercialize any product candidate, there can be no assurance that the Company will generate significant revenues or ever achieve profitability.

 

The Company expects to continue to incur substantial losses for the foreseeable future, and these losses may be increasing. The Company is uncertain about when or if it will be able to achieve or sustain profitability. If the Company achieves profitability in the future, it may not be able to sustain profitability in subsequent periods. Failure to become and remain profitable would impair the Company’s ability to sustain operations and adversely affect the price of the Common Shares and its ability to raise capital.

 

ESSA has a limited operating history, which may make it difficult for you to evaluate the success of ESSA’s business to date and to assess ESSA’s future viability.

 

The Company’s operations to date have been primarily limited to organizing and staffing ESSA, acquiring the in-licensing of intellectual property, discovering and developing novel small molecule product candidates, conducting preliminary preclinical research, and execution of a Phase I clinical study of a first-generation agent. ESSA is a development stage company with limited operating history and no revenue. ESSA has not identified a product candidate to advance through clinical development and does not have any products ready for commercialization. Consequently, evaluating ESSA’s performance, viability or future success will be more difficult than if ESSA had a longer operating history or approved products on the market.

 

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ESSA’s Product Candidate and Regulatory Matters

 

ESSA does not currently have a clinical product candidate. If ESSA is unable to identify a product candidate that is suitable for advancing into clinical trials, its business would be materially harmed.

 

Due to a strategic shift in the Company’s business focus away from the development of EPI-506, ESSA is currently conducting preclinical studies on a select group of next-generation Aniten molecules, but has not yet identified a lead product candidate suitable for advancing into clinical trials. Accordingly, ESSA continues to evaluate its next-generation Aniten compounds to determine which, if any, are ready to move further into preclinical and clinical development. If ESSA determines that its next-generation Aniten compounds do not contain any product candidates worthy of development or cannot obtain regulatory approval for clinical development, its business would be materially harmed.

 

ESSA’s future success is dependent primarily on the regulatory approval and commercialization of a single product candidate, which has not yet been selected and which is still in the preclinical stage.

 

The Company does not have any products that have obtained regulatory approval for clinical development or commercialization. Currently, ESSA is engaged in the preclinical stage of identifying a product candidate to take forward from its Aniten series of compounds through preclinical and clinical development to determine the safety, tolerability, maximum tolerated dose, pharmacokinetics and potential therapeutic benefits of such a candidate in patients with metastatic castration-resistant prostate cancer (“CRPC”), and to ultimately receive regulatory approval. As a result, the Company’s near-term prospects, including its ability to finance its operations and generate revenue, are substantially dependent on its ability to obtain regulatory approval for, and, if approved, to successfully commercialize a product candidate in a timely manner. ESSA cannot commercialize future product candidates in the United States without first obtaining regulatory approval for the product from the FDA; similarly, ESSA cannot commercialize future product candidates outside of the United States without obtaining regulatory approval from comparable foreign regulatory authorities. The FDA review process typically varies in time and may take years to complete and approval is not guaranteed. Obtaining regulatory approval and successful commercialization of ESSA’s product candidates will depend on many factors, including, but not limited to, the following:

 

·successfully completing formulation and process development activities;

 

·completing clinical trials that demonstrate the efficacy and safety of ESSA’s product candidates;

 

·receiving marketing approval from applicable regulatory authorities;

 

·establishing commercial manufacturing capabilities;

 

·launching commercial sales, marketing and distribution operations;

 

·acceptance of ESSA’s product candidates by patients, the medical community and third-party payors;

 

·a continued acceptable safety profile following approval; and

 

·competing effectively with other therapies, including with respect to the sales and marketing of ESSA’s product candidates, if approved.

 

Many of these factors are wholly or partially beyond ESSA’s control, including clinical development, the regulatory submission process and changes in the competitive landscape. If ESSA does not achieve one or more of these factors in a timely manner, it could experience significant delays or an inability to develop ESSA’s product candidates at all.

 

If the Company breaches any of the agreements under which the Company licenses rights to its technology from third-parties, the Company could lose license rights that are important to ESSA’s business. ESSA’s current license agreement may not provide an adequate remedy for its breach by the licensor.

 

 15 

 

 

ESSA is developing its Aniten series product candidates pursuant to a License Agreement with UBC and the BC Cancer Agency. The Company is subject to a number of risks associated with the Company’s collaboration with UBC and the BC Cancer Agency, including the risk that UBC or the BC Cancer Agency may terminate the License Agreement upon the occurrence of certain specified events. ESSA’s License Agreement requires, among other things, that the Company make certain payments and use reasonable commercial efforts to meet certain clinical and regulatory milestones. See “Patents and Proprietary Rights” in Item 4 of this Annual Report. If ESSA fails to comply with any of these obligations or otherwise breaches this or similar agreements, UBC, the BC Cancer Agency or any future licensors may have the right to terminate the license. ESSA could also suffer the consequences of non-compliance or breaches by licensors in connection with ESSA’s license agreements. Such non-compliance or breaches by such third parties could in turn result in ESSA’s breaches or defaults under the Company’s agreements with the Company’s other collaboration partners, and the Company could be found liable for damages or lose certain rights, including rights to develop and/or commercialize a product or product candidate. Loss of ESSA’s rights to the Licensed IP or any similar license granted to ESSA in the future, or the exclusivity rights provided therein, could harm ESSA’s financial condition and operating results.

 

The Company may not be able to obtain required regulatory approvals for the Company’s proposed products.

 

The research, testing, manufacturing, labeling, packaging, storage, approval, sale, marketing, advertising and promotion, pricing, export, import and distribution of drug products developed by ESSA or ESSA’s future collaborative partners, if any, is subject to extensive regulation by federal, provincial, state and local governmental authorities and those regulations differ from country to country. ESSA’s potential future product candidates will be principally regulated in the United States by the FDA, in the European Union by the EMA and the regulators in the individual European Union member countries, in Canada by the TPD, and by other similar regulatory authorities in Japan and other jurisdictions. Government regulation substantially increases the cost and risk of researching, developing, manufacturing and selling products. Following several widely publicized issues in recent years, the FDA and similar regulatory authorities in other jurisdictions have become increasingly focused on product safety. This development has led to requests for more clinical trial data, for the inclusion of a significantly higher number of patients in clinical trials and for more detailed analysis of trial results. Consequently, the process of obtaining regulatory approvals, particularly from the FDA, is time-consuming and has become more costly than in the past. Any product developed by ESSA or ESSA’s future collaborative partners, if any, must receive all relevant regulatory approvals or clearances from the applicable regulatory authorities before it may be marketed and sold in a particular country.

 

ESSA will not be permitted to market any potential products in the United States, Europe, Japan, Canada or in other countries where ESSA intends to market its potential future product candidates until such product candidate receives approval of a NDA from the FDA or similar approval in other countries as restrictions apply. In the United States, the FDA generally requires the completion of preclinical testing and clinical trials of each drug to establish its safety and efficacy and extensive pharmaceutical development to ensure its quality before an NDA is approved. This process can take many years and require the expenditure of substantial resources and may include post-marketing studies and surveillance. Regulatory authorities in other jurisdictions impose similar requirements. Of the large number of drugs in development, only a small percentage result in the submission of an NDA to the FDA and even fewer are approved for commercialization. To date, the Company has not submitted an NDA for any of the Company’s potential products to the FDA or comparable applications to other regulatory authorities. If the Company’s development efforts for potential products are not successful for the treatment of CRPC and regulatory approval is not obtained in a timely fashion or at all, the Company’s business will be adversely affected.

 

The receipt of required regulatory approvals for the Company’s potential future products is uncertain and subject to a number of risks, including the following:

 

  · the FDA, IRBs or comparable foreign regulatory authorities may disagree with the design or implementation of the Company’s clinical trials;

 

  · the Company may not be able to provide acceptable evidence of the safety, efficacy or quality of its potential products;

 

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  · the results of the Company’s clinical trials may not meet the level of statistical or clinical significance required by the FDA or other regulatory agencies for marketing approval;

 

  · the dosing of the Company’s potential products in a particular clinical trial may not be at an optimal level;

 

  · patients in the Company’s clinical trials may suffer adverse effects for reasons that may or may not be related to the Company’s potential products;

 

  · the data collected from the Company’s clinical trials may not be sufficient to support the submission of an NDA for the Company’s potential products or to obtain regulatory approval in the United States, Europe, Japan, Canada, or elsewhere;

 

  · the FDA or comparable foreign regulatory authorities may find deficiencies in the manufacturing processes or facilities of third-party manufacturers with which the Company contracts for clinical and commercial supplies; and

 

  · the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering the Company’s clinical data insufficient for approval.

 

The FDA and other regulators have substantial discretion in the approval process and may refuse to accept any application or may decide that the Company’s data is insufficient for approval and require additional clinical trials, or other studies. In addition, varying interpretations of the data obtained from preclinical studies and clinical trials could delay, limit or prevent regulatory approval of the Company’s potential products. ESSA, or ESSA’s future collaborative partner, if any, must obtain and maintain regulatory authorization to conduct clinical trials. ESSA’s preclinical research is subject to GLP and other requirements and ESSA’s clinical research is subject to good clinical practice and other requirements. Failure to adhere to these requirements could invalidate ESSA’s data. In addition, the relevant regulatory authority or independent review board may modify, suspend or terminate a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the benefits. Further, the process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon, among other things, the type, complexity and novelty of the prescription product candidates involved, the jurisdiction in which regulatory approval is sought and the substantial discretion of the regulatory authorities. If regulatory approval is obtained in one jurisdiction, it does not necessarily mean that ESSA’s potential products will receive regulatory approval in all jurisdictions in which the Company may seek approval, or any regulatory approval obtained may not be as broad as what was obtained in other jurisdictions. However, the failure to obtain approval for ESSA’s potential products in one or more jurisdictions may negatively impact the Company’s ability to obtain approval in a different jurisdiction. Accordingly, despite ESSA’s expenditures and investment of time and effort, it may be unable to receive required regulatory approvals for product candidates developed by it. If a significant portion of these development efforts are not successfully completed, required regulatory approvals are not obtained, or any approved products are not commercially successful, ESSA’s business, financial condition and results of operations may be materially harmed.

 

Until September 2017, ESSA was largely dependent on the success of EPI-506, the development of which it has now suspended. All of the Company’s other potential future product candidates are still in preclinical development, and accordingly ESSA’s business is now dependent on its ability to successfully identify and develop much earlier stage product candidates. If ESSA is unable to develop these potential future product candidates in a timely manner, its business will be materially harmed.

 

Until September 2017, ESSA’s business prospects and potential product revenues were largely dependent upon its ability to obtain regulatory approval of, and successfully commercialize, EPI-506. Due to a strategic shift in the Company’s business focus, it is now dependent on the successful identification and development of preclinical stage Aniten compounds.

 

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Before ESSA can commercialize these Aniten compounds it will need to:

 

·conduct substantial research and development;

 

·undertake nonclinical and clinical testing and engage in sampling activity and other costly and time consuming measures;

 

·scale-up manufacturing processes; and

 

·pursue and obtain marketing and manufacturing approvals and, in some jurisdictions, pricing and reimbursement approvals.

 

This process involves a high degree of risk and takes many years, and success is never guaranteed. ESSA’s Aniten compound development efforts may fail for many reasons, including:

 

·ESSA’s inability to secure the funds to continue the operation of its business;

 

·failure of potential future product candidates in nonclinical studies;

 

·delays or difficulty enrolling patients in clinical trials, particularly for disease indications with small patient populations;

 

·patients exhibiting adverse reactions to potential future product candidates or indications of other safety concerns;

 

·insufficient clinical trial data to support the bioequivalence of one or more of ESSA’s potential future product candidates with the applicable reference product;

 

·inability to manufacture sufficient quantities of potential future product candidates for development or commercialization activities in a timely and cost-efficient manner, if at all;

 

·potential patent litigation with innovator companies or others who may hold patents;

 

  · failure to obtain, or delays in obtaining, the required regulatory approvals for potential future product candidates, the facilities or the processes used to manufacture such product candidates;

 

  · changes in the regulatory environment, including pricing and reimbursement that make development of ESSA’s potential future product candidates no longer desirable; or

 

  · ESSA’s inability, in any future clinical trial that might require one or more comparative products, to obtain on a timely basis supplies of the applicable reference products to which its potential future product candidates must be compared.

 

If ESSA’s product development efforts fail for any of these or other reasons, or it decides to abandon development of a potential future product candidate at any time, it would never realize revenue from those programs and its business could be materially harmed

 

ESSA may not be able to successfully commercialize its Aniten series of compounds.

 

Even if a candidate from ESSA’s Aniten series were to successfully obtain approval from the FDA and comparable foreign regulatory authorities, any approval might contain significant limitations related to use restrictions for specified age groups, warnings, precautions or contraindications, may be subject to burdensome post-approval study or risk management requirements, or may be limited to a subset of CRPC patients with limited commercial value. If ESSA is unable to obtain regulatory approval in one or more jurisdictions, or any approval contains significant limitations, ESSA may not be able to obtain sufficient funding or generate sufficient revenue to continue the development of any other future product candidates that ESSA may discover, in-license, develop or acquire in the future. Also, any regulatory approval of any future product candidates, once obtained, may be withdrawn. Furthermore, even if ESSA obtains regulatory approval for a product candidate, the commercial success of such product candidate will depend on a number of factors, including the following:

 

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  · development of a commercial organization or establishment of a commercial collaboration with a commercial infrastructure;

 

  · establishment of commercially viable pricing and approval for adequate reimbursement from third-party and government payors;

 

  · the ability of ESSA’s third-party manufacturers to manufacture quantities of the compound using commercially efficient processes and at a scale sufficient to meet anticipated demand and enable ESSA to reduce its cost of manufacturing;

 

  · ESSA’s success in educating physicians and patients about the benefits, administration and use of the compound;

 

  · the availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing treatments;

 

  · the effectiveness of ESSA’s own or its potential strategic collaborators’ marketing, sales and distribution strategy and operations;

 

  · acceptance of the product candidate as safe and effective by patients and the medical community; and
     
  · a continued acceptable safety profile of a product candidate following approval.

 

Many of these factors are beyond ESSA’s control. If ESSA, or its potential commercialization collaborators, are unable to successfully commercialize a product candidate, ESSA may not be able to earn sufficient revenues to continue the Company’s business.

 

The Company’s potential future product candidates may have undesirable side effects that may delay or prevent marketing approval or, if approval is received, require them to be taken off the market, require them to include safety warnings or otherwise limit their sales.

 

Although any future product candidates will undergo safety testing, not all adverse effects of drugs can be predicted or anticipated. Unforeseen side effects from any of ESSA’s potential future product candidates could arise either during clinical development or, if approved by regulatory authorities, after the approved product has been marketed.  The results of any future clinical trials may show that the product candidate(s) cause undesirable or unacceptable side effects, which could interrupt, delay or halt clinical trials, and result in delay of, or failure to obtain, marketing approval from the FDA and other regulatory authorities, or result in marketing approval from the FDA and other regulatory authorities with restrictive label warnings, limited patient populations or potential product liability claims.

 

If any of ESSA’s potential future product candidates receive marketing approval and it or others later identify undesirable or unacceptable side effects caused by such products:

 

·regulatory authorities may require us to take ESSA’s approved product off the market;

 

·regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication or field alerts to physicians and pharmacies;

 

·it may be required to change the way the product is administered, conduct additional clinical trials or change the labeling of the product;

 

·it may be subject to limitations on how it may promote or distribute the product;

 

·sales of the product may decrease significantly;

 

·it may be subject to litigation or product liability claims; and

 

·ESSA’s reputation may suffer.

 

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Any of these events could prevent ESSA or its future collaborative partners from achieving or maintaining market acceptance of the affected product or could substantially increase commercialization costs and expenses, which in turn could delay or prevent ESSA from generating significant revenue from the sale of ESSA’s products.

 

Clinical drug development involves a lengthy and expensive process with an uncertain outcome, results of earlier studies and trials may not be predictive of future trial results and ESSA’s potential future product candidates may not have favorable results in later trials or in the commercial setting.

 

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. ESSA’s planned clinical trials may produce negative or inconclusive results, and ESSA or any of its current and future collaborators may decide, or regulators may require ESSA, to conduct additional clinical or preclinical testing. The results of preclinical studies and early clinical trials may not be predictive of the results of later-stage clinical trials. Preclinical tests and Phase I and Phase II clinical trials are primarily designed to test safety, to study pharmacokinetics and pharmacodynamics and to understand the side effects of product candidates at various doses and schedules. Success in preclinical or animal studies and early clinical trials does not ensure that later large-scale efficacy trials will be successful nor does it predict final results. Favorable results in early trials may not be repeated in later trials. The Company cannot assure you that the FDA, TPD or EMA or other similar government bodies will view the results as the Company does, or that any future trials of ESSA’s proposed products for other indications will achieve positive results. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials.

 

A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Any future clinical trial results for ESSA’s proposed products may not be successful. Similarly, preclinical interim results of a clinical trial do not necessarily predict final results. A number of factors could contribute to a lack of favorable safety and efficacy results for ESSA’s proposed products for other indications. For example, such trials could result in increased variability due to varying site characteristics, such as local standards of care, differences in evaluation period and due to varying patient characteristics including demographic factors and health status. There can be no assurance that the Company’s clinical trials will demonstrate sufficient safety and efficacy for the FDA EMA to approve ESSA’s potential products for the treatment of CRPC, or any other indication that the Company may consider in any additional NDA or NDS submissions for ESSA’s potential products.

 

The Company will be required to demonstrate through larger-scale clinical trials that any potential future product is safe and effective for use in a diverse population before ESSA can seek regulatory approvals for its commercial sale. There is typically an extremely high rate of attrition from the failure of product candidates proceeding through clinical and post-approval trials. If ESSA’s potential products fail to demonstrate sufficient safety and efficacy in ongoing or future clinical trials, the Company could experience potentially significant delays in, or be required to abandon development of a product candidate.

 

In addition, clinical trials and nonclinical studies performed by research organizations and other independent third parties may yield negative results regarding the effect of ESSA’s potential products on CRPC, either in absolute terms or relative to other products.

 

As an organization, ESSA has never submitted an NDA/NDS and may be unable to do so for any future products ESSA develops.

 

ESSA completed a Phase I clinical trial for EPI-506 which will not be taken forward into Phase II. ESSA will have to complete a Phase I clinical trial for any future product candidates. Additionally, ESSA will need to conduct Phase II and Phase III of clinical trials, which it has not previously undertaken. The conduct of Phase III clinical trials and the submission of a successful IND or CTA and NDA or NDS is a complicated process. As an organization, ESSA has limited experience in preparing, submitting and prosecuting regulatory filings and has not submitted an NDA or NDS. ESSA’s interactions with the FDA to date have been limited to the completed EPI-506 clinical trial. Consequently, even if ESSA’s initial clinical trials are successful, the Company may be unable to successfully and efficiently execute and complete necessary clinical trials in a way that leads to NDA or NDS submission and approval of ESSA’s proposed products or any other future product candidate ESSA may develop. The Company may require more time and incur greater costs than competitors and may not succeed in obtaining regulatory approvals of products that the Company develops. Failure to commence or complete, or delays in, ESSA’s planned clinical trials, would prevent ESSA from or delay ESSA in commercializing proposed products or any other future product candidate ESSA develops.

 

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If ESSA is unable to enroll subjects in clinical trials, ESSA will be unable to complete these trials on a timely basis.

 

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 subjects to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, ability to obtain and maintain patient consents, risk that enrolled subjects will drop out before completion, 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 ESSA is investigating. Furthermore, ESSA relies on CROs and clinical trial sites to ensure the proper and timely conduct of the Company’s clinical trials, and while the Company has agreements governing their committed activities, the Company has limited influence over their actual performance.

 

If ESSA experiences delays in the completion or termination of any clinical trial of any future product candidates, the commercial prospects of product candidates will be harmed, and ESSA’s ability to generate product revenues from any of these product candidates will be delayed. In addition, any delays in completing ESSA’s clinical trials will increase costs, slow down product candidate development and approval process and could shorten any periods during which ESSA may have the exclusive right to commercialize product candidates or allow competitors to bring products to market before ESSA does, and jeopardize ESSA’s ability to commence product sales, which would impair ESSA’s ability to generate revenues and may harm ESSA’s business, results of operations, financial condition and cash flows and future prospects. In addition, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of ESSA’s proposed products or future product candidates.

 

ESSA may conduct trials for future product candidates at sites outside the United States and the FDA may not accept data from trials conducted in such locations.

 

ESSA may in the future choose to conduct more clinical trials outside the United States. Although the FDA may accept data from clinical trials conducted outside the United States, acceptance of this data is subject to certain conditions imposed by the FDA. For example, the clinical trial must be well designed and conducted and performed by qualified investigators in accordance with ethical principles. The trial population must also adequately represent the U.S. population, and the data must be applicable to the U.S. population and U.S. medical practice in ways that the FDA deems clinically meaningful. In addition, while these clinical trials are subject to the applicable local laws, FDA acceptance of the data will be dependent upon its determination that the studies also complied with all applicable U.S. laws and regulations. There can be no assurance the FDA will accept data from trials conducted outside of the United States. If the FDA chooses to not accept data collected outside the United States, it would likely result in the need for additional trials, which would be costly and time-consuming and delay or permanently halt the development of the Company’s proposed products or any future product candidates.

 

Even if the Company obtains marketing approval for any potential future products, the Company will be subject to ongoing obligations and continued regulatory review, which may result in significant additional expense.

 

Even if the Company obtains U.S., Canadian or European regulatory approval for a future product candidate, which would not occur until the Company successfully completes multiple clinical trials, including Phase III clinical trials, the FDA, TPD or EMA may still impose significant restrictions on its indicated uses or marketing or the conditions of approval, or impose ongoing requirements for potentially costly and time-consuming post-approval studies, including Phase 4 clinical trials or clinical outcome studies and post-market surveillance to monitor the safety and efficacy of ESSA’s potential products. Even if the Company secures U.S., Canadian or European regulatory approval, the Company would continue to be subject to ongoing regulatory requirements governing manufacturing, labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, recordkeeping and reporting of adverse events and other post-market information. These requirements include registration with the FDA, as well as continued compliance with GCP obligations, for any clinical trials that the Company conducts post approval. In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents.

 

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With respect to any product candidates for which ESSA obtains regulatory approval, ESSA will be subject to post-marketing regulatory obligations, including the requirements by the FDA, EMA and similar agencies in other jurisdictions to maintain records regarding product safety and to report to regulatory authorities serious or unexpected adverse events. Compliance with extensive post-marketing record keeping and reporting requirements requires a significant commitment of time and funds, which may limit ESSA’s ability to successfully commercialize approved products.

 

In addition, manufacturing of approved drug products must comply with extensive regulations governing cGMP. Manufacturers and their facilities are subject to continual review and periodic inspections. As ESSA will be dependent on third parties for manufacturing, ESSA will have limited ability to ensure that any entity manufacturing products on its behalf is doing so in compliance with applicable cGMP requirements. Failure or delay by any manufacturer of ESSA’s products to comply with cGMP regulations or to satisfy regulatory inspections could have a material adverse effect on ESSA, including potentially preventing ESSA from being able to supply products for clinical trials or commercial sales. In addition, manufacturers may need to obtain approval from regulatory authorities for product, manufacturing, or labeling changes, which requires time and money to obtain and can cause delays in product availability. ESSA is also required to comply with good distribution practices such as maintenance of storage and shipping conditions, as well as security of products, in order to ensure product quality determined by cGMP is maintained throughout the distribution network. In addition, ESSA is subject to regulations governing the import and export of its products.

 

Sales and marketing of pharmaceutical products are subject to extensive federal and state or other laws governing on-label and off-label advertising, scientific/educational grants, gifts, consulting and pricing and are also subject to consumer protection and unfair competition laws. Compliance with extensive regulatory requirements requires training and monitoring of the sales force, which imposes a substantial cost on ESSA and ESSA’s collaborators. To the extent any future ESSA products are marketed by collaborators, ESSA’s ability to ensure their compliance with applicable regulations will be limited. In addition, ESSA is subject to regulations governing the design, testing, control, manufacturing, distribution, labeling, quality assurance, packaging, storage, shipping, import and export of ESSA’s products and product candidates.

 

Failure to comply with applicable legal and regulatory requirements may result in administrative or judicial sanctions.

 

If the Company or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, lack of efficacy, problems with the facility where the product is manufactured, or the Company or its manufacturers fail to comply with applicable regulatory requirements, the Company may be subject to the following administrative or judicial sanctions:

 

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

 

  · issuance of warning letters or untitled letters;

 

  · clinical holds;

 

  · injunctions or the imposition of civil or criminal penalties or monetary fines;

 

  · suspension or withdrawal of regulatory approval;

 

  · suspension of any ongoing clinical trials;

 

  · refusal to approve pending applications or supplements to approved applications filed by the Company, or suspension or revocation of product license approvals;

 

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  · suspension or imposition of restrictions on operations, including costly new manufacturing requirements;

 

  · withdrawal of the product from the market and product recalls; or

 

  · product seizure or detention or refusal to permit the import or export of product.

 

The occurrence of any event or penalty described above may inhibit the Company’s ability to commercialize potential products and generate revenue. Adverse regulatory action, whether pre- or post-approval, can also potentially lead to product liability claims and increase the Company’s product liability exposure.

 

In the future, the regulatory climate might change due to changes in the FDA and other regulatory authorities’ staffing, policies or regulations and such changes could impose additional post-marketing obligations or restrictions and related costs. While it is impossible to predict future legislative or administrative action, if the Company is not able to maintain regulatory compliance, the Company will not be able to market its drugs and its business could suffer.

 

If clinical trials for ESSA’s potential future product candidates are prolonged, delayed or stopped, ESSA may be unable to obtain regulatory approval and commercialize such product candidates on a timely basis, or at all, which would require ESSA to incur additional costs and delay receipt of any product revenue.

 

ESSA may experience delays in any future preclinical studies or clinical trials, and ESSA does not know whether future preclinical studies or clinical trials will begin on time, need to be redesigned, enroll an adequate number of patients on time or be completed on schedule, if at all. The commencement of these planned clinical trials could be substantially delayed or prevented by several factors, including:

 

·discussions with the FDA or other regulatory agencies regarding the scope or design of ESSA’s clinical trials;

 

·the limited number of, and competition for, suitable sites to conduct ESSA’s clinical trials, many of which may already be engaged in other clinical trial programs, including some that may be for the same indication as ESSA’s product candidates;

 

·any delay or failure to obtain regulatory approval or agreement to commence a clinical trial in any of the countries where enrollment is planned;

 

·inability to obtain sufficient funds required for a clinical trial;

 

·clinical holds on, or other regulatory objections to, a new or ongoing clinical trial;

 

·delay or failure to manufacture sufficient supplies of the product candidate for ESSA’s clinical trials;

 

·delay or failure to reach agreement on acceptable clinical trial agreement terms or clinical trial protocols with prospective sites or clinical research organizations (“CROs”), the terms of which can be subject to extensive negotiation and may vary significantly among different sites or CROs; and

 

·delay or failure to obtain institutional review board, or IRB, approval to conduct a clinical trial at a prospective site.

 

The completion of ESSA’s clinical trials, once started, could also be substantially delayed or prevented by several factors, including:

 

·slower than expected rates of patient recruitment and enrollment;

 

·failure of patients to complete the clinical trial;

 

·the inability to enroll a sufficient number of patients in studies to ensure adequate statistical power to detect statistically significant treatment effects;

 

·unforeseen safety issues, including severe or unexpected drug-related adverse effects experienced by patients, including possible deaths;

 

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·lack of efficacy during clinical trials;

 

·termination of ESSA’s clinical trials by one or more clinical trial sites;

 

·inability or unwillingness of patients or clinical investigators to follow ESSA’s clinical trial protocols;

 

·inability to monitor patients adequately during or after treatment by ESSA and/or ESSA’s CROs;

 

·ESSA’s CROs or clinical study sites failing to comply with regulatory requirements or meet their contractual obligations to ESSA in a timely manner, or at all, deviating from the protocol or dropping out of a study;

 

·the inability to produce or obtain sufficient quantities of the product candidate to complete clinical studies;

 

·the inability to scale up manufacture of the product candidate into a commercially acceptable formulation at reasonable cost;

 

·the inability to address any noncompliance with regulatory requirements or safety concerns that arise during the course of a clinical trial; and

 

·the need to repeat or terminate clinical trials as a result of inconclusive or negative results or unforeseen complications in testing.

 

Changes in regulatory requirements, policies and guidelines may also occur and ESSA may need to significantly amend clinical trial protocols to reflect these changes with appropriate regulatory authorities. Such changes may require ESSA to renegotiate terms with CROs or resubmit clinical trial protocols to IRBs for re-examination, which may impact the costs, timing or successful completion of a clinical trial. ESSA’s clinical trials may be suspended or terminated at any time by the FDA, other regulatory authorities, the IRB overseeing the clinical trial at issue, any of ESSA’s clinical trial sites with respect to that site, or ESSA, due to a number of factors, including:

 

·failure to conduct the clinical trial in accordance with regulatory requirements or ESSA’s clinical protocols;

 

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

 

·lack of adequate funding to continue the clinical trial due to unforeseen costs or other business decisions; and

 

·upon a breach or pursuant to the terms of any agreement with, or for any other reason by, current or future collaborators that have responsibility for the clinical development of any of ESSA’s product candidates.

 

Product development costs for any of ESSA’s potential products will increase if it has delays in testing or approval or if the Company needs to perform more or larger clinical studies than planned. Additionally, changes in regulatory requirements and policies may occur and the Company may need to amend clinical study protocols to reflect these changes. Amendments may require the Company to resubmit its clinical study protocols to the FDA, EMA, TPD or similar regulatory authorities or IRBs for re-examination, which may impact the costs, timing or successful completion of that study. Any delays in completing the Company’s future clinical trials will increase its costs, slow down its development and approval process and jeopardize its ability to generate revenues. Any of these occurrences may have a material adverse effect on the Company’s business, financial condition and prospects.

 

Failure to obtain regulatory approval in international jurisdictions would prevent any potential future product candidates from being marketed outside the United States or Canada.

 

In order to market and sell ESSA’s potential future products in the European Union and many other jurisdictions, it must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA or TPD approval. The regulatory approval process outside of the United States or Canada generally includes all of the risks associated with obtaining FDA or TPD approval. In addition, in many countries outside the United States or Canada, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for ESSA and could delay or prevent the introduction of its potential products in certain countries. ESSA may not obtain approvals from regulatory authorities outside the United States or Canada on a timely basis, if at all. A failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory approval process in others. ESSA may not be able to file for marketing approvals and may not receive necessary approvals to commercialize its potential products in any market. If ESSA is unable to obtain approval of any of its future product candidates by regulatory authorities in the European Union or another jurisdiction, the commercial prospects of that product candidate may be significantly diminished and its business prospects could decline.

 

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Recently enacted and future legislation in the United States may increase the difficulty and cost for the Company to obtain marketing approval of, and commercialize, its potential future products and affect the prices the Company may obtain.

 

In the United States, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval for ESSA’s potential future products, restrict or regulate post-approval activities and affect the Company’s ability to profitably sell potential future products. Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. The Company does not know whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of ESSA’s potential future products, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject the Company to more stringent product labeling and post-marketing testing and other requirements.

 

In recent years, the U.S. Congress has considered reductions in Medicare reimbursement levels for drugs administered by physicians. CMS also has authority to revise reimbursement rates and to implement coverage restrictions for some drugs. Cost reduction initiatives and changes in coverage implemented through legislation or regulation could decrease utilization of and reimbursement for any approved products, which in turn would affect the price ESSA can receive for those products, if approved. While Medicare regulations apply only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from federal legislation or regulation may result in a similar reduction in payments from private payors.

 

In March 2010, the Patient Protection and Affordable Care Act (the “ACA”) was signed into law. This law substantially changes the way healthcare is financed by both governmental and private insurers in the United States, and significantly impacts the pharmaceutical industry. The ACA is intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers, and impose additional health policy reforms. Among other things, the ACA imposed an annual fee on manufacturers of branded prescription drugs, increased the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program; expanded the healthcare fraud and abuse laws, implemented a Medicare Part D coverage gap discount program, in which manufacturers must agree to offer discounts off negotiated prices; expanded the eligibility criteria for Medicaid programs; expanded the entities eligible for discounts under the Public Health Service Act pharmaceutical pricing program; and imposed a number of substantial new compliance provisions related to pharmaceutical companies' interactions with healthcare practitioners. If not repealed or amended, it is likely that the Affordable Care Act will continue the pressure on pharmaceutical pricing, especially under the Medicare and Medicaid programs, and may also increase our regulatory burdens and operating costs

 

Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA, including a January 2017 Executive Order issued by President Trump that directed federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers , health insurers or manufacturers of pharmaceutical or medical devices. President Trump and the United States Congress have also proposed repealing and replacing the ACA, including the insurance mandate. It remains to be seen, however, precisely what the new legislation would provide, when it will be enacted and what impact it will have on the availability of healthcare and containing of lowering the cost of healthcare. Such reforms, however, could have an adverse effect on anticipated revenue from product candidates that ESSA may successfully develop and for which ESSA may obtain marketing approval and may affect ESSA’s overall financial condition and ability to develop or commercialize product candidates. For example, it is possible that these repeal and replacement initiatives, if enacted into law, could ultimately result in fewer individuals having health insurance coverage or in individuals having insurance coverage with less generous benefits. The scope of potential future legislation to repeal and replace the ACA provisions is highly uncertain in many respects, as is the effect of such future legislation on ESSA’s business and prospects.

 

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In addition, other legislative changes have been proposed and adopted since the ACA was enacted. Beginning April 1, 2013, Medicare payments for all items and services, including drugs and biologics, were reduced by 2% under the sequestration (i.e., automatic spending reductions) required by the Budget Control Act of 2011 and will remain in effect through 2027, unless additional Congressional action is taken. Similarly, in January 2013, the American Taxpayer Relief Act of 2012, among other things, further reduced Medicare payments to certain providers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. New laws may result in additional reductions in Medicare and other healthcare funding, which may materially adversely affect future customer demand and affordability for any future our products, if approved and, accordingly, the results of our financial operations.

 

Further, 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. For example, in December 2016, the 21st Century Cures Act (“Cures Act”) was signed into law. The Cures Act, among other things, is intended to modernize the regulation of drugs and biologics and spur innovation, but its ultimate implementation is unclear. 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, which would adversely affect our business, prospects and ability to achieve or sustain profitability. In addition, on May 30, 2018, the Trickett Wendler, Frank Mongiello, Jordan McLinn, and Matthew Bellina Right to Try Act of 2017 (“Right to Try Act”) was signed into law. The law, among other things, provides a federal framework for certain patients to access certain investigational new drug products that have completed a Phase I clinical trial and that are undergoing investigation for FDA approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded access program. There is no obligation for a drug manufacturer to make its drug products available to eligible patients as a result of the Right to Try Act. ESSA cannot be sure whether additional legislative changes will be enacted, or whether FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on its product candidates, if any, may be.

 

We also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action in the United States. For example, the Trump Administration has issued a number of Executive Orders, applicable to all executive agencies, including the FDA, which imposes budget restriction on agencies contemplating issuing new regulations and requires such agencies to identify at least two existing regulations to be repealed, unless prohibited by law. It is difficult to predict how these requirements will be implemented, and the extent to which they will impact the FDA's ability to exercise its regulatory authority. If these executive actions impose constraints on the FDA's ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted.

 

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Also, there has been heightened governmental scrutiny recently over the manner in which pharmaceutical companies set and advertise prices for their marketed products, which have resulted in several Congressional inquiries and proposed federal legislation, as well as state efforts, designed to, among other things, bring more transparency to product pricing, reduce the cost of prescription drugs under Medicare, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products. At the federal level, the Trump administration’s budget proposal for fiscal year 2019 contains further drug price control measures that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. Further, the Trump administration released a “Blueprint,” or plan, to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase drug manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products, and reduce the out of pocket costs of drug products paid by consumers. The Department of Health and Human Services has already started the process of soliciting feedback on some of these measures and, at the same, is immediately implementing others under its existing authority. For example, the CMS announced that it will allow Medicare Advantage Plans the option to use step therapy for Part B drugs beginning January 1, 2019, and also proposed a new rule that would require direct-to-consumer television advertisements of prescription drugs and biological products, for which payment is available through or under Medicare or Medicaid, to include in the advertisement the Wholesale Acquisition Cost, or list price, of that drug or biological product. While some proposed measures will require authorization through additional legislation to become effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, individual states in the United States are increasingly active in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

 

ESSA’s business may be materially adversely affected by new legislation, new regulatory requirements and the continuing efforts of governmental and third-party payors to contain or reduce the costs of healthcare through various means.

 

Governments and regulatory authorities in Europe and other markets in which ESSA intends to sell its products may propose and adopt new legislation and regulatory requirements relating to pharmaceutical approval criteria and manufacturing requirements. Such legislation or regulatory requirements, or the failure to comply with such, could adversely impact ESSA’s operations and could have a material adverse effect on ESSA’s business, financial condition and results of operations.

 

In recent years, national, federal, provincial, state, and local officials and legislators have proposed, or are reportedly considering proposing, a variety of price based reforms to the healthcare systems in the European Union, the United States and other countries. Some proposals include measures that would limit or eliminate payments for certain medical procedures and treatments or subject the pricing of pharmaceuticals to government control. Furthermore, in certain foreign markets, the pricing or profitability of healthcare products is subject to government controls and other measures that have been prepared by legislators and government officials. While ESSA cannot predict whether any such legislative or regulatory proposals or reforms will be adopted, the adoption of any such proposals or reforms could adversely affect the commercial viability of the Company’s existing and potential products. Significant changes in the healthcare system in the European Union and other countries may have a substantial impact on the manner in which ESSA conducts its business. Such changes could also have a material adverse effect on ESSA’s business, financial condition and results of operations.

 

ESSA relies on third parties to conduct its preclinical studies and clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, this could substantially harm ESSA’s business because it may not be able to obtain regulatory approval for or commercialize potential future product candidates in a timely manner or at all.

 

ESSA has extensively relied upon and plans to continue to extensively rely upon entities outside of its control, including academic institutions and CROs, to monitor and manage data for its ongoing preclinical and clinical programs. ESSA relies on these parties for execution of its preclinical studies and clinical trials, and it controls only some aspects of their activities. Nevertheless, ESSA is responsible for ensuring that each of its studies and clinical trials is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and ESSA’s reliance on academic institutions and CROs does not relieve it of these responsibilities. ESSA also relies on third parties to assist in conducting its preclinical studies in accordance with GLP and the Animal Welfare Act requirements. ESSA and the third parties that it relies on are required to comply with federal regulations and current GCP, which are international standards meant to protect the rights and health of patients that are enforced by the FDA and comparable foreign regulatory authorities for all of ESSA’s products in clinical development. Regulatory authorities enforce GCP through periodic inspections of trial sponsors, principal investigators and trial sites. If ESSA or any of the third parties it relies on fail to comply with applicable GCP, the clinical data generated in ESSA’s clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require ESSA to perform additional clinical trials before approving ESSA’s marketing applications. ESSA cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of its clinical trials comply with GCP requirements. In addition, ESSA’s clinical trials must be conducted with product produced under cGMP requirements. Failure to comply with these regulations may require ESSA to repeat preclinical studies and clinical trials, which would delay the regulatory approval process.

 

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The third parties that ESSA relies upon are not its employees, and except for remedies available to the Company under its agreements with such third parties, ESSA cannot control whether or not they devote sufficient time and resources to the Company’s ongoing clinical, nonclinical and preclinical programs. Academic institutions may not operate under the same commercial standards as other third-party CROs that undertake such work and may not be able to devote adequate time and resources to preclinical studies. If academic institutions or CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, or if the quality or accuracy of the preclinical or clinical data they obtain is compromised due to the failure to adhere to our protocols, regulatory requirements or for other reasons, ESSA’s preclinical or clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize future product candidates. As a result, ESSA’s results of operations and the commercial prospects for its future product candidates would be harmed, its costs could increase and its ability to generate revenues could be delayed.

 

Because ESSA has relied on third parties, its internal capacity to perform these functions is limited. Outsourcing these functions involves risk that third parties may not perform to ESSA’s standards, may not produce results in a timely manner or may fail to perform at all. In addition, the use of third-party service providers requires ESSA to disclose our proprietary information to these parties, which could increase the risk that this information will be misappropriated. ESSA currently has a small number of employees, which limits the internal resources we have available to identify and monitor third-party providers. To the extent ESSA is unable to identify and successfully manage the performance of third-party service providers in the future, its business may be adversely affected. Though ESSA carefully manages its relationships with academic institutions and CROs, there can be no assurance that it will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse impact on ESSA’s business, results of operations, financial condition and cash flows and future prospects.

 

If ESSA’s relationships with academic institutions or CROs terminate, its drug development efforts could be delayed.

 

ESSA relies on entities outside of its control, including academic institutions and CROs, for preclinical studies and clinical trials related to its drug development efforts. Switching or adding additional academic institutions or CROs would involve additional cost and would require management time and focus. The academic institutions and CROs that ESSA relies on have the right to terminate their agreements with the Company in the event of an uncured material breach. If any of ESSA’s relationships with academic institutions or CROs terminate, the Company could experience a significant delay in identifying, qualifying and managing performance of a comparable third-party service provider, which could adversely affect its development programs. In addition, there is a natural transition period when a new academic institution or CRO commences work and the new academic institution or CRO may not provide the same type or level of services as the original provider. ESSA may not be able to enter into arrangements with alternative academic institutions or CROs or be able to do so on commercially reasonable terms.

 

ESSA has limited experience manufacturing product candidates on a large clinical or commercial scale and has no manufacturing facility. As a result, ESSA may in the future be dependent on third party manufacturers for the manufacture of potential future product candidates as well as on third parties for ESSA’s supply chain, and if ESSA experiences problems with any future third parties, the manufacturing of ESSA’s potential future product candidates or products could be delayed.

 

ESSA does not own or operate facilities for the manufacture of future potential product candidates. ESSA currently has no plans to build internal clinical or commercial scale manufacturing capabilities. As a result, ESSA potentially may rely on third-party contract manufacturing organizations, in the future, for the manufacture of active pharmaceutical ingredients for ESSA’s potential products. Also, ESSA may potentially rely on another contract manufacturing organization for the production of the final product formulation. To meet ESSA’s projected potential needs for clinical supplies to support its activities through regulatory approval and commercial manufacturing, the contract manufacturing organizations with whom ESSA may potentially work will need to increase the scale of production. ESSA may need to identify additional contract manufacturing organizations for continued production of supply for product candidates in the event the current potential contract manufacturing organizations ESSA chooses to utilize are unable to scale production, or if ESSA otherwise experiences any problems with them. Although alternative third-party suppliers with the necessary manufacturing and regulatory expertise and facilities exist, it could be expensive and take a significant amount of time to arrange for alternative suppliers. ESSA may encounter technical difficulties or delays in the transfer of any future potential product manufacturing on a commercial scale to additional third-party manufacturers. ESSA may be unable to enter into agreements for commercial supply with third-party manufacturers, or may be unable to do so on acceptable terms. If ESSA is unable to arrange for alternative third-party manufacturing sources or to do so on commercially reasonable terms or in a timely manner, ESSA may not be able to complete development of its potential product candidates, market or distribute them.

 

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Reliance on third-party manufacturers entails risks to which ESSA would not be subject if ESSA manufactured product candidates or products ourselves, including reliance on the third party for regulatory compliance and quality assurance, the possibility of breach of the manufacturing agreement by the third party because of factors beyond ESSA’s control, including a failure to synthesize and manufacture product candidates or any products ESSA may eventually commercialize in accordance with ESSA’s specifications and the possibility of termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or damaging to ESSA. In addition, the FDA and other regulatory authorities require that ESSA’s product candidates and any products that ESSA may eventually commercialize be manufactured according to GMP and similar foreign standards. Any failure by ESSA’s third-party manufacturers to comply with GMP or failure to scale up manufacturing processes, including any failure to deliver sufficient quantities of product candidates in a timely manner, could lead to a delay in, or failure to obtain, regulatory approval of any of ESSA’s potential product candidates and could cause ESSA to incur higher costs and prevent ESSA from commercializing product candidates successfully. In addition, such failure could be the basis for the FDA to issue a warning letter, withdraw approvals for product candidates previously granted to ESSA, or take other regulatory or legal action, including recall or seizure of outside supplies of the product candidate, total or partial suspension of production, suspension of ongoing clinical trials, refusal to approve pending applications or supplemental applications, detention or product, refusal to permit the import or export of products, injunction, or imposing civil and criminal penalties.

 

Any significant disruption in ESSA’s supplier relationships could harm the Company’s business. Any significant delay in the supply of a product candidate or its key materials for a potential ongoing clinical study could considerably delay completion of ESSA’s potential clinical trials, product testing and regulatory approval of ESSA’s potential product candidates. If ESSA’s manufacturers or ESSA is unable to purchase these key materials after regulatory approval has been obtained for ESSA’s product candidates, the commercial launch of ESSA’s product candidates would be delayed or there would be a shortage in supply, which would impair ESSA’s ability to generate revenues from the sale of its product candidates. It may take several years to establish an alternative source of supply for ESSA’s product candidates and to have any such new source approved by the FDA.

 

Risks Related to ESSA’s Intellectual Property

 

ESSA relies on proprietary technology, the protection of which can be unpredictable and costly.

 

The Company’s activities depend, in part, on its ability to (i) obtain and maintain patents, trade secret protection and operate without infringing the intellectual proprietary rights of third parties, (ii) successfully defend these patents (including patents owned by or licensed to the Company) against third-party challenges and (iii) successfully enforce these patents against third-party competitors. There is no assurance that the Company will be granted such patents or proprietary technology or that such granted patents or proprietary technology will not be circumvented through the adoption of a competitive, though non-infringing, process or product. The patent positions of pharmaceutical companies can be highly uncertain and involve complex legal, scientific and factual questions for which important legal principles remain unresolved. Changes in either the patent laws or in interpretations of patent laws may diminish the value of the Company’s intellectual property. Accordingly, the Company cannot predict the breadth of claims that may be allowable or enforceable in its patents (including patents owned by or licensed to the Company). Failure to protect the Company’s existing and future intellectual property rights could seriously harm its business and prospects and may result in the loss of its ability to exclude others from using the Company’s technology or its own right to use the technologies. If the Company does not adequately ensure the right to use certain technologies, it may have to pay others for the right to use their intellectual property, pay damages for infringement or misappropriation or be enjoined from using such intellectual property. The Company’s patents do not guarantee the right to use the technologies if other parties own intellectual property rights that are necessary in order to use such technologies. The Company’s patent position is subject to complex factual and legal issues that may give rise to uncertainty as to the validity, scope and enforceability of a particular patent.

 

In addition, there is a risk that improved versions of ESSA’s own product developed by third parties will be granted patent protection and compete with ESSA’s products. For example, any patents ESSA obtains may not be sufficiently broad to prevent others from utilizing its technologies or from developing competing products and technologies. Third parties may attempt to circumvent ESSA’s patents by means of alternative designs and processes or may independently develop similar products, duplicate any of ESSA’s products not under patent protection, or design around the inventions ESSA claims in any of its existing patents, existing patent applications or future patents or patent applications. The actual protection afforded by a patent varies on a product-by-product basis, from country to country and depends upon many factors, including the type of patent, the scope of ESSA’s coverage, the availability of regulatory related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the patents. It is impossible to anticipate the breadth or degree of protection that patents will afford products developed by ESSA or their underlying technology.

 

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In any case, there can be no assurance that:

 

  · any rights under Canadian, U.S. or foreign patents owned by the Company or other patents that third parties license to the Company will not be curtailed;

 

  · the Company was the first inventor of inventions covered by its issued patents or pending applications or that the Company was the first to file patent applications for such inventions;

   

  · the Company’s pending or future patent applications will be issued with the breadth of claim coverage sought by the Company, or be issued at all;

 

  · the Company’s competitors will not independently develop or patent technologies that are substantially equivalent or superior to the Company’s technologies;

 

  · third parties will not attempt to circumvent ESSA’s patents by means of alternative designs and processes or that third parties will not also independently develop similar products, duplicate any of ESSA’s products not under patent protection, or design around the inventions ESSA claims in any of the Company’s existing patents, existing patent applications or future patents or patent applications;

 

  · any of the Company’s trade secrets will not be learned independently by its competitors; or

 

  · the steps the Company takes to protect its intellectual property will be adequate.

 

In addition, effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not sought in certain foreign countries. Further, countries ESSA may sell to may not protect its intellectual property to the same extent as the laws of the United States, Canada or Europe, and may lack rules and procedures required for defending ESSA’s patents.

 

There is a risk that any patents issued relating to ESSA’s products or any patents licensed to ESSA may be successfully challenged or that the practice of its products might infringe the patents of third parties. If the practice of ESSA’s products infringes the patents of third parties, the Company may be required to design around such patents, potentially causing increased costs and delays in product development and introduction or precluding ESSA from developing, manufacturing or selling its planned products. In addition, disputes may arise as to the rights to know-how and inventions among ESSA’s employees and consultants who use intellectual property owned by others for the work performed for the Company. The scope and validity of patents which may be obtained by third parties, the extent to which ESSA may wish or need to obtain patent licenses and the cost and availability of such licenses are currently unknown. If such licenses are obtained, it is likely they would be royalty bearing, which could reduce ESSA’s income. If licenses cannot be obtained on an economical basis, delays in market introduction of its planned products could occur or introduction could be prevented, in some cases causing the expenditure of substantial funds.

 

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In certain instances, ESSA may elect not to seek patent protection but instead rely on the protection of the Company’s technology through confidentiality agreements or trade secrets. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach or that such persons or institutions will not assert rights to intellectual property arising out of these relationships. The value of ESSA’s assets could also be reduced to the extent that third parties are able to obtain patent protection with respect to aspects of ESSA’s technology or products or that confidential measures ESSA has in place to protect the Company’s proprietary technology are breached or become unenforceable. However, third parties may independently develop or obtain similar technology and such third parties may be able to market competing products and obtain regulatory approval through a showing of equivalency to one of ESSA’s products which has obtained regulatory approval, without being required to undertake the same lengthy and expensive clinical studies that ESSA would have already completed. The cost of enforcing the Company’s patent rights or defending rights against infringement charges by other patent holders may be significant and could limit operations.

 

Litigation may also be necessary to enforce patents issued or licensed to ESSA or to determine the scope and validity of a third party’s proprietary rights. ESSA could incur substantial costs if the Company is required to defend itself in patent suits brought by third parties, if ESSA participates in patent suits brought against or initiated by ESSA’s corporate collaborators or if ESSA initiates such suits. The Company may not have the necessary resources to participate in or defend any such activities or litigation. Even if ESSA did have the resources to vigorously pursue its interests in litigation, because of the complexity of the subject matter, it is impossible to predict whether ESSA would prevail in any such action. Any claims of patent infringement asserted by third parties may:

 

  · divert the time and attention of the Company’s technical personnel and management;

 

  · cause product development or commercialization delays;

 

  · require the Company to cease or modify its use of the technology and/or develop non-infringing technology; or

 

  · require the Company to enter into royalty or licensing agreements.

 

An adverse outcome in litigation or an interference to determine priority or other proceeding in a court or patent or selling office could subject ESSA to significant liabilities, require disputed rights to be licensed from third parties or require ESSA to cease using certain technology or products, any of which may have a material adverse effect on the Company’s business, financial condition and results of operations.

 

ESSA may not be able to protect its intellectual property rights throughout the world.

 

Filing, prosecuting and defending patents on ESSA’s potential future product candidates throughout the world would be prohibitively expensive. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States or federal and provincial laws in Canada. Consequently, ESSA may not be able to prevent third-parties from practicing its inventions in all countries outside the United States or Canada, or from selling or importing products made using its inventions in and into the United States, Canada or other jurisdictions. Competitors may use ESSA’s technologies in jurisdictions where it has not obtained patent protection to develop their own products, and may export otherwise infringing products to territories where ESSA has patent protection, but where enforcement is not as strong as that in the United States or Canada. These products may compete with ESSA’s products in jurisdictions where it does not have any issued patents and its patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing.

 

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for ESSA to stop the infringement of its patents or marketing of competing products in violation of its proprietary rights generally. Proceedings to enforce ESSA’s patent rights in foreign jurisdictions could result in substantial cost and divert its efforts and attention from other aspects of its business. ESSA may not prevail in any lawsuits that it initiates and the damages or other remedies awarded, if any, may not be commercially meaningful.

 

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The requirements for patentability may differ in certain countries, particularly developing countries. For example, unlike other countries, China has a heightened requirement for patentability, and specifically requires a detailed description of medical uses of a claimed drug. In India, unlike the United States, there is no link between regulatory approval of a drug and its patent status. Furthermore, generic or biosimilar drug manufacturers or other competitors may challenge the scope, validity or enforceability of ESSA’s patents, requiring it to engage in complex, lengthy and costly litigation or other proceedings. Generic or biosimilar drug manufacturers may develop, seek approval for, and launch biosimilar versions of ESSA’s products. In addition to India, certain countries in Europe and developing countries, including China, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In those countries, ESSA may have limited remedies if patents are infringed or if it is compelled to grant a license to a third-party, which could materially diminish the value of those patents. This could limit ESSA’s potential revenue opportunities. Accordingly, ESSA’s efforts to enforce intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that it owns or licenses.

 

ESSA may be subject to claims by third-parties asserting that ESSA, or ESSA’s employees have misappropriated their intellectual property, or claiming ownership of what ESSA regards as its own intellectual property.

 

Certain of ESSA’s employees, including senior management, were previously employed, or continue to be employed, at universities or other public institutions, or at other biotechnology or pharmaceutical companies, including ESSA’s competitors or potential competitors. Some of these employees, executed proprietary rights, nondisclosure and noncompetition agreements, in connection with such previous employment. ESSA may be subject to claims that ESSA, or these employees, have used or disclosed confidential information or intellectual property, including trade secrets or other proprietary information, of any such employee’s former employer. If ESSA fails in prosecuting or defending any such claims, in addition to paying monetary damages, ESSA may lose valuable intellectual property rights or personnel or sustain damages. Such intellectual property rights could be awarded to a third-party, and ESSA could be required to obtain a license from such third-party to commercialize ESSA’s technology or products. Such a license may not be available on commercially reasonable terms or at all. Even if ESSA is successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

 

Obtaining and maintaining ESSA’s patent protection depends on compliance with various procedural, document submissions, fee payment and other requirements imposed by governmental patent agencies, and its patent protection could be reduced or eliminated for non-compliance with these requirements.

 

Periodic maintenance and annuity fees on any issued patent are due to be paid to the United States Patent and Trademark Office (“USPTO”) and other foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If ESSA or its future potential licensors fail to maintain the patents and patent applications covering product candidates, ESSA’s competitive position would be adversely affected.

 

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Other Risks Related to ESSA’s Business

 

The Company’s business and operations would suffer in the event of computer system failures or security breaches.

 

In the ordinary course of ESSA’s business, the Company collects, stores and transmits confidential information, including intellectual property, proprietary business information and personal information. Despite the implementation of security measures, ESSA’s internal computer systems, and those of other third parties on which the Company relies, are vulnerable to damage from computer viruses, unauthorized access, cyberattacks, natural disasters, fire, terrorism, war and telecommunication and electrical failures. Cyberattacks are increasing in their frequency, sophistication and intensity. Cyberattacks could include the deployment of harmful malware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and availability of information. Significant disruptions of ESSA’s information technology systems or security breaches could adversely affect ESSA’s business operations and/or result in the loss, misappropriation, and/or unauthorized access, use or disclosure of, or the prevention of access to, confidential information (including trade secrets or other intellectual property, proprietary business information and personal information), and could result in financial, legal, business and reputational harm to the Company. If such disruptions were to occur and cause interruptions in ESSA’s operations, it could result in a material disruption of ESSA’s drug development program. For example, the loss of preclinical study or clinical trial data from completed, ongoing or planned preclinical studies or clinical trials could result in delays in ESSA’s efforts to identify a potential future product candidate and significantly increase its costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of, or damage to, ESSA’s data or applications, or inappropriate disclosure of confidential or proprietary information, the Company could incur liability and the further development of EPI compounds or the Company’s potential future product candidates could be delayed.

 

Business disruptions could seriously harm ESSA’s future revenues and financial condition and increase costs and expenses.

 

ESSA’s operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions, for which ESSA is predominantly self-insured. ESSA does not carry insurance for all categories of risk that ESSA’s business may encounter. The occurrence of any of these business disruptions could seriously harm ESSA’s operations and financial condition and increase costs and expenses. Further, any significant uninsured liability may require ESSA to pay substantial amounts, which would adversely affect ESSA’s business, results of operations, financial condition and cash flows from future prospects.

 

ESSA’s business depends heavily on the use of information technologies.

 

Several key areas of ESSA’s business depend on the use of information technologies. Despite ESSA’s best efforts to prevent such behavior, third-parties may nonetheless attempt to hack into ESSA’s systems and obtain data relating to ESSA’s preclinical studies or proprietary information on potential products. If ESSA fails to maintain or protect ESSA’s information systems and data integrity effectively, ESSA could lose or have difficulty attracting customers, have difficulty preventing, detecting and controlling fraud, have regulatory sanctions or penalties imposed, experience increases in operating expenses, incur expenses or lose revenues, or suffer other adverse consequences as a result of a data privacy breach. While ESSA has invested in the protection of data and information technology, there can be no assurance that ESSA’s efforts, or those of ESSA’s third-party collaborators, if any, to implement adequate security and quality control measures for data processing would be sufficient to protect against data deterioration or loss in the event of a system malfunction, or to prevent data from being stolen or corrupted in the event of a security breach. Any such loss or breach could have a material adverse effect on ESSA’s business, operating results and financial condition.

 

If the Company is not successful in attracting and retaining highly qualified personnel, the Company may not be able to successfully implement its business strategy.

 

The Company’s ability to compete in the highly competitive pharmaceuticals industry depends in large part upon its ability to attract and retain highly qualified managerial, scientific and medical personnel. Competition affects the Company’s ability to hire and retain highly qualified personnel on acceptable terms. The Company is highly dependent on its management, scientific and medical personnel. The Company’s management team has substantial knowledge in many different aspects of drug development and commercialization. Despite the Company’s efforts to retain valuable employees, members of its management, scientific and medical teams may terminate their employment with the Company on short notice or, potentially, without any notice at all. The loss of the services of any of the Company’s executive officers or other key employees could potentially harm its business, operating results or financial condition. The Company’s success may also depend on its ability to attract, retain and motivate highly skilled junior, mid-level, and senior managers and scientific personnel. Other pharmaceutical companies with which the Company competes for qualified personnel have greater financial and other resources, different risk profiles, and a longer history in the industry than the Company does. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high-quality candidates than what the Company has to offer. If the Company is unable to continue to attract and retain high-quality personnel, the rate and success at which the Company can develop and commercialize product candidates would be limited.

 

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Third-party coverage and reimbursement and health care cost containment initiatives and treatment guidelines may constrain the Company’s future revenues.

 

In many of the markets ESSA hopes to sell future products in, successful commercialization of any potential future product candidate will depend, in part, on the extent to which coverage and reimbursement for such product candidates and related treatments will be available from government healthcare programs, private health insurers, managed care plans and other organizations. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. However, no uniform policy for coverage and reimbursement for products exists among third-party payors in the United States. Therefore, coverage and reimbursement for products can differ significantly from payor to payor. As a result, the coverage determination process is often a time-consuming and costly process that will require ESSA to provide scientific and clinical support for the use of ESSA’s products to each payor separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance.

 

A primary trend in the U.S. healthcare industry is cost containment. Government authorities and third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. ESSA cannot be sure that coverage and reimbursement will be available for any product candidates that it or any future collaborator commercialize and, if reimbursement is available, the level of reimbursement. In addition, coverage and reimbursement may impact the demand for, or the price of, any product candidate for which ESSA or a collaborator obtains marketing approval. If coverage and reimbursement are not available or reimbursement is available only to limited levels, ESSA or its collaborators may not be able to successfully commercialize any product candidate for which marketing approval is obtained.

 

There may be significant delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the TPD, FDA or other regulatory authorities. Moreover, eligibility for coverage and reimbursement does not imply that a drug will be paid for in all cases or at a rate that covers ESSA’s costs, including research, development, manufacture, sale and distribution expenses. Interim reimbursement levels for new drugs, if applicable, may also be insufficient to cover ESSA’s and any collaborator’s costs and may not be made permanent. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payers and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. ESSA’s or any collaborator’s inability to promptly obtain coverage and profitable payment rates from both government-funded and private payers for any approved products that ESSA or its collaborators develop could have a material adverse effect on ESSA’s operating results, ability to raise capital needed to commercialize product candidates and overall financial condition.

 

The directors and officers of ESSA may be subject to conflicts of interest.

 

Some of the directors and officers are engaged and will continue to be engaged in the search for additional business opportunities on behalf of other corporations and situations may arise where these directors and officers will be in direct competition with the Company. Not all of the Company’s directors or officers are subject to non-competition agreements. Some of the directors and officers of the Company are or may become directors or officers of the other companies engaged in other business ventures whose operations may, from time to time, be in direct competition with ESSA’s operations. Conflicts, if any, will be dealt with in accordance with the relevant provisions of the Business Corporations Act (British Columbia) and under the Company’s articles of incorporation.

 

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The Company faces intense competition from other biotechnology and pharmaceutical companies and its operating results will suffer if the Company fails to compete effectively.

 

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. The Company’s potential competitors in the United States, Canada, and globally include large, well-established pharmaceutical companies, specialty pharmaceutical sales and marketing companies and specialized cancer treatment companies. Many companies, as well as research organizations, currently engage in, or have in the past engaged in, efforts related to the development of products in the same therapeutic areas as ESSA does. Due to the size of the prostate cancer treatment market and the large unmet medical need for products that treat CRPC, a number of the world’s largest pharmaceutical companies are developing, or could potentially develop, products that could compete with the Company’s future product candidates.

 

Many of the companies developing competing technologies and products in ESSA’s field have significantly greater financial resources and expertise in discovery, R&D, manufacturing, preclinical studies and clinical testing, obtaining regulatory approvals and marketing than ESSA does. Other smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. Academic institutions, government agencies and other public and private research organizations may also conduct research, seek patent protection and establish collaborative arrangements for discovery, research, clinical development and marketing of products similar to ESSA’s. There is a risk that one or more of ESSA’s competitors may develop more effective or more affordable products and that such competitors will commercialize products that will render its product candidates obsolete. ESSA faces competition with respect to product efficacy and safety, ease of use and adaptability to various modes of administration, acceptance by physicians, the timing and scope of regulatory approvals, availability of resources, reimbursement coverage, price and patent positions of others. In addition, these companies and institutions also compete with ESSA in recruiting and retaining qualified personnel. If the Company is not able to compete effectively against its current and future competitors, its business will not grow and its financial condition and operations will suffer materially adverse effects.

 

The Company may face exposure to adverse movements in foreign currency exchange rates.

 

ESSA’s business may expand internationally and as a result, a significant portion of its revenues, expenses, current assets and current liabilities may be preliminary denominated in foreign currencies, while its financial statements are expressed in U.S. dollars. A decrease in the value of such foreign currencies relative to the U.S. dollar could result in losses in revenues from currency exchange rate fluctuations. To date, ESSA has not hedged against risks associated with foreign exchange rate exposure. ESSA cannot be sure that any hedging techniques it may implement in the future will be successful or that its business, financial condition, and results of operations will not be materially adversely affected by exchange rate fluctuations.

 

If ESSA is not able to convince public payors and hospitals to include ESSA’s potential future products on their approved formulary lists, revenues may not meet expectations and ESSA’s business, results of operations and financial condition may be adversely affected.

 

Hospitals establish formularies, which are lists of drugs approved for use in the hospital. If a drug is not included on the hospital’s formulary, the ability to promote and sell ESSA’s potential future products may be limited or denied. If ESSA fails to secure and maintain formulary inclusion for potential future products on favorable terms or are significantly delayed in doing so, ESSA may have difficulty achieving market acceptance of potential future products and ESSA’s business, results of operations and financial condition could be materially adversely affected.

 

The Company has never marketed a drug before, and if the Company is unable to establish an effective sales force and marketing infrastructure, or enter into acceptable third-party sales and marketing or licensing arrangements, the Company may be unable to generate any revenue.

 

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ESSA does not currently have an infrastructure for the sales, marketing and distribution of pharmaceutical drug products and the cost of establishing and maintaining such an infrastructure may exceed the cost-effectiveness of doing so. In order to market any products that may be approved by the FDA and comparable foreign regulatory authorities, ESSA must build its sales, marketing, managerial and other nontechnical capabilities or make arrangements with third parties to perform these services. If ESSA is unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, ESSA may not be able to generate product revenue and may not become profitable. ESSA will be competing with many companies that currently have extensive and well-funded sales and marketing operations. Without an internal commercial organization or the support of a third party to perform sales and marketing functions, ESSA may be unable to compete successfully against these more established companies.

  

In order to establish the Company’s sales and marketing infrastructure, the Company will need to expand the size of its organization and the Company may experience difficulties in managing this growth.

 

As the Company’s development and commercialization plans and strategies develop, the Company expects that it will need to expand the size of its employee base for managerial, operational, sales, marketing, financial and other resources. Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, motivate and integrate additional employees. In addition, the Company’s management may have to divert a disproportionate amount of its attention away from the Company’s day-to-day activities and devote a substantial amount of time to managing these growth activities. The Company’s future financial performance and its ability to commercialize its potential products and any other future product candidates and its ability to compete effectively will depend, in part, on the Company’s ability to effectively manage any future growth.

 

ESSA’s potential future products may, if approved for sale, not achieve or maintain expected levels of market acceptance, which could have a material adverse effect on its business, financial condition and results of operations and could cause the market value of its securities to decline.

 

Even if ESSA is able to obtain regulatory approvals for its product candidates, the success of those products is dependent upon achieving and maintaining market acceptance. New product candidates that appear promising in development may fail to reach the market or may have only limited or no commercial success. Levels of market acceptance for ESSA’s products could be impacted by several factors, many of which are not within ESSA’s control, including but not limited to:

 

  · demonstration of clinical safety and efficacy of ESSA’s potential products and other possible AR NTD inhibitors generally;

 

  · safety, efficacy, convenience and cost-effectiveness of ESSA’s products compared to products of its competitors;

 

  · the prevalence and severity of any adverse side effects;

 

  · scope of approved uses and marketing approval;

 

  · limitations or warnings contained in FDA-approved labeling;

 

  · timing of market approvals and market entry;

 

  · the willingness of physicians to prescribe ESSA’s potential products and of the target patient population to try new therapies;

 

  · the inclusion of AR NTD inhibitor products in applicable treatment guidelines;

 

  · new procedures or methods of treatment that may reduce the incidences of any of the indications for which ESSA’s potential products shows utility;

 

  · difficulty in, or excessive costs to, manufacture;

 

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  · infringement or alleged infringement of the patents or intellectual property rights of others;

 

  · the introduction of any new products, including generic AR NTD inhibitor products, that may in the future become available to treat indications for which ESSA’s potential product may be approved;

 

  · availability of alternative products from ESSA’s competitors;

 

  · acceptance of the price of ESSA’s products; and

 

  · ability to market ESSA’s products effectively at the retail level.

 

In addition, the success of any new product will depend on ESSA’s ability to either successfully build its in-house sales capabilities or to secure new, or to realize the benefits of existing arrangements with third-party marketing or distribution partners. Seeking out, evaluating and negotiating marketing or distribution agreements may involve the commitment of substantial time and effort and may not ultimately result in an agreement. In addition, the third-party marketing or distribution partners may not be as successful in promoting ESSA’s products as it had anticipated. If ESSA is unable to commercialize new products successfully, whether through a failure to achieve market acceptance, a failure to build its own in-house sales capabilities, a failure to secure new marketing partners or to realize the benefits of ESSA’s arrangements with existing marketing partners, there may be a material adverse effect on ESSA’s business, financial condition and results of operations and it could cause the market value of ESSA’s securities to decline.

  

In addition, by the time any products are ready to be commercialized, what ESSA believes to be the market for these products may have changed. The Company’s estimates of the number of patients who have received or might have been candidates to use a specific product may not accurately reflect the true market or market prices for such products or the extent to which such products, if successfully developed, will actually be used by patients. ESSA’s failure to successfully introduce and market its products that are under development would have a material adverse effect on its business, financial condition and results of operations.

 

The Company may acquire businesses or products or form strategic alliances in the future and the Company may not realize the benefits of such acquisitions.

 

The Company may acquire additional businesses or products, form strategic alliances or create joint ventures with third parties that the Company believes will complement or augment its existing business.

 

If the Company acquires businesses in the future, it may not be able to realize the benefit of acquiring such businesses if the Company is unable to successfully integrate them with its existing operations and company culture. The Company may encounter numerous difficulties in developing, manufacturing and marketing any new products resulting from a strategic alliance or acquisition that delay or prevent the Company from realizing their expected benefits. The potential failure of the due diligence processes to identify significant problems, liabilities or other shortcomings or challenges with respect to intellectual property, product quality, revenue recognition or other accounting practices, taxes, corporate governance and internal controls, regulatory compliance, employee, customer or partner disputes or issues and other legal and financial contingencies could decrease or eliminate the anticipated benefits and synergies of any acquisition and could negatively affect ESSA’s future business and financial results.

 

As part of ESSA’s business strategy, it may also continue to acquire additional companies, products or technologies principally related to, or complementary to, ESSA’s current operations. Any such acquisitions will be accompanied by certain risks including but not limited to:

 

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  · exposure to unknown liabilities of acquired companies and the unknown issues with any associated technologies or research;

 

  · higher than anticipated acquisition costs and expenses;

 

  · the difficulty and expense of integrating operations, systems and personnel of acquired companies;

 

  · disruption of ESSA’s ongoing business;

 

  · inability to retain key customers, distributors, vendors and other business partners of the acquired company;

 

  · diversion of management’s time and attention; and

 

  · possible dilution to shareholders.

 

Also, the anticipated benefit of any joint venture or acquisition may not materialize or such strategic alliance, joint venture or acquisition may be prohibited. In November 2016, ESSA entered into the SVB Term Loan, which restricts ESSA’s ability to pursue certain mergers, acquisitions, amalgamations or consolidations that it may believe to be in its best interest. Additionally, future acquisitions or dispositions could result in potentially dilutive issuances of ESSA’s equity securities, the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm ESSA’s financial condition. ESSA cannot predict the number, timing or size of future joint ventures or acquisitions, or the effect that any such transactions might have on its operating results.

 

ESSA may not be able to successfully overcome these risks and other problems associated with acquisitions and this may adversely affect ESSA’s business, financial condition or results of operations.

 

ESSA may seek to enter into collaborations with third parties for the development and commercialization of its potential future product candidates. If ESSA fails to enter into such collaborations, or such collaborations are not successful, it may not be able to capitalize on the market potential of its potential future product candidates.

 

The Company may seek third-party collaborators for development and commercialization of its potential future product candidates. ESSA is not currently party to any such arrangement. However, if ESSA does enter into any such arrangements with any third parties in the future, it will likely have limited control over the amount and timing of resources that its collaborators dedicate to the development or commercialization of ESSA’s product candidates. The Company’s ability to generate revenues from these arrangements will depend on its collaborators’ abilities to successfully perform the functions assigned to them in these arrangements.

 

Collaborations involving ESSA’s product candidates would pose the following risks:

 

  · collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations;

 

  · collaborators may not pursue development and commercialization of ESSA’s product candidates or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in the collaborators’ strategic focus or available funding, or external factors such as an acquisition that diverts resources or creates competing priorities;

 

  · collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;

 

  · collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with ESSA’s products or product candidates if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than ESSA’s;

 

  · collaborators with marketing and distribution rights to one or more of ESSA’s products may not commit sufficient resources to the marketing and distribution of such product or products;

 

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  · collaborators may not properly maintain or defend ESSA’s intellectual property rights or may use ESSA’s proprietary information in such a way as to invite litigation that could jeopardize or invalidate ESSA’s intellectual property or proprietary information or expose ESSA to potential litigation;

 

  · collaborators may infringe the intellectual property rights of third parties, which may expose ESSA to litigation and potential liability;

 

  · disputes may arise between the collaborators and ESSA that result in the delay or termination of the research, development or commercialization of ESSA’s products or product candidates or that result in costly litigation or arbitration that diverts management attention and resources; and

  

  · collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable product candidates.

 

Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner or at all. If a collaborator of ESSA’s were to be involved in a business combination, the continued pursuit and emphasis on ESSA’s product development or commercialization program could be delayed, diminished or terminated.

 

ESSA’s employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could cause significant liability for ESSA and harm ESSA’s reputation.

 

ESSA is exposed to the risk of employee fraud or other misconduct, including intentional failures to comply with FDA regulations or similar regulations of comparable foreign regulatory authorities, provide accurate information to the FDA or comparable foreign regulatory authorities, comply with manufacturing standards ESSA has established, comply with federal and state healthcare fraud and abuse laws and regulations and similar laws and regulations established and enforced by comparable foreign regulatory authorities, report financial information or data accurately or disclose unauthorized activities to ESSA. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to ESSA’s reputation. If any such actions are instituted against ESSA and ESSA is not successful in defending itself or asserting ESSA’s rights, those actions could have a significant impact on ESSA’s business, results of operations, financial condition and cash flows from future prospects, including the imposition of significant fines or other sanctions.

 

If product liability lawsuits are brought against the Company, it may incur substantial liabilities and may be required to cease the sale, marketing and distribution of its potential future products.

 

The Company could face a potential risk of product liability as a result of its potential sales, marketing and distribution activities relating to any future commercialization of any future product. For example, the Company may be sued if any product it develops allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under U.S. state or Canadian provincial or other foreign consumer protection legislation. If the Company cannot successfully defend itself against product liability claims, it may incur substantial liabilities or be required to cease the sale, marketing and distribution of its products. Even successful defense against product liability claims would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

 

  · decreased demand for any future products that the Company may develop;

 

  · injury to the Company’s reputation;

 

  · withdrawal of clinical trial participants;

 

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  · costs to defend the related litigation;

 

  · a diversion of management’s time and the Company’s resources;

 

  · substantial monetary awards to consumers, trial participants or patients;

 

  · product recalls, withdrawals or labeling, marketing or promotional restrictions;

 

  · loss of revenue;

 

  · the inability to commercialize;

 

  · the inability to continue the sale, marketing and distribution of ESSA’s potential future products; and

 

  · a decline in the price of the Preferred Shares or Common Shares.

 

The Company currently maintains insurance that it believes has sufficient coverage to protect against the liability risks discussed above and the Company believes this coverage is consistent with industry norms for companies at a similar stage of development. However, if the Company is unable to obtain and retain sufficient product liability insurance in the future at an acceptable cost to protect against potential product liability claims, the commercialization of products it develops could be hindered or prevented.

 

Compulsory licensing or generic competition may affect the Company’s business in certain countries.

 

In a number of countries, governmental authorities and other groups have suggested that companies which manufacture medical products (e.g., pharmaceuticals) should make products available at a low cost. In some cases, governmental authorities have held that where a pharmaceutical company does not do so, its patents might not be enforceable to prevent generic competition. Alternatively, some governmental authorities could require that ESSA grant compulsory licenses to allow competitors to manufacture and sell their own versions of ESSA’s products, thereby reducing ESSA’s sales or the sales of ESSA’s licensee(s). In all of these situations, the results of future operations in these countries if any, could be adversely affected.

 

ESSA incurs significantly increased costs and devotes substantial management time as a result of operating as a public company.

 

As a public company, ESSA incurs significant legal, accounting and other expenses that it did not incur as a private company or as a Canadian public company. For example, ESSA is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is required to comply with the applicable requirements of Sarbanes-Oxley and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC and including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. ESSA’s continued compliance with these requirements increase its legal and financial compliance costs and make some activities more time consuming and costly. In addition, ESSA’s management and other personnel need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, ESSA may or in the future incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of Sarbanes-Oxley, which involves annual assessments of a company’s internal controls over financial reporting. ESSA may in the future need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and may need to establish an internal audit function. ESSA cannot always predict or estimate the amount of additional costs incurred as a result of being a public company or the timing of such costs.

 

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Risks Related to Additional Legal Compliance and Regulatory Matters

 

ESSA is subject to risks inherent in foreign operations.

 

ESSA intends to pursue international market growth opportunities, such that international sales may account for a significant

portion of its revenue. ESSA is subject to a number of risks associated with its potential international business operations, sales and marketing activities that may increase liability, costs, lengthen sales cycles and require significant management attention. These risks include:

 

  · compliance with the laws of the United States, Canada, the European Union and other jurisdictions where ESSA may conduct business, including import and export legislation;

 

  · increased reliance on third parties to establish and maintain foreign operations;

 

  · the complexities and expenses of administering a business abroad;

 

  · complications in compliance with, and unexpected changes in, foreign regulatory requirements;

 

  · instability in economic or political conditions, including inflation, recession and actual or anticipated military conflicts, social upheaval or political uncertainty;

 

  · foreign currency fluctuations;

 

  · foreign exchange controls and cash repatriation restrictions;

 

  · tariffs and other trade barriers;

 

  · difficulties in collecting accounts receivable;

 

  · differing tax structures and related potential adverse tax consequences;

 

  · uncertainties of laws and enforcement relating to the protection of intellectual property or secured technology;

 

  · litigation in foreign court systems;

 

  · unauthorized copying or use of ESSA’s intellectual property;

 

  · cultural and language differences;

 

  · difficulty in managing a geographically dispersed workforce in compliance with local laws and customs that vary from country to country; and

 

  · other factors, depending upon the country involved.

 

There can be no assurance that the policies and procedures ESSA implements to address or mitigate these risks will be successful, that ESSA’s personnel will comply with them or that ESSA will not experience these factors in the future or that they will not have a material adverse effect on ESSA’s business, results of operations and financial condition.

 

Laws and regulations governing international operations may preclude ESSA from developing, manufacturing and selling certain product candidates outside of the United States and Canada and require ESSA to develop and implement costly compliance programs.

 

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ESSA must comply with numerous laws and regulations in each jurisdiction in which ESSA plans to operate. ESSA must also comply with U.S. laws applicable to the foreign operations of U.S. individuals, such as the FCPA, and Canadian laws applicable to the foreign operations of Canadian businesses and individuals, such as the CFPOA. The creation and implementation of international business practices compliance programs is costly and such programs are difficult to enforce, particularly where reliance on third parties is required.

 

The CFPOA prohibits Canadian businesses and individuals from giving or offering to give a benefit of any kind to a foreign public official, or any other person for the benefit of the foreign public official, where the ultimate purpose is to obtain or retain a business advantage. Furthermore, a company may be found liable for violations by not only its employees, but also by its third-party agents. Any failure to comply with the CFPOA, as well as applicable laws and regulations in foreign jurisdictions, could result in substantial penalties or restrictions on ESSA’s ability to conduct business in certain foreign jurisdictions, which may have a material adverse impact on ESSA and its share price.

 

The FCPA prohibits any U.S. individual or business from paying, offering, authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with certain accounting provisions requiring ESSA to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations. The anti-bribery provisions of the FCPA are enforced primarily by the Department of Justice. The SEC is involved with enforcement of the books and records provisions of the FCPA.

 

Compliance with the FCPA is expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, the FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are operated by the government, and doctors and other hospital employees are considered foreign officials. Certain payments to hospitals in connection with clinical studies and other work have been deemed to be improper payments to government officials and have led to FCPA enforcement actions.

 

Violation of the FCPA can result in significant civil and criminal penalties. Indictment alone under the FCPA can lead to suspension of the right to do business with the U.S. government until the pending claims are resolved. Conviction of a violation of the FCPA can result in long-term disqualification as a government contractor. The termination of a government contract or relationship as a result of ESSA’s failure to satisfy any of its obligations under laws governing international business practices would have a negative impact on its operations and harm its reputation and ability to procure government contracts. The SEC also may suspend or bar issuers from trading securities on U.S. exchanges for violations of the FCPA’s accounting provisions.

 

ESSA’s employees or other agents may, without the Company’s knowledge and despite the Company’s efforts, engage in prohibited conduct under its policies and procedures and the CFPOA, FCPA or other anti-bribery laws that ESSA may be subject to for which it may be held responsible. If ESSA’s employees or other agents are found to have engaged in such practices, it could suffer severe penalties and other consequences that may have a material adverse effect on its business, financial condition and results of operations.

  

Various laws, regulations and executive orders also restrict the use and dissemination outside of the United States, or the sharing with certain non-U.S. nationals, of information classified for national security purposes, as well as certain products and technical data relating to those products. If ESSA expands its presence outside of the United States in the future, it will be required to dedicate additional resources to comply with these laws, and these laws may preclude ESSA from developing, manufacturing, or selling certain products and product candidates outside of the United States, which could limit ESSA’s growth potential and increase development costs.

 

ESSA is subject to U.S. laws relating to fraud and abuse and patients’ rights.

 

As a pharmaceutical company, even though ESSA does not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to ESSA’s future arrangements with third-party payors and customers who are in a position to purchase, recommend and/or prescribe ESSA’s product candidates for which the Company obtains marketing approval. These broadly applicable fraud and abuse and other healthcare laws and regulations may constrain ESSA’s future business or financial arrangements and relationships with healthcare professionals, principal investigators, consultants, customers, and third-party payors and other entities, including ESSA’s marketing practices, educational programs and pricing policies. Restrictions under applicable federal and state healthcare laws and regulations that may affect ESSA’s ability to operate include, but are not limited to, the following:

 

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  · the U.S. Anti-Kickback Statute, among other things, prohibits persons from knowingly and willfully soliciting, offering, receiving or providing paying any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service, for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare and Medicaid;

 

  · civil and criminal false claims laws and civil monetary penalty laws impose criminal and civil penalties, including through civil whistleblower or qui tam actions, among other things, prohibits individuals or entities from knowingly presenting, or causing to be presented, to the federal government, including the Medicare and Medicaid programs, claims for payment or approval that are false or fraudulent or from knowingly making a false statement to improperly avoid, decrease or conceal an obligation to pay money to the federal government;

 

Efforts to ensure that ESSA’s business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that ESSA’s business practices may not comply with current or future statutes, regulations, agency guidance, or case law involving applicable fraud and abuse or other healthcare laws and regulations. If ESSA’s operations are found to be in violation of any of these laws or any other governmental regulations that may apply to ESSA, the Company may be subject to penalties, including without limitation, significant civil, criminal and administrative penalties, damages, fines, disgorgement, exclusion from government funded healthcare programs, such as Medicare and Medicaid, contractual damages, reputational harm, administrative burdens and diminished profits and future earnings, and the curtailment or restructuring of ESSA’s operations. If any physicians or other healthcare providers or entities with whom ESSA expects to do business are found to not be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs. Moreover, ESSA expects there will continue to be federal and state laws and regulations, proposed and implemented, that could impact ESSA’s operations and business. The extent to which future legislation or regulations, if any, relating to healthcare fraud abuse laws or enforcement, may be enacted or what effect such legislation or regulation would have on ESSA’s business remains uncertain.

 

If ESSA fails to comply with environmental, health and safety laws and regulations, ESSA could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of ESSA’s business.

 

ESSA is subject to numerous environmental, health and safety laws and regulations in the United States and in Canada, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. ESSA’s operations involve the use of hazardous and flammable materials, including chemicals and biological materials. ESSA’s operations also produce hazardous waste products. The Company generally contracts with third parties for the disposal of these materials and wastes. ESSA cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from ESSA’s use of hazardous materials, it could be held liable for any resulting damages, and any liability could exceed its resources. ESSA also could incur significant costs associated with civil or criminal fines and penalties.

 

Although ESSA maintains workers’ compensation insurance to cover for costs and expenses ESSA may incur due to injuries to employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. ESSA does not maintain insurance for environmental liability or toxic tort claims that may be asserted against it in connection with its storage or disposal of biological or hazardous materials.

 

In addition, ESSA may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair ESSA’s research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

 

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ESSA is a “foreign private issuer” and has disclosure obligations that are different from those of U.S. domestic reporting companies. As a foreign private issuer, ESSA is subject to different U.S. securities laws and rules than a domestic U.S. issuer, which may limit the information publicly available to its shareholders.

 

ESSA is a “foreign private issuer,” as such term is defined in Rule 405 under the Securities Act of 1933, as amended (the “Securities Act”), and is not subject to the same requirements that are imposed upon U.S. domestic issuers by the SEC. Under the Exchange Act, ESSA will be subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting companies. ESSA will be required to file or furnish to the SEC the continuous disclosure documents that ESSA is required to file in Canada under Canadian securities laws. For example, ESSA will not be required to issue quarterly reports, proxy statements that comply with the requirements applicable to U.S. domestic reporting companies, or individual executive compensation information that is as detailed as that required of U.S. domestic reporting companies. ESSA will also have four months after the end of each fiscal year to file ESSA’s annual reports with the SEC and will not be required to file current reports as frequently or promptly as U.S. domestic reporting companies. Furthermore, ESSA’s officers, directors and principal shareholders are exempt from the insider reporting and short-swing profit recovery requirements in Section 16 of the Exchange Act. Accordingly, ESSA’s shareholders may not know on as timely a basis when ESSA’s officers, directors and principal shareholders purchase or sell their common shares, as the reporting deadlines under the corresponding Canadian insider reporting requirements are longer. As a foreign private issuer, ESSA is also exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. As a result of such varied reporting obligations, shareholders should not expect to receive the same information at the same time as information provided by U.S. domestic companies.

 

In addition, as a foreign private issuer, ESSA has the option to follow certain Canadian corporate governance practices rather than those required of U.S. domestic issuers, except to the extent contrary to U.S. securities laws, and provided that ESSA disclose the requirements ESSA is not following and describe the Canadian practices ESSA follows instead. As a result, ESSA’s shareholders may not have the same protections afforded to shareholders of companies that are subject to all domestic U.S. corporate governance requirements.

 

ESSA may lose foreign private issuer status in the future, which could result in significant additional costs and expenses to the Company.

 

ESSA may in the future lose foreign private issuer status if a majority of ESSA’s Common Shares are held in the United States and ESSA fails to meet the additional requirements necessary to avoid loss of foreign private issuer status, such as if: (i) a majority of ESSA’s directors or executive officers are U.S. citizens or residents; (ii) a majority of ESSA’s assets are located in the United States; or (iii) ESSA’s business is administered principally in the United States. The regulatory and compliance costs to ESSA under U.S. securities laws as a U.S. domestic issuer will be significantly more than the costs incurred as a Canadian foreign private issuer. If ESSA is not a foreign private issuer, ESSA would be required to file periodic and current reports and Annual Reports on U.S. domestic issuer forms with the SEC, which are generally more detailed and extensive than the forms available to a foreign private issuer.

 

In addition, ESSA may lose the ability to rely upon exemptions from corporate governance requirements that are available to foreign private issuers. Further, if ESSA engages in capital raising activities after losing foreign private issuer status, there is a higher likelihood that investors may require ESSA to file resale Annual Reports with the SEC as a condition to any such financing.

 

ESSA is and there is a risk that ESSA may continue to be a “passive foreign investment company” which would likely result in materially adverse U.S. federal income tax consequences for U.S. investors.

 

ESSA believes it was classified as a PFIC for the taxable year ending September 30, 2018, and believes it may be classified as a PFIC for the current taxable year and in future taxable years. However, the determination as to whether ESSA is a PFIC for any taxable year is based on the application of complex U.S. federal income tax rules that are subject to differing interpretations. If ESSA is a PFIC for any taxable year during which a U.S. Holder (as defined under “Certain United States Federal Income Tax Considerations”) holds the Common Shares, it would likely result in adverse U.S. federal income tax consequences for such U.S. Holder. U.S. Holders should carefully read “Certain United States Federal Income Tax Considerations—Passive Foreign Investment Company Rules” for more information and consult their own tax advisors regarding the consequences of ESSA being treated as a PFIC for U.S. federal income tax purposes, including the advisability of making a qualified electing fund (“QEF”) election (including a protective election), which may mitigate certain possible adverse U.S. federal income tax consequences but may result in an inclusion in gross income without receipt of such income.

 

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The Company’s status as an Emerging Growth Company and the reduced disclosure requirements applicable to Emerging Growth Companies, may make the Common Shares less attractive to investors.

 

ESSA is an “emerging growth company,” as defined in Section 2(a)(19) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As such, the Company is eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of Sarbanes-Oxley.

 

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards, and delay compliance with new or revised accounting standards until those standards are applicable to private companies. ESSA will not take advantage of the extended transition period for complying with new or revised accounting standards. This election is irrevocable.

 

ESSA may take advantage of some or all of the reduced regulatory and reporting requirements that will be available to it so long as it qualifies as an “emerging growth company” and thus the level of information provided may be different than that of other U.S. public companies. If ESSA does take advantage of any of these exemptions, some investors may find its securities less attractive, which could result in a less active trading market for ESSA’s Common Shares, and its share price may be more volatile as a result.

 

ESSA could be an emerging growth company until the last day of the first fiscal year following the fifth anniversary of its U.S. initial public offering, although circumstances could cause ESSA to lose that status earlier if annual revenues exceed US$1.07 billion, if ESSA issues more than US$1.0 billion in non-convertible debt in any three-year period or if ESSA becomes a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act.

 

It may be difficult for United States investors to effect services of process or enforcement of actions against the Company or certain of its directors and officers under U.S. federal securities laws.

 

The Company is incorporated under the laws of the Province of British Columbia, Canada. Its directors and officers reside in Canada or the United States. Because a number of these persons and a substantial portion of the assets of the Company are located outside the United States, it will be difficult for United States investors to effect service of process in the United States upon the Company or the directors or officers of the Company, or to realize in the United States upon judgments of United States courts predicated upon civil liabilities under the Exchange Act or other United States laws. There is substantial doubt as to whether an original action could be brought successfully in Canada against any of such persons or the Company predicated solely upon such civil liabilities and whether a judgment of a United States court predicated solely upon such civil liabilities would be enforceable in Canada by a Canadian court.

 

Risks Relating to ESSA’s Common Shares

 

ESSA’s Common Shares could be delisted from the Nasdaq, which could affect ESSA’s Common Shares' market price and liquidity.

 

The Company’s listing on the Nasdaq is contingent upon meeting all the continued listing requirements of the Nasdaq, which include maintaining (i) a minimum bid price of not less than $1.00 per share and (ii) either a minimum stockholders’ equity of $2,500,000, a minimum market value of $35 million or a minimum $500,000 of net income from continuing operations. Nasdaq listing rules provide that noncompliance with such requirements exists if the deficiency continues for a period of 30 consecutive business days.

 

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If the Company’s Common Shares are delisted from the Nasdaq, its ability to raise capital in the future may be limited. Delisting could also result in less liquidity for the Company’s shareholders and a lower share price. Such a delisting would likely have a negative effect on the price of the Company’s Common Shares and could impair the Company shareholders’ ability to sell or purchase the Company’s Common Shares. For example, the Company’s shareholders in the United States may be required to resell their shares on the TSX-V if a liquid over-the-counter trading market did not develop in the United States following a delisting. In the event of a delisting, the Company would expect to take actions to restore its compliance with the Nasdaq’s listing requirements, but it can provide no assurance that any action taken by the Company would result in its Common Shares becoming listed again, or that any such action would stabilize the market price or improve the liquidity of its Common Shares.

 

The market price and trading volume of ESSA's Common Shares may be volatile, which could result in rapid and substantial losses for its shareholders or securities litigation.

 

The market price of ESSA's Common Shares may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in the Common Shares may fluctuate and cause significant price variations to occur as demonstrated by ESSA’s share price’s low on the TSX (C$3.00) and corresponding high (C$9.00), after giving effect to the Consolidation, for the year ended September 30, 2018. For the year ended September 30, 2018, ESSA’s share price’s low on the Nasdaq was $2.67 and high was $7.00, after giving effect to the Consolidation. The market price of the Common Shares may fluctuate or decline significantly in the future. Some of the factors that could negatively affect ESSA's share price or result in fluctuations in the price or trading volume of the Common Shares include:

 

  · quarterly variations in operating results;
  · operating results that vary from the expectations of securities analysts and investors;
  · change in valuations;
  · changes in ESSA's operations;
  · expenses ESSA incurs related to future research;
  · regulatory approvals;
  · fluctuations in the demand for ESSA's product candidates;
  · changes in the industry in which ESSA operates;
  · announcements by ESSA or other companies of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures, capital commitments, plans, prospects, service offerings or operating results;
  · additions or departures of key personnel;
  · future sales of ESSA’s securities;
  · trading of ESSA’s securities by a large shareholder;
  · other risk factors discussed herein; and
  · other unforeseen events.

 

Stock markets in the United States and Canada have experienced extreme price and volume fluctuations. Market fluctuations, as well as general political and economic conditions such as acts of terrorism, prolonged economic uncertainty, a recession or interest rate or currency rate fluctuations, could adversely affect the market price of ESSA's Common Shares resulting in substantial losses for shareholders. Also, in the past, companies that have experienced volatility in the market price of their common shares have been subject to securities litigation. ESSA may be the target of this type of litigation in the future. Securities litigation against ESSA could result in substantial costs and divert management’s attention from other business concerns, which could materially harm ESSA’s business.

 

The Company has never declared dividends and may not do so in the future.

 

ESSA has not declared or paid any cash dividends on Common Shares to date. The payment of dividends in the future will be dependent on ESSA’s earnings and financial condition and on such other factors as ESSA’s Board considers appropriate. Unless and until ESSA pays dividends, shareholders may not receive a return on their shares. There is no present intention by the Board to pay dividends on the Common Shares.

 

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The Company may experience future sales or issue additional securities.

 

The market price of the Company’s equity securities could decline as a result of issuances of securities by the Company or sales by the Company’s existing shareholders of Common Shares in the market, or the perception that such sales could occur. Sales of Common Shares by shareholders might also make it more difficulty for the Company to sell equity securities at a time and price that the Company deems appropriate. Sales or issuances of substantial numbers of Common Shares, or the perception that such sales could occur, may adversely affect the prevailing market prices of the Common Shares. With any additional sale or issuance of Common Shares, investors will suffer dilution to their voting power and the Company may experience dilution in its earnings per share.

  

If ESSA is unable to implement and maintain effective internal controls over financial reporting in the future, ESSA may not be able to report financial results accurately or prevent fraud. In that case, investors may lose confidence in the accuracy and completeness of ESSA’s financial reports and the market price of ESSA’s common shares may be negatively affected.

 

Maintaining effective internal control over financial reporting is necessary for ESSA to produce reliable financial reports and is important in helping to prevent financial fraud. If ESSA is unable to maintain adequate internal controls, ESSA’s business and operating results could be harmed. As a non-accelerated public company, ESSA is not currently required to comply with Section 404(b) of the Sarbanes-Oxley Act. ESSA is not considered a “venture issuer” under applicable Canadian securities laws by virtue of having its securities listed on the Nasdaq. Non-venture issuers must establish and maintain disclosure controls and procedures and internal control over financial reporting. ESSA will be required to certify that it has established disclosure controls and procedures and internal controls over financial reporting for the period ended September 30, 2018. Pursuant to National Instrument 52-109—Certification of Disclosure in Issuers’ Annual and Interim Filings of the Canadian Securities Administrators (“NI 52-109”), ESSA evaluates how to document and test internal control procedures to satisfy the requirements of Section 404(a) of Sarbanes-Oxley and the related rules of the SEC and NI 52-109, which require, among other things, ESSA’s management to assess annually the effectiveness of ESSA’s internal control over financial reporting. During the course of this documentation and testing, ESSA may identify weaknesses or deficiencies that ESSA may be unable to remedy.

 

Preparing ESSA’s consolidated financial statements involves a number of complex manual and automated processes which are dependent on individual data input or review and require significant management judgment. One or more of these elements may result in errors that may not be detected and could result in a material misstatement of ESSA’s consolidated financial statements. Management’s significant estimates and judgements with respect to financial reporting are discussed and disclosed in the consolidated financial statements.

 

The process of designing and implementing effective internal controls and procedures, and expanding ESSA’s internal accounting capabilities, is a continuous effort that requires ESSA to anticipate and react to changes in ESSA’s business and the economic and regulatory environments and expend significant resources to establish and maintain a system of internal controls that is adequate to satisfy ESSA’s reporting obligations as a public company. The standards that must be met for management to assess the internal control over financial reporting as effective are complex, and require significant documentation, testing and possible remediation to meet the detailed standards. ESSA cannot be certain at this time whether the Company will be able to successfully complete the continuing implementation of controls and procedures or the certification and attestation requirements of Section 404(a) of Sarbanes-Oxley and NI 52-109 on a continuous basis.

 

If a material misstatement occurs in the future, ESSA may fail to meet its future reporting obligations, it may need to restate its financial results and the price of its Common Shares may decline. Any failure of ESSA’s internal controls could also adversely affect the results of the periodic management evaluations and any future annual independent registered public accounting firm attestation reports regarding the effectiveness of ESSA’s internal control over financial reporting that may be required when Section 404 of Sarbanes-Oxley becomes fully applicable to ESSA. Effective internal controls are necessary for ESSA to produce reliable financial reports and are important to helping prevent financial fraud. If ESSA cannot provide reliable financial reports or prevent fraud, ESSA’s business and results of operations could be harmed, investors could lose confidence in ESSA’s reported financial information, and the trading price of ESSA’s Common Shares could drop significantly.

   

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An active trading market for the Common Shares may not be sustained.

 

Although ESSA has listed the Common Shares on the Nasdaq and the TSX-V, an active trading market for the Common Shares may not be sustained. For example, certain trading days in the year ended September 30, 2018 resulted in no volume of trading of ESSA’s Common Shares on either of the Nasdaq or the TSX. If an active trading market for the Common Shares is not maintained, the liquidity of the Common Shares and the prices that may be obtained for the Common Shares will be adversely affected.

 

ESSA's Common Shares may be thinly traded, the prices at which Common Shares trade are volatile and the buying or selling actions of a few shareholders may adversely affect ESSA's share price.

 

As of September 30, 2018, ESSA's public float, which is defined as Common Shares outstanding minus Common Shares held by officers, directors, or beneficial holders of greater than 10% of ESSA's outstanding Common Shares, represented approximately 56.4% of ESSA's outstanding Common Shares. In addition, the Company is aware of a number of significant shareholders, defined as a holding greater than 5%, who have participated in recent financings. The average number of shares traded in any given day over the past year has been relatively small compared to the public float. Thus, the actions of a few shareholders either buying or selling ESSA's Common Shares may adversely affect the price of the Common Shares. Historically, securities similar to ESSA's Common Shares have experienced extreme price and volume fluctuations that do not necessarily relate to operating performance and could result in rapid and substantial losses for shareholders.

 

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about ESSA’s business, its stock price and trading volume could decline.

 

The trading market for ESSA’s Common Shares depends in part on the research and reports that securities or industry analysts publish about it, or its business. If one or more of the securities or industry analysts who cover ESSA downgrade its Common Shares or publish inaccurate or unfavorable research about its business, its stock price would likely decline. If one or more of these analysts cease coverage of ESSA or fail to publish reports on it regularly, demand for ESSA’s stock could decrease, which might cause its stock price and trading volume to decline.

 

ITEM 4.         INFORMATION ON THE COMPANY

 

  A. History and development of the Company

 

  1. Name, Address and Incorporation; Trading Market

 

The Company was incorporated under the name “ESSA Pharma Inc.” pursuant to the Business Corporations Act (British Columbia) on January 6, 2009. The Company’s articles of incorporation (the “Articles”) were amended on December 16, 2010 to attach certain special rights and restrictions to the Common Shares, on April 22, 2014 to authorize the creation of a new class of preferred shares in the capital of the Company, issuable in one or more series, and again on July 28, 2014 to create the class A preferred shares in the capital of the Company (the “Preferred Shares”) and attach certain special rights and restrictions to such Preferred Shares.

 

The Company’s registered and records office is located at Suite 2600, 595 Burrard Street, Vancouver, British Columbia, Canada V7X 1L3. The Company’s head office is located at Suite 720, 999 West Broadway, Vancouver, British Columbia, Canada V5Z 1K5.

 

Since July 9, 2015, the Company has been trading its Common Shares on the Nasdaq under the symbol “EPIX”. Since July 28, 2015, the Company has been trading its Common Shares under the symbol “EPI” on the TSX after graduating from the TSX-V. On November 27, 2017, the Company delisted its common shares from the TSX and began trading on the TSX-V under the same symbol, “EPI”.

 

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  2. Summary Corporate History and Intercorporate Relationships

 

Intercorporate Relationships

 

The Company has one wholly-owned subsidiary, ESSA Pharmaceuticals Corp. (“ESSA Texas”), existing under the laws of the State of Texas. The head office of ESSA Texas is located at Suite 1400, 1001 Texas Avenue, Houston, Texas, USA 77002.

 

Overview

 

ESSA is a pharmaceutical company, currently in the preclinical stage, focused on the development of small molecule drugs for the treatment of castration-resistant prostate cancer (“CRPC”). The Company is developing drugs which selectively block the amino-terminal domain (“NTD”) of the androgen receptor (“AR”), potentially overcoming the known AR-dependent resistance mechanisms of CRPC and providing CRPC patients with the potential for increased progression-free and overall survival.

 

In 1999, Dr. Marianne Sadar, a Distinguished Scientist at the British Columbia Cancer Agency (the “BC Cancer Agency”), elucidated a unique drug target on the AR: the NTD. In 2003, Dr. Sadar and Dr. Raymond Andersen, a Professor at the University of British Columbia (“UBC”) known for his natural product libraries and medicinal chemistry experience and expertise, began a collaboration focused on discovery of small-molecule inhibitors of the AR NTD. By mid-2008, they together discovered a family of compounds that selectively inhibit the NTD target on the AR and demonstrated the efficacy of those molecules in recognized laboratory models of prostate cancer. These compounds are potential drugs for treatment of CRPC.

 

Drs. Sadar and Andersen incorporated ESSA in January 2009. In 2010, Robert Rieder and Richard Glickman, both former CEOs of Nasdaq-traded biopharmaceutical companies, completed the founding team at ESSA. Mr. Rieder was appointed CEO of the Company and Dr. Glickman was appointed Chairman of the board of directors of the Company (the “Board”).

 

ESSA began substantive operations in 2010 with the licensing of intellectual property related to the research of Drs. Sadar and Andersen from the BC Cancer Agency and UBC (see “Patents and Proprietary Rights” in Item 4 of this Annual Report), and completion of a seed round financing. The 2010 seed financing raised a total of C$1,350,000 at a pre-Consolidation price of C$0.50 per Common Share from qualified investors on a private placement basis.

   

2012 to 2014

 

Between April and July 2012, ESSA undertook a second financing, raising an aggregate of C$2,390,000 at a price of C$320.00 per Common Share.

 

Also in 2012, ESSA applied to the Cancer Prevention and Research Institute of Texas (“CPRIT”) for a $12,000,000 grant (the “CPRIT Grant”) to help fund the clinical development of ESSA’s program. On July 9, 2014, the Chief Executive Officer of CPRIT executed the CPRIT Agreement of $12,000,000 to be used in connection with ESSA’s development of EPI-506 towards completion of the Phase I/II clinical trial.

 

The initial advance of $2,793,533 from the CPRIT Grant was received in the fiscal year ended September 30, 2014.

 

During the second quarter of 2014, in connection with certain obligations under the CPRIT Grant, the Company established a wholly-owned subsidiary, ESSA Pharmaceuticals Corp., under the laws of the State of Texas, to manage the NTD development project related to the CPRIT Grant.

 

On July 29, 2014, ESSA completed a brokered private placement offering, raising an aggregate of C$2,370,800 at a price of C$40.00 per Preferred Share.

 

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On October 22, 2014 and October 23, 2014, the Company completed a private placement, raising gross proceeds of C$1,359,280 at a price of C$40.00 per Special Warrant, which were exercised into Preferred Shares on December 15, 2014.

 

Year Ended September 30, 2015

 

In January 2015, the Company issued the 218,182 special warrants at a price of US$55.00 per special warrant for gross proceeds of approximately $12,000,000 (the “2015 Special Warrant Financing”). Each 2015 Special Warrant was converted, without payment of any additional consideration, into one Common Share and deemed exercised upon completion of the Nasdaq listing in July 2015.

 

An IND application was filed with the FDA on March 31, 2015 and was approved on September 23, 2015, which permitted the Company to initiate its planned Phase I/II clinical trial of its novel agent, EPI-506. The Health Protection Branch of Health Canada issued a “no objection letter” on November 5, 2015, which allowed ESSA to include Canadian sites in its Phase I/II clinical study. Accordingly, the Company’s Phase I/II clinical trial of EPI-506 commenced in November 2015.

 

Year Ended September 30, 2016

 

In October 2015, ESSA received a second advance of $3,786,667 from the CPRIT Grant.

 

On January 7, 2016, Dr. David R. Parkinson was appointed as the Company’s President and Chief Executive Officer. Dr. Parkinson replaced Mr. Robert Rieder who announced his departure from the Company and resignation from the Board of the Company.

 

In January 2016, the Company completed a private placement of 227,273 units of the Company at $66.00 per unit for gross proceeds of approximately $15,000,000 (the “January 2016 Financing”). Each unit consists of one Common Share, one seven-year cash and cashless exercise warrant and one-half of one two-year cash exercise warrant (“Two-Year Warrants”, and together with the “Seven-Year Warrants”, the “2016 Warrants”). Each of the 2016 Warrants has an exercise price of $66.00.

 

On January 14, 2016, effective on the closing of the January 2016 Financing, Scott Requadt, then Managing Director of Clarus Ventures, LLC, was appointed to the Board of the Company. Pursuant to the terms of a subscription agreement between the Company and Clarus Lifesciences III, L.P. (“Clarus”) in connection with the January 2016 Financing, Clarus is entitled to nominate two directors to the Board of the Company, one of which must be an independent director and pre-approved by the Company. The nomination rights will continue for so long as Clarus holds greater than or equal to 53,030 Common Shares, subject to adjustment in certain circumstances.

 

On March 21, 2016, the Company completed a private placement of 83,333 Common Shares of the Company at $60.00 per share for aggregate gross proceeds of approximately $5,000,000 (the “March 2016 Financing”).

 

On August 1, 2016, the Company appointed Peter Virsik as Executive Vice-President and Chief Operating Officer.

 

Year Ended September 30, 2017

 

On November 18, 2016, the Company entered into the $10,000,000 SVB Term Loan, pursuant to which the Company initially drew down $8,000,000, and had a now-expired conditional option to receive an additional $2,000,000 by April 28, 2017, subsequently amended to July 31, 2017, upon (i) positive data for its ongoing Phase I clinical trial of EPI-506 and (ii) receipt of the third and final tranche of the CPRIT grant of $5,422,000. The SVB Term Loan bears interest at a rate of the Wall Street Journal Prime Rate plus 3% per annum and will mature on September 1, 2020. The SVB Term Loan requires a final payment of 8.6% of the amount advanced under the term loans, due upon the earlier of the maturity or termination of the term loan facility. The SVB Term Loan is secured by a perfected first priority lien on all the company’s assets, with a negative pledge on intellectual property. The SVB Term Loan is subject to standard events of default, including default in the event of a material adverse change. There are no financial covenants. Upon funding of the respective tranches, the Company granted to SVB warrants to purchase Common Shares equal to 4% of the amount advanced, divided by the exercise price of the warrants, based on the five-day volume-weighted average trading price of the Company’s Common Shares on the TSX-V, to be determined at the time of the issuance of the warrants. In connection with the initial $8,000,000 advance, the Company granted SVB and Life Sciences Loans II LLC an aggregate of 7,477 warrants, exercisable at a price of $42.80 per warrant for a period of seven years.

 

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In January and March 2017, the Company received a total of $5,192,799 in advances from the CPRIT grant.

 

On July 20 and July 21, 2017, the Company received notifications from the Nasdaq indicating that it was not in compliance with two requirements for continued listing, being (i) the maintenance of a minimum bid price of $1.00 and (ii) either a minimum stockholders’ equity of $2,500,000, a minimum market value of $35,000,000 or a minimum of $500,000 of net income from continuing operations. Nasdaq listing rules provide that noncompliance with such requirements exists if the deficiency continues for a period of 30 consecutive business days. The Nasdaq granted grace periods for 180 calendar days, to January 15 and January 16, 2018, respectively, to regain compliance with these requirements. During this time, the Company’s Common Shares continued to be listed and traded on the Nasdaq. The Company subsequently regained compliance with the Nasdaq listing requirements, as described below.

 

In July 2017, the Company’s Executive Vice President of Research and Development, Paul Cossum, passed away.

 

On September 11, 2017, the Company announced the results from the Phase I portion of its clinical study of EPI-506 and its strategic decision to discontinue further clinical development of EPI-506. Instead, the Company implemented a corporate restructuring plan to focus its resources on a pre-clinical program around its next-generation Anitens targeting the AR-NTD. ESSA’s next-generation Aniten compounds represent a new class of drugs that are NTD inhibitors of the AR and are designed to improve upon a number of attributes of first-generation Aniten compound, EPI-506. The next-generation Anitens are more potent than EPI-506 or its active metabolite, EPI-002, as demonstrated in an in vitro assay measuring inhibition of AR transcriptional activity. In addition, the compounds are designed to improve upon the pharmaceutical properties of EPI-506 to enable a more efficient and cost-effective formulation approach. The Aniten program is currently at the IND lead-selection stage with an IND filing expected to occur nine to twelve months after the selection of an IND candidate.

 

Year Ended September 30, 2018

 

On November 27, 2017, the Company voluntarily delisted from the TSX and began trading its Common Shares on the TSX-V under the same symbol, “EPI”, to allow for improved operating efficiency, lower costs and enhanced financing flexibility, while providing shareholders continued liquidity on a recognized stock exchange.

 

On January 9 and 16, 2018, the Company closed the first and second tranches of the January 2018 Financing, respectively, issuing an aggregate of 4,321,000 common shares and 2,189,000 pre-funded warrants at a price of $4.00 each, for total gross proceeds of $26,040,000. Each pre-funded warrant is exercisable, for a nominal exercise price of $0.002, into one Common Share for a period of five years. In connection with the first tranche of the January 2018 Financing, the Company paid total cash commissions of $1,556,800, incurred other financing costs of $829,099 including $211,073 of deferred financing costs at September 30, 2017, and issued 238,937 broker warrants, each exercisable into one Common Share at a price of $4.00 per Common Share for a period of five years.

 

On January 16, 2018, effective on the closing of the January 2018 Financing, Hugo Beekman of Omega Fund Management, LLC (“Omega”), was appointed to the Board of the Company. Omega is entitled to nominate one director to the Board of the Company, who must be an independent director and pre-approved by the Company. These nomination rights will continue for so long as Omega holds at least 9.99% of the issued and outstanding Common Shares of the Company.

 

On January 18, 2018, the Company received notification from the Nasdaq indicating that (i) it had demonstrated compliance with the minimum stockholders’ equity standard upon completion of the January 2018 Financing, and (ii) a further grace period of 180 calendar days, to July 16, 2018, had been granted to the Company in relation to regaining a minimum bid price of $1.00. Effective April 25, 2018, the Company completed the Consolidation on a basis of one (1) post-Consolidation Common Share for every twenty (20) pre-Consolidation Common Shares. As a result, the Company issued a press release on May 10, 2018 that stated the Company received written confirmation from the Listing Qualifications Department of the Nasdaq notifying the Company that it had regained compliance with Nasdaq Listing Rule 5550(a)(2) as a result of maintaining the $1.00 minimum closing bid price for at least ten consecutive trading days. Nasdaq informed the Company that this matter was closed.

 

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On January 26, 2018, the Company announced that Dr. Frank Perabo, the Company’s CMO, had resigned from the Company, effective January 31, 2018. Dr. Perabo continues to serve the Company in an advisory capacity.

 

On January 30, 2018, the voting agreement among certain of the Company’s shareholders, dated January 14, 2016, as further described in the Company’s management information circular dated January 27, 2017, was terminated.

 

On May 30, 2018, Mr. Beekman resigned from the Board of the Company as a result of his departure from Omega.

 

On June 28, 2018, the Company filed a registration statement on Form F-3 (the “Form F-3”) with the SEC, allowing the issuance of up to $100,000,000 in Common Shares, preferred shares, debt securities, subscription receipts, warrants or units of the Company. Concurrently, the Company filed a preliminary short form prospectus with securities regulators in the provinces of British Columbia, Alberta and Ontario.

 

On July 12, 2018, the Company filed an amendment to the Form F-3 with the SEC, concurrently with a final short form base shelf prospectus with securities regulators in the provinces of British Columbia, Alberta and Ontario. The Form F-3 was declared effective by the SEC on July 27, 2018 and, in conjunction with the Canadian final short form base shelf prospectus, will allow the Company to maintain financial flexibility.

 

Recent Developments

 

On October 1, 2018, the Company issued 535,000 Common Shares to Omega upon the exercise of 535,000 pre-funded warrants originally issued in the January 2018 Financing.

 

On October 18, 2018, Dr. Otello Stampacchia of Omega was appointed to the Board of the Company. Concurrently, the Company granted 12,000 stock options, exercisable at $3.58 per share for a period of ten years, to Dr. Stampacchia in relation to his appointment.

 

The SEC maintains an Internet site (http://www.sec.gov) that makes available reports and other information that the Company files or furnishes electronically with it. The Company’s Internet site can be found at http://www.essapharma.com.

 

B. Business Overview

 

Introduction

 

ESSA is a pharmaceutical company currently in preclinical stage, focused on developing novel and proprietary therapies for the treatment of prostate cancer in patients whose disease is progressing despite treatment with current therapies, including abiraterone and enzalutamide. The Company believes its preclinical series of compounds can significantly expand the interval of time in which patients suffering from CRPC can benefit from hormone-based therapies. Specifically, the compounds act by disrupting the AR signaling pathway, the primary pathway that drives prostate cancer growth, by preventing AR activation through selective binding to the Tau-5 region of the NTD of the AR. In this respect ESSA’s compounds differ from classical anti-androgens, which interfere either with the binding of androgens to the ligand-binding domain (“LBD”) located at the opposite end of the receptor from the NTD. A functional NTD is essential for activation of the AR; blocking the NTD inhibits AR-driven transcription and therefore androgen-driven biology. We believe that the transcription inhibition mechanism of ESSA’s preclinical series of compounds is unique and has the advantage of bypassing identified mechanisms of resistance to the anti-androgens currently used in the treatment of CRPC. The Company has been granted by the United States Adopted Names ("USAN") Council a unique USAN stem "-aniten" to recognize this new mechanistic class. The Company refers to this series of proprietary compounds, currently in development, as the Aniten series. In preclinical studies, blocking the NTD has demonstrated the capability to prevent AR-driven gene expression. A recently completed Phase I clinical trial of ESSA’s first-generation agent EPI-506 demonstrated prostate-specific antigens (“PSA”) declines, a sign of inhibition of AR-driven biology, at the higher dose levels.

 

 

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According to the American Cancer Society, prostate cancer is the second most frequently diagnosed cancer among men in the United States, behind skin cancer. Using a dynamic progression model, Scher et al have projected a 2020 incidence of 546,955 and prevalence of 3,072,480 for prostate cancer among men in the United States1. Approximately one-third of all prostate cancer patients who have been initially treated for local disease will subsequently have rising serum levels of PSA, which is an indication of recurrent or advanced disease. Patients with advanced disease often undergo androgen ablation therapy using analogues of luteinizing hormone releasing hormone (“LHRH”) or surgical castration; this approach is termed “androgen deprivation therapy”, or “ADT”. Most advanced prostate cancer patients initially respond to androgen ablation therapy; however, many patients experience a recurrence in tumor growth despite the reduction of testosterone to castrate levels, and at that point are considered to have CRPC. Following diagnosis of CRPC, patients have been generally treated with anti-androgens that block the binding of androgens (enzalutamide, apalutamide or bicalutamide) to the AR, or inhibit synthesis of androgens (abiraterone). More recently, important results have been achieved by utilizing this latest generation of anti-androgens, in combination with ADT, in newly diagnosed metastatic prostate cancer.

 

The growth of prostate tumors is mediated by an activated AR. Generally, there are three means of activating the AR. First, androgens such as dihydrotestosterone can activate AR by binding to its LBD. Second, CRPC can be driven by constitutively-active variants of AR (“vAR”) that lack an LBD and do not require androgen for activation. The third mechanism involves certain signaling pathways that activate AR independent of androgen activity. Generally, current drugs for the treatment of prostate cancer work by focusing on the first mechanism in combination with either (i) interfering with the production of androgen, or (ii) preventing androgen from binding to the LBD. However, over time these approaches eventually fail due to mechanisms of resistance which all involve the LBD, whether at the DNA (AR amplification or LBD mutations) or RNA level (emergence of AR splice variants).

 

Through their potential to directly and selectively block all known means of activating the AR, the Company believes the Aniten series of compounds hold the potential to be effective in cases where current therapies have failed. Both preclinical and clinical studies support this belief. In preclinical studies, the Aniten series of compounds has been shown to shrink benign prostate tissue in mice as well as prostate cancer xenografts, including tumors both sensitive and resistant to the current generation anti-androgens such as enzalutamide. Recent studies have also suggested the potential for combinations of ESSA’s Aniten compounds with anti-androgens to potentially inhibit AR-driven biology more completely in unique and complementary mechanisms by affecting opposite ends of the AR receptor.

 

The Phase I clinical trial of first-generation ralaniten acetate (“EPI-506”), has confirmed the safety and tolerability for this mechanism of transcription inhibition of AR-driven biology as patients tolerated doses of the drug at overall exposures consistent with those associated with efficacy in animal models. Possible proof of concept was shown with short duration PSA declines of up to 29% being observed in some patients highly refractory to current anti-androgens. However, unlike in animals, this first-generation drug was significantly metabolized in humans, leading to a very short half-life of circulating drug. Consequently, very high doses were required to achieve the desired overall exposures, with the relatively short half-life limiting the therapeutic level exposure of the drug within a 24-hour period. This limitation, together with unfavorable pharmaceutical properties, led to the Company’s decision to discontinue EPI-506 development in favor of focusing on the development of the next generation of Anitens. The Company is now focused on developing this next generation, including significantly more potent drugs with increased resistance to metabolism as well as improved pharmaceutical properties, including expected improvements to manufacturability, stability, and likelihood of successful commercial formulation.

 

The NTD of the AR is flexible with a high degree of intrinsic disorder making it difficult to be used for crystal structure-based drug design. The Company is not currently aware of any success by other drug development companies in finding drugs that bind specifically to this drug target. The nature of the highly specific binding of the Aniten compounds to the NTD, and the biological consequences of that binding, have been defined in recent scientific studies. The selectivity of the binding, based on in vivo imaging as well as in vitro studies, is consistent with the clean toxicological profile observed with first-generation EPI-506 and the subsequent safety profile in the Phase 1 trial.

 

 

1 Scher HI, Solo K, Valant J, Todd MB, Mehra M (2015) Prevalence of Prostate Cancer Clinical States and Mortality in the United States: Estimates Using a Dynamic Progression Model. PLoS ONE 10(10): e0139440. doi:10.1371/journal.pone.0139440

 

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As noted above, the incidence of both metastatic and non-metastatic CPRC continues to rise. Using a dynamic progression model, Scher et al have projected a 2020 incidence of 546,955 and prevalence of 3,072,480 for prostate cancer in the United States2.The Company expects that the Aniten series of compounds could be effective for many of those patients. In its early clinical development, the Company intends to initially focus on patients who have failed abiraterone or enzalutamide therapies for the following reasons:

 

  · CRPC treatment remains a prostate cancer market segment with an apparent and significant unmet therapeutic need and is therefore a potentially large market;

 

  · ESSA believes that the unique mechanism of action of its Aniten compounds is well suited to treat those patients who have failed AR LBD focused therapies, and whose biological characterization reveals that their tumors are still largely driven by AR biology;

 

  · ESSA expects that the large number of patients with an apparent unmet therapeutic need in this area will facilitate timely enrollment in its clinical trials; and

 

  · ESSA believes that a successful Phase I clinical trial will facilitate the early study of the combination of the ESSA Aniten compound with anti-androgens such as enzalutamide or apalutamide.

 

The British Columbia Cancer Agency (“BCCA”) and the University of British Columbia (“UBC”) are joint owners of the intellectual property that constitutes the Company’s initial series of compounds, including EPI-506. The Company licensed the original EPI-family of drugs from UBC and the BCCA. The Company is party to a license agreement with the BCCA and UBC dated December 22, 2010, as amended (“the License Agreement”), which provides the Company with exclusive world-wide rights to the issued patents and the patent applications in respect of the EPI-series compounds, including the next-generation Aniten compounds.

 

The Company believes that it has developed a strong and defensive intellectual property position for multiple EPI and Aniten structural classes, with 18 patent families filed covering different structural motifs/analogues.

 

Patent applications are pending in the United States and in contracting states to the Patent Cooperation Treaty (“PCT”) for the Aniten next-generation NTD inhibitors with expiry between 2034-2038. 

 

Management Team

 

One of ESSA's key resources is the experience embodied in its management team and scientific founders:

 

Dr. David R. Parkinson, President and Chief Executive Officer

 

  · served as Vice President, Global Clinical Oncology for Novartis International AG (“Novartis”), and Vice President, Oncology Development at Amgen, Inc.(“Amgen”);
  · at both Novartis and Amgen, he was responsible for clinical development activities leading to a series of successful global drug registrations for important cancer therapeutics, including Gleevec, Femara, Zometa, Kepivance, and Vectibix.

 

David Wood, Chief Financial Officer

 

  · 10 years as Head of Finance and Corporate Development at Celator Pharmaceuticals Inc., where he helped take the company public;
  · 22 years of experience in increasingly senior finance roles at various biotech companies.

 

Peter Virsik, Executive Vice-President and Chief Operating Officer

 

  · 20 years of experience in corporate development, new product planning, licensing and alliance management with global pharmaceutical organizations;
  · at XenoPort, Inc., played a role in the licensing and commercialization of Horizant (gabapentin enacarbil).

 

 

2 Scher HI, Solo K, Valant J, Todd MB, Mehra M (2015) Prevalence of Prostate Cancer Clinical States and Mortality in the United States: Estimates Using a Dynamic Progression Model. PLoS ONE 10(10): e0139440. doi:10.1371/journal.pone.0139440

 

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Scientific Founders

 

Dr. Marianne Sadar, Chief Scientific Officer

 

  · internationally known for her research on identifying human mechanisms of activating the AR and developing therapeutics for advanced prostate cancer;

  · served on approximately 50 scientific panels and as President of the Society of Basic Urological Research.

 

Dr. Raymond Andersen, Chief Technical Officer

 

  · internationally known for his research on marine natural products and their potential as drug leads;

  · discoveries have represented core technologies of several pharmaceutical companies and progressed to the clinical trial stage.

 

ESSA's Strategy

 

The Company’s initial therapeutic goal is to develop a safe and effective therapy for prostate cancer patients whose tumors have progressed on current anti-androgen therapy. However, the action of the NTD-inhibiting Aniten compounds suggests that there may ultimately be additional therapeutic advantage to combining these agents with anti-androgens at an earlier stage of treatment. Therefore, while the first priority is to select and enter into Phase 1 development of an optimal NTD inhibitor, in parallel the Company is also conducting preclinical studies of combination therapy with academic and industry collaborators.

 

Identifying an Aniten compound to take into clinical trials

 

The purpose of the next-generation program is to identify drug candidates with improved potency, reduced metabolic susceptibility and superior pharmaceutical properties compared to ESSA’s first-generation compounds. Structure-activity relation (“SAR”) studies conducted on the chemical scaffold of ESSA’s first-generation compounds have resulted in generation of a new series of compounds that have demonstrated significantly higher potency and predicted longer half-lives while retaining the NTD specificity. Additional changes in the chemical scaffold have also been incorporated with the goal of improving absorption, distribution, metabolism and excretion (“ADME”) and pharmaceutical properties of the chemical class.

 

In preclinical models of AR inhibition, several candidate molecules have displayed greater than 10 times higher potency than EPI-002. Considerable progress has been made towards making a final IND candidate selection. Our current estimate is that a final IND candidate will be selected in the first quarter of calendar 2019, with the filing of an IND with the FDA and a CTA with Health Canada expected an estimated nine to twelve months thereafter.

 

Advancing a potential future product candidate through clinical development and regulatory approval in CRPC patients

 

Following successful identification, characterization and IND approval of a development candidate, the Company intends to conduct a Phase I clinical trial to determine the safety, tolerability, maximum tolerated dose, pharmacokinetics and potential therapeutic benefits of the drug in mCRPC patients. Depending on the number of cohorts enrolled, the Phase I clinical trial is expected to take nine to twelve months. At this time, it is expected that the design of the Phase I clinical trial will be the standard three patients per dose cohort. All patients will be characterized biologically for underlying tumor genomic characteristics, for evidence of AR pathway activation, and for dose-related pharmacological and pharmacodynamic effects. Once the Phase I clinical trial is complete, the Company plans to review the data, including the safety, tolerability, evidence of efficacy and pharmacological and biomarker data. This information will inform the final size, design, timing and clinical as well as biological characteristics of the patients to be entered into a potential Phase II clinical trial.

 

Developing a potential future product candidate as an essential component of a new standard of care for the treatment of pre-CRPC and expanding usage earlier in the disease stage

 

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An activated AR is required for the growth and survival of most prostate cancer; and NTD inhibition of AR-directed biology occurs both in full length AR, vARs and in the setting of the multiple, resistance mechanisms affecting the anti-androgens which work through the opposite end of the AR. The Company, therefore, believes that the AR-NTD is an ideal target for next-generation hormone therapy. If ESSA’s potential future product candidate is successful in treating CRPC patients, it is reasonable to expect that such clinical candidate may be effective in treating earlier stage patients. Therefore, the Company may conduct additional clinical studies potentially leading to the approval of a clinical candidate for use in prostate cancer patients at an earlier disease stage, likely in combination with anti-androgens. The Company is currently generating in vitro and in vivo data in collaboration with academic and industry investigators in this regard. Preliminary data indicates that there may be potential benefits to combining an NDT inhibitor, such as an Aniten compound, with an anti-androgen that works through inhibition of the LBD of the AR. Other emerging potential clinical applications for NTD inhibitors are in combination with other agents, such as poly ADP ribose polymerase (“PARP”) inhibitors, as well as in the subset of metastatic breast cancer patients whose tumors have been demonstrated to have activation of the AR pathway.

 

Evaluating strategic collaborations to maximize value

 

The Company currently retains all commercial rights for its EPI and Aniten series drug portfolios. The Company continues to evaluate potential collaborations that could enhance the value of its prostate cancer program and allow it to leverage the expertise of such strategic collaborators.

 

Overview of Castration-Resistant Prostate Cancer

 

According to the American Cancer Society, prostate cancer is the second most frequently diagnosed cancer among men in the United States, behind skin cancer. Using a dynamic progression model, Scher et al have projected a 2020 incidence of 546,955 and prevalence of 3,072,480 for prostate cancer among men in the United States3. Overall, in the United States, about one in nine men will be diagnosed with prostate cancer during his lifetime, and about one in 41 men will die from the disease.

 

Prostate cancer is most frequently diagnosed at an early stage, when it is confined to the prostate gland and its immediate surroundings. Advances in screening and diagnosis, including the widespread use of PSA screening, have allowed detection of the disease in its early stages. Patients with early-stage disease are typically treated with surgery or radiation therapy, or in certain circumstances, with both. For the majority of men, these procedures are successful in curing the disease. However, for others, these procedures are not curative and their prostate cancer ultimately recurs. Men with recurrent or metastatic prostate cancer are considered to have advanced prostate cancer.

 

Hormonal therapy of prostate cancer which is effective in inhibiting tumor growth typically use drugs conferring pharmacological castration (i.e. LHRH (Leuprolide), or abiraterone). Other drugs competitively bind in the ligand-binding pocket of the LBD of the AR prevent both the binding of androgen and interaction of the AR with co-regulatory proteins, and therefore also prevent AR transcriptional activity. Commonly, these drugs are called “anti-androgens”. Current anti-androgens used for prostate cancer include apalutamide, bicalutamide, cyproterone acetate, flutamide, nilutamide and enzalutamide.

 

When the disease becomes resistant to initial androgen ablation therapy, second line hormonal treatments can be used depending on several factors that include the biology of the tumor, evidence of metastases, whether or not the patient is experiencing symptoms and if the disease comprises neuroendocrine or small cell carcinoma. However, castrate levels of androgen are typically maintained (i.e. patient remains on LHRH analogues) while other therapies are added to the patient’s regime. Asymptomatic patients with rising PSA and evidence of metastasis will typically go on to receive second-line hormonal therapies that include abiraterone acetate, corticosteroids or enzalutamide. For symptomatic CRPC patients, docetaxel or radium-233 for bone metastases are generally the treatments of choice. Prostate small cell carcinoma can be treated with chemotherapies such as docetaxel as those carcinomas usually do not respond to AR targeted therapies.

 

 

3 Scher HI, Solo K, Valant J, Todd MB, Mehra M (2015) Prevalence of Prostate Cancer Clinical States and Mortality in the United States: Estimates Using a Dynamic Progression Model. PLoS ONE 10(10): e0139440. doi:10.1371/journal.pone.0139440

 

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Abiraterone acetate plus prednisone was approved by the FDA and in many countries globally for patients with post-docetaxel metastatic CRPC in 2011. In the key clinical trials supporting initial approval for post-chemotherapy CRPC, abiraterone acetate plus prednisone demonstrated a statistically significant improvement in overall survival of 4.6 months in patients with metastatic CRPC who have failed one prior chemotherapy regimen. Abiraterone acetate plus prednisone has also been approved in the pre-chemotherapy setting. In the key supporting clinical trial, the co-primary endpoint showed a statistically significant increase in median radiographic progression-free survival with abiraterone plus prednisone versus prednisone alone of 16.5 months versus 8.3 months, whereas improvement in median overall survival only showed a trend towards statistical significance. Treatment with abiraterone requires the concomitant usage of prednisone to ameliorate symptoms of mineralocorticoid excess, including fluid overload, hypertension and hypokalemia; abiraterone plus prednisone must be used with caution in those with a significant cardiovascular history, including congestive heart failure. These effects, as well as treatment-associated elevations in liver enzymes, necessitate monitoring for blood pressure, serum potassium, fluid retention, aspartate aminotransferase (“AST”), alanine transaminase (“ALT”) and bilirubin levels. Furthermore, the pharmacokinetics of abiraterone acetate demonstrate a large food effect, with exposure increasing up to ten-fold in the presence of food. For safe administration, food must not be eaten two hours before the drug is taken and for one hour afterwards.

  

Enzalutamide was approved by the FDA as a treatment for patients with post-docetaxel metastatic CRPC in 2012. In the initial pivotal clinical trial supporting FDA approval in the post-chemotherapy CRPC population, the median overall survival was 18.4 months in the enzalutamide group versus 13.6 months in the placebo group. The label extension to metastatic CRPC is subsequently supported by data from a pivotal Phase III trial in chemo-naive CRPC, which demonstrated a statistically significant 29% reduction in the risk of death over placebo, despite enrolling patients with visceral disease, a population with a poorer prognosis that has historically been excluded from this trial setting. This survival benefit was achieved without the requirement for concomitant prednisone. The safety profile of enzalutamide is considered favorable despite a higher incidence of hypertension and a risk for seizure.

 

Apalutamide was approved by the FDA for the treatment of prostate cancer in February 2018. It is a non-steroidal anti-androgen specifically indicated for use in conjunction with castration in the treatment of non-metastatic castration-resistant prostate cancer, and acts as an antagonist of the androgen receptor.

 

The immunotherapy sipuleucel-T has been shown to increase the median survival time of CRPC patients by four months. Sipuleucel-T is generally considered a treatment option in advanced patients who are either asymptomatic or minimally symptomatic and with a good performance status (“ECOG 0-1”). Sipuleucel-T is not indicated for patients with hepatic metastases or less than six month life expectancy. In clinical trials, sipuleucel-T has shown no effect on serum PSA and does not affect the time to disease progression.

 

Radium-223 has been shown to extend survival in CRPC patients with symptomatic bone metastases and no known visceral metastatic disease. Limitations include the incidence of bone marrow suppression, primarily thrombocytopenia, and the need for this injectable radiopharmaceutical to be administered by trained personnel at select centers able to handle this product. In addition, the administration of radium-233 is associated with potential risks for other persons (e.g. medical staff, care givers and members of the patient’s family) from radiation or contamination from body fluids such as spills of urine, feces and vomit. Therefore, radiation protection precautions must be taken in accordance with national and local regulations.

 

Androgen and the Androgen Receptor

 

Androgens such as testosterone and dihydrotestosterone mediate their biological effects through the AR. In adult males, the testes produce the majority of androgen with some contribution from the adrenal glands and other tissues. Androgens play a role in a wide range of developmental and physiological responses and are involved in male sexual differentiation, maintenance of spermatogenesis and male gonadotropin regulation. The growth and survival of the prostate is dependent on androgen. When androgens increase in males during puberty there is an increase in growth of the prostate gland, and in adult males when androgens are reduced by castration there is involution of the prostate and apoptosis, or cell death, of prostate epithelial cells. This dependency of the prostate epithelium on androgens provides the underlying rationale for treating advanced prostate cancer with androgen ablation.

 

The AR is a ligand-activated transcription factor that mediates the biological effects of androgen. Without a functional full-length AR, the addition of androgen has no biological effects. The AR has distinct functional domains that include a C-terminal LBD, DNA-binding domain, the N-terminal domain and a hinge region. All current FDA-approved therapies that target the AR are directly or indirectly focused on its C-terminal LBD. Androgens such as testosterone and dihydrotestosterone bind to the LBD of the AR which result in changes in conformation and post-translational modifications, nuclear translocation and ultimately binding to the regulatory regions of DNA of target genes called androgen response elements. Thus, AR regulates the transcription of genes involved in prostate tissue growth and survival.

 

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AR is unique from other steroid hormone receptors in that the AF-1 region in the NTD contributes to transcriptional activity, with little to no activity contributed from AF-2 in the LBD. AR LBD functions independent of the NTD and can still bind ligand even if the AF-1 region is deleted or mutated; however, no transcriptional activity can be achieved without the AF-1 region in the NTD. Previous research used deletion mutants of the AR to explore which regions of the AR were critical to its activity, with the following key findings:

 

  · truncated AR (AR1-653) that lacked the LBD was found to be constitutively active, and mimicked the AR splice variants that were reported more than one decade later in 2008;

 

  · deletion of AF-1 (residues 245-527) in the AR NTD yielded a receptor that could still bind androgen but was transcriptionally dead; and

 

  · deletion of AF1 also blocked all transcriptional activity of the truncated variant AR.

 

It is generally believed that, in the majority of patients, CRPC continues to be driven by a transcriptionally-active AR in spite of maintaining castrate levels of androgen. Evidence to support the concept that CRPC remains dependent upon AR signaling includes:

 

1)many of the same genes that are increased by androgens become elevated in CRPC, such as PSA;
2)detection of nuclear localization of the AR in CRPC tissues supports that the AR may continue to be transcriptionally active in the absence of testicular androgens;
3)increased expression of the AR (full-length and AR splice variant) in tissues from CRPC;
4)survival advantages with enzalutamide and abiraterone (block synthesis of androgens) in CRPC patients; and
5)correlation of levels of expression of AR splice variant with poor outcome and resistance to abiraterone and enzalutamide.

 

AR-related mechanisms of CRPC

 

The mechanisms for the development of CRPC have been intensely studied, in part because the emergence of CRPC is almost universal in recurrent prostate cancer treatment. The mechanisms described below represent the current state of knowledge in this regard.

 

Mutations Causing AR Activation by Antiandrogens

 

Some patients receiving antiandrogens will develop antiandrogen withdrawal syndrome. This syndrome is characterized by a rising PSA and worsening symptoms while the patient is taking antiandrogens, followed by a decline in PSA or improvement when the patient is taken off antiandrogens. Prostate cancer cells obtained from patients with antiandrogen withdrawal syndrome may have gain-of-function mutations in the LBD of the AR. Thus, current antiandrogens used to block the LBD of the AR may become activators of the mutated AR and as a result, have the opposite effect from what they were intended to do.

 

Amplification or Over-Expression of AR

 

Several studies have shown that androgen deprivation results in over-expression of the AR, thus giving any residual androgen more opportunities to bind and thereby activate the full-length AR.

 

Residual Androgens Activate AR

 

While in mature men, the majority of androgen is produced by the testes, androgen is produced by a number of other tissues including the adrenal glands and in some prostate cancer tumors. A variety of different pathways can produce androgen, as well. As blood levels of androgen are reduced through use of current androgen-suppressing drugs or surgical castration, androgen production by alternate pathways may become an important way in which ARs become activated. Recently, it has been shown that prostate cancer tumor tissue can synthesize androgen, leading potentially to concentrations of intra-tumoral androgen that are sufficient to activate the full-length AR.

 

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Over-expression of AR Coactivators

 

The AR requires interaction with an abundance of other proteins such as bridging factors and coactivators. An example of a bridging factor that is associated with CRPC is CREB-binding protein (“CBP”). CBP is a bridging factor that interacts with the NTD of the AR and is thought to be essential for AR transcriptional activity. CBP levels are increased in CRPC, which may lead to cancer growth driven by AR activity. Coactivators of AR have also been reported to be increased in CRPC which may subsequently result in aberrant transactivation of AR.

 

Ligand-independent Activation by Cytokines or Kinases

 

There is evidence that cytokines and kinases can activate the NTD of the AR. It is possible that under castrate levels of androgen, cross-talk between the AR and signal transduction pathways circumvent the need for androgen for the activation of the AR for the growth and survival of CRPC.

 

Constitutively Active AR Splice Variants that Lack the Ligand-Binding Domain

 

CRPC may involve the expression of constitutively active splice-variants of the AR that lack the full ligand-binding domain. These AR splice variants are always activated and have a truncated LBD, thus do not require androgen to be transcriptionally active. Antiandrogens such as enzalutamide would have no effect on these AR splice variants because antiandrogens bind to the LBD which is not present in these variants.

 

ESSA’s drug candidates have been shown to be active on all of the above pathways. Specifically, ESSA’s first-generation compounds demonstrated:

 

  · EPI-002 does not cause activation of mutated ARs that are activated by antiandrogens;

 

  · EPI-002 is active in vivo against VCaP xenografts that overexpress AR;

 

  · EPI-002 is not competitive with androgen for the LBD, hence its inhibitory effect cannot be competed away by high localized concentrations of androgen;

 

  · EPI-001 blocks the interaction of CBP and RAP74 which are required for transcriptional activity and may contribute to tumor growth;

 

  · EPI-001 blocks AR activation by IL-6, bone-derived factors and stimulation of the PKA pathway;

 

  · In vitro and in vivo, EPI-002 significantly inhibits LNCaP95 human prostate cancer cells that harbour constitutively-active AR splice variant V7 and are resistant to enzalutamide; and

 

  · EPI-002 blocks gene expression regulated by full-length AR and V7.

 

Programs and Potential Products

 

The Company’s EPI-Series Drugs

 

The Company’s first-generation compounds, based on EPI-001, are selective, oral, small molecules that block the NTD of the AR. The AR is required for the growth and survival of most prostate cancer; therefore, the NTD of the AR is an ideal target for next-generation hormone therapy. Consistent with the inhibition of AR activity by other EPI compounds, experimentation conducted in a test-tube or in a controlled environment outside a living organism (known as “in vitro” studies) and experimentation done in or on the living tissue of a whole, living organism (known as “in vivo” studies) show that stereoisomers of EPI-001 selectively block AR-dependent proliferation of human prostate cancer cells that express AR and do not inhibit the proliferation of cells that do not express functional AR or do not rely on the AR for growth and survival. By directly inhibiting the NTD of the AR, the Company believes EPI series molecules may be able to overcome resistance mechanisms in CRPC.

 

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Completed Phase I Clinical Study of EPI-506

 

The Company conducted an initial proof-of-concept Phase I clinical study utilizing the first-generation Aniten compound, EPI-506. The objective of the EPI-506 Phase I clinical trial was to explore the safety, tolerability, maximum tolerated dose and pharmacokinetics of EPI-506, in addition to tumor response rates in asymptomatic or minimally symptomatic patients with metastatic CRPC (“mCRPC”) who were no longer responding to either abiraterone or enzalutamide treatments, or both. Efficacy endpoints, such as PSA reduction, and other progression criteria were evaluated. Details relating to the design of the Phase I/II clinical trial of EPI-506 are available on the U.S. National Institutes of Health clinical trials website (see https://clinicaltrials.gov).

 

The IND application to the FDA for EPI-506, to begin a Phase I clinical trial, was accepted in September 2015, with the first clinical patient enrolled in November 2015. The Company’s CTA submission to Health Canada was subsequently also accepted. Based on allometric scaling, an initial dose level of EPI-506 of 80 mg was determined. However, following the enrollment of the initial cohorts, it became apparent that levels of EPI-506 were much lower in humans than the projections from the animal studies. Supported by the large therapeutic index from toxicology studies, EPI-506 dosing was escalated aggressively to allow patients in the clinical study greater exposure to the drug. The highest dose patients ultimately received was 3600 mg of EPI-506, administered in a single dose or split into two doses daily. The initial data from the Phase I clinical trial was presented at the European Society of Medical Oncology meeting in September 2017.

 

Conducted at five sites in the United States and Canada, the open-label, single-arm, dose-escalation study evaluated the safety, pharmacokinetics, maximum-tolerated dose and anti-tumor activity of EPI-506 in men with end-stage mCRPC who had progressed after prior enzalutamide and/or abiraterone treatment and who may have received one prior line of chemotherapy. Twenty-eight patients were available for analysis, with each patient having received four or more prior therapies for prostate cancer at the time of study entry. Patients self-administered oral doses of EPI-506 ranging from 80 mg to 3600 mg, with a mean drug exposure of 85 days (range of eight to 535 days). Four patients underwent prolonged treatment (with a median of 318 days; and a range of 219 to 535 days at data cut-off), following intra-patient dose escalation. PSA declines, an indication of efficacy, ranging from 4% to 29% were observed in five patients, which occurred predominantly in the higher dose cohorts (≥1280 mg).

 

EPI-506 was generally well-tolerated with a favorable safety profile having been demonstrated across all doses up to 2400 mg. At a dose of 3600 mg, gastrointestinal adverse events (nausea, vomiting and abdominal pain) were observed in two patients: one patient in the once-daily (“QD”) dosing cohort and one patient in the 1800 mg twice-daily dosing cohort, leading to study discontinuation and a dose-limiting toxicity (“DLT”) due to more than 25% of doses being missed in the 28-day safety reporting period. A separate patient in the 3600 mg QD cohort experienced a transient Grade 3 increase in liver enzymes (AST/ALT), which also constituted a DLT, and enrollment was consequently concluded in this cohort.

 

Although the safety profile and possible signs of efficacy at higher-dose levels support the concept that inhibiting the AR NTD may provide a clinical benefit to mCRPC patients, the pharmacokinetic and metabolic studies revealed that the challenges encountered in achieving exposures similar to those associated with efficacy in the animal models were due to the greatly increased metabolism of EPI-506 in patients as compared to rodents. In light of these discoveries, ESSA concluded that prioritizing the development of one of its Aniten next-generation NTD inhibitors that, in the Company’s discovery program, had demonstrated greater potency, reduced metabolism and other enhanced pharmaceutical properties offered a more compelling regulatory and commercial pathway forward. As a result, the Company announced on September 11, 2017 its decision to discontinue the further clinical development of EPI-506 and to implement a corporate restructuring plan to focus research and development resources on its next-generation Anitens targeting the AR NTD. The restructuring included a decrease in headcount and a reduction of operational expenditures related to the clinical program.

 

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ESSA’s next-generation Aniten compounds represent chemical scaffold changes to the first-generation drugs and appear to retain the specific binding and NTD inhibition of the AR. However, they have demonstrated an ability to improve upon a number of attributes of the first-generation compound, EPI-506. In in vitro assays measuring inhibition of AR transcriptional activity, these drugs demonstrate greater than 10 times higher potency than EPI-506 or its active metabolite, EPI-002. In addition, the compounds demonstrate resistance to metabolism in preclinical studies, indicative of longer half-lives in humans. Lastly, the compounds demonstrate significantly improved pharmaceutical properties relative to EPI-506. They represent potential improvements in ease and cost of large-scale manufacture, drug product stability and suitability for commercialization globally. The Aniten program is currently in the final stages of IND lead-selection with IND and CTA filings expected to occur an estimated nine to twelve months after a candidate is nominated.

 

Preclinical Studies

 

The Company is focused on the advancement of next-generation Aniten NTD inhibitors designed to improve upon the properties of the first-generation compound, EPI-506, a prodrug of EPI-002. A series of oral small molecule compounds have been identified which, while retaining the common mechanism of action to interfere with AR-mediated signaling, hold the promise of improved properties such as enhanced potency, reduced susceptibility to metabolism and improved drug-like properties. Several of these compounds are currently being characterized in more detail with the goal of selecting a next-generation development compound based on certain established criteria. The Company also continues to conduct preclinical combination studies.

 

These next-generation compounds were discovered through chemical modification of the first-generation drug, EPI-002. Specific chemical changes to the structure of EPI-002 have resulted in increased potency in an in vitro AR-based gene transcription assay, exhibiting greater than 10 times higher potency than EPI-002. The ability of the first in the series of these next-generation molecules to reduce tumor growth was confirmed in a human prostate cancer xenograft model. In this preclinical study, the next-generation compound reduced tumor growth compared to the control using low daily doses of the drug. This next-generation compound also inhibited in vitro cellular proliferation of an enzalutamide-resistant cell line.

 

In addition to higher potency, the next-generation compounds are designed to reduce the metabolism of these agents following oral dosing compared to EPI-002. Excessive metabolism of a drug candidate may reduce the effective exposure levels of a drug and necessitate frequent and excessive dosing requirements. Specific modifications in the chemical structure of these molecules were made in an attempt to block known sites of metabolism of EPI-002. A series of in vitro studies examining drug metabolism were conducted with the next-generation compounds. Results indicated that several of these compounds, with the additional chemical modifications, may be metabolized more slowly than EPI-002 in humans. Currently, the Company is conducting animal pharmacokinetic studies to verify the initial in vitro metabolism results. If this in vitro and in vivo data is replicated in animals and in patients, the reduced metabolism of the next-generation compounds may be expected to improve their pharmacokinetic profile and daily dose requirements following oral dosing compared to EPI-002.

 

Importantly, the next-generation compounds exhibiting less in vitro metabolism were tested against off-target screening. Significant off-target binding of drug candidates could lead to unanticipated off-target toxicity. Broad characterization of these compounds has demonstrated minimal non-specific binding properties in this screening, indicating a favorable selectivity profile for further development. The most promising of these next-generation compounds are in the final stages of preclinical characterization, as required to select a final IND candidate.

 

Future Clinical Development Program

 

Phase I/II Clinical Trial Design for treating CRPC patients

 

If the Company successfully identifies a clinical candidate and approval of any IND or CTA, the Company will conduct a Phase I/II clinical trial to determine the safety, tolerability, maximum tolerated dose, pharmacokinetics and efficacy of the compound in CRPC patients. In a Phase I study, it is expected the clinical trial will evaluate the safety, tolerability, pharmacokinetics and maximum-tolerated dose of the compound, in multiple-dose escalations. Learnings from the Phase I clinical trial of EPI-506 will be incorporated into the design and conduct of potential future trials. The Company plans to include, for example, extensive biological characterization of the patients entered into the trial. If the Phase I portion of the clinical trial is successful, the Phase II portion (dose expansion) of the clinical trial will evaluate activity in a target group of biologically-characterized mCRPC patients.

 

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Early Conduct of a Combination Phase I/II Clinical Trial

 

Given the evolution of prostate cancer therapeutics towards combination therapy strategies, the biological rationale for combining NTD and LBD inhibitors, and compelling early in vitro and preclinical animal model results, the Company may perform combination studies of the next-generation Aniten compound with current generation anti-androgens.

 

Phase III Clinical Trial

  

In order to ultimately obtain full regulatory approval, the Company expects that at least one Phase III clinical trial will be required, most likely in patients similar to the population of mCRPC patients that will have been enrolled in the planned Phase I/II clinical trial. However, the results of the Phase I/II clinical trial may also suggest modification of the initial patient population based on response and biomarker assessment. In a Phase III clinical trial, the key end-point is expected to be progression-free survival or overall survival relative to patients receiving the standard-of-care. It is expected that such a Phase III clinical trial would be conducted at numerous sites around the world.

 

Competition

 

The competition in the prostate cancer market is very high, with several pharmaceutical therapies already approved and many new molecules being tested for their effect in this patient population.

 

Currently approved or developmental therapies in clinical trials include:

 

GENERIC/PROGRAM NAME

 

BRAND NAME

 

COMPANY NAME(S)

 

STAGE

Enzalutamide   Xtandi   Astellas and Pfizer   Marketed
Abiraterone acetate   Zytiga   Johnson & Johnson   Marketed
Sipuleucel-T   Provenge   Valeant   Marketed
Docetaxel   n/a   Sanofi and various   Marketed
Cabazitaxel   Jevtana   Sanofi   Marketed
Radium-233   Xofigo   Bayer   Marketed
Apalutamide (ARN-509)   n/a   Johnson & Johnson   Phase III
ODM-201   n/a   Orion Corp. and Bayer   Phase III

 

In this market, ESSA believes that its competitive position is strong because its product candidate, if successful, will focus mechanistically on the approach to prostate cancer that has been shown to make the biggest difference to the survival of recurrent prostate cancer patients: blocking AR activation. Since EPI compounds have been shown to directly block the AR NTD, they have the potential to overcome the AR-dependent resistance pathways (discussed above) that may develop as a result of treatment with current hormone-related therapies that target the AR LBD. If successful, ESSA believes this could represent a significant step forward in the treatment of prostate cancer. To ESSA’s knowledge, no other antagonist to the AR NTD is currently undergoing clinical trials for prostate cancer or any other indication.

 

Patents and Proprietary Rights

 

License Agreement with UBC and the BCCA

 

ESSA has in-licensed intellectual property embodied in issued patents, pending patents applications and know-how relating to compounds that modulate AR activity created through research work done at the BCCA and UBC (together, the “Licensors”) under the direction of Drs. Marianne Sadar and Raymond Andersen, respectively. ESSA refers to these intellectual property rights as the “Licensed IP”.

 

Pursuant to an agreement among ESSA and the Licensors dated as of December 22, 2010 and amended on February 10, 2011 and on May 27, 2014 (the “License Agreement”), ESSA has been granted a worldwide, exclusive license to develop and commercialize products based on the Licensed IP. ESSA paid a minimum annual royalty of C$40,000 in the 2014 calendar year, increasing to C$65,000 in each of 2015 and 2016 and C$85,000 in 2017 and 2018, and must continue to pay a minimum of C$85,000 for each year thereafter. An additional C$50,000 and C$900,000 must be paid upon enrollment of a patient in a Phase II and Phase III clinical trial, respectively.

 

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The Licensors may terminate the License Agreement upon ESSA’s insolvency, or the License Agreement may be terminated by either party for certain material breaches by the other party. ESSA has already spent more than C$5,000,000 in connection with the commercialization of products relating directly to the Licensed IP. ESSA is required to allocate reasonable time to the development and commercialization of the Licensed IP and to use reasonable efforts to promote, market and sell products covered by the Licensed IP. The terms of the License Agreement required ESSA to issue to the Licensors, in lieu of payment of an initial license fee, 1,000,034 pre-Consolidation Common Shares. If ESSA develops products covered by the Licensed IP in the future, it will be required to pay certain development and regulatory milestone payments up to an aggregate of C$2.4 million for the first drug product developed under the license and up to an aggregate of C$510,000 for each subsequent product. ESSA must also pay the Licensors low single-digit royalties based on aggregate worldwide net sales of products covered by the Licensed IP and a percentage of sublicensing revenue in the low teens. ESSA is also required to reimburse costs incurred by the Licensors related to the prosecution and maintenance of patents embodying the Licensed IP. The License Agreement will expire on the later of 20 years after the date of the License Agreement or the expiry of the last issued patent included in the Licensed IP.

 

ESSA’s Intellectual Property Strategy

 

Both ESSA and the broader pharmaceutical industry attach significant importance to patents for the protection of new technologies, products and processes. Accordingly, ESSA’s success depends, in part, on its ability to obtain patents or rights thereto, to protect commercial secrets and carry on activities without infringing the rights of third parties. See “Risk Factors” in Item 3.D elsewhere in this Annual Report. Where appropriate, and consistent with management’s objectives, patents are pursued once concepts have been validated through appropriate laboratory work. To that end, ESSA will continue to seek patents in relation to those components or concepts that it perceives to be important.

 

Patent Applications

 

ESSA has licensed certain patent rights, with respect to its compounds that modulate AR activity, from the Licensors, jointly. ESSA has the right to acquire ownership of the licensed patents and patent applications upon specified payment to the Licensors, and providing that payments required under the License Agreement continue to be made. ESSA currently has 18 active patent families which cover multiple EPI- and Aniten structural classes of compounds with different structural motifs/analogues, that provide a strong and defensive intellectual property portfolio.

 

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Regulatory Environment

 

The production and manufacture of ESSA’s potential future product candidates and its R&D activities are subject to regulation for safety, efficacy, quality and ethics by various governmental authorities around the world. In Canada, these activities are regulated by the Food and Drugs Act and the rules and regulations thereunder, which are enforced by the TPD. In the United States, drugs and biological products are subject to regulation by the FDA. Drug approval laws require registration of manufacturing facilities, carefully controlled research and testing of product candidates, government review and approval of experimental results prior to giving approval to sell drug products. Regulators also require that rigorous and specific standards such as cGMP, GLP and GCP are followed in the manufacture, testing and clinical development respectively of any drug product. See “Risk Factors” in Item 3.D elsewhere in this Annual Report.

 

The process of obtaining regulatory approvals and the corresponding compliance with appropriate federal, state, local and foreign statutes and regulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval may subject an applicant or sponsor to a variety of administrative or judicial sanctions, including refusal by the FDA to approve pending applications, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters and other types of enforcement letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement of profits, or civil or criminal investigations and penalties brought by the FDA and the Department of Justice or other governmental entities.

 

An applicant seeking approval to market and distribute a new drug product in the United States must typically undertake the following:

 

  · completion of extensive nonclinical, sometimes referred to as preclinical laboratory tests, and preclinical animal trials and applicable requirements for the humane use of laboratory animals and formulation studies in compliance with applicable regulations, including GLPs;

 

  · submission to the FDA of an IND, which must take effect before human clinical trials may begin;

 

  · approval by an IRB, representing each clinical site before each clinical trial may be initiated;

 

  · performance of adequate and well-controlled human clinical trials according to the FDA’s regulations commonly referred to as GCP regulations and any additional requirements for the protection of human research subjects and their health information, to establish the safety and efficacy of the proposed biological product for its intended use;

 

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  · preparation and submission to the FDA of a NDA;

 

  · review of the product by an FDA advisory committee, where appropriate or if applicable;

 

  · satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities at which the product, or components thereof, are produced to assess compliance with current Good Manufacturing Practices, or cGMP, requirements and to assure that the facilities, methods and controls are adequate to preserve the product’s identity, strength, quality and purity;

 

  · payment of user fees and securing FDA approval of the NDA; and

 

  · compliance with any post-approval requirements, including Risk Evaluation and Mitigation Strategies (“REMS”) and post-approval studies required by the FDA.

 

Preclinical Studies

 

Preclinical studies are conducted in vitro and in animals to evaluate pharmacokinetics, metabolism and possible toxic effects to provide evidence of the safety of the product candidate prior to its administration to humans in clinical studies and throughout development. The conduct of preclinical studies is subject to federal regulations and requirements, including GLP regulations. The results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and plans for clinical studies, among other things, are submitted to the FDA as part of an IND. Some long-term preclinical testing, such as animal tests of reproductive adverse events and carcinogenicity, may continue after the IND is submitted.

 

Initiation of Human Testing

 

Clinical trials involve the administration of the investigational product to human subjects under the supervision of qualified investigators in accordance with GCP requirements, which include, among other things, the requirement that all research subjects provide their informed consent in writing before their participation in any clinical trial. Clinical trials are conducted under written trial protocols detailing, among other things, the objectives of the trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to a proposed clinical trial and places the trial on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. In Canada, this application is called a CTA. An IND/CTA application must be filed and accepted by the FDA or TPD, as applicable, before human clinical trials may begin. In addition, an IRB representing each institution participating in the clinical trial must review and approve the plan for any clinical trial before it commences at that institution, and the IRB must conduct continuing review and reapprove the trial at least annually. The IRB must review and approve, among other things, the trial protocol and informed consent information to be provided to trial subjects. An IRB must operate in compliance with FDA regulations.

 

Two key factors influencing the rate of progression of clinical trials are the rate at which patients can be enrolled to participate in the research program and whether effective treatments are currently available for the disease that the drug is intended to treat. Patient enrollment is largely dependent upon the incidence and severity of the disease, the treatments available and the potential side effects of the drug to be tested and any restrictions for enrollment that may be imposed by regulatory agencies.

 

Phase I Clinical Trials

 

Phase I clinical trials for cancer therapeutics are typically conducted on a small number of patients to evaluate safety, dose limiting toxicities, tolerability, pharmacokinetics and to determine the dose for Phase II clinical trials in humans.

 

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Phase II Clinical Trials

 

Phase II clinical trials typically involve a larger patient population than Phase I clinical trials and are conducted to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of a product candidate for specific targeted diseases and to determine dosage tolerance, optimal dosage and dosing schedule.

 

Phase III Clinical Trials

 

Phase III clinical trials typically involve testing an experimental drug on a much larger population of patients suffering from the targeted condition or disease – in ESSA’s case, CRPC. These studies involve testing the experimental drug in an expanded patient population at geographically dispersed test sites (multi-center trials) to establish clinical safety and effectiveness. These trials also generate information from which the overall risk-benefit relationship relating to the drug can be determined.

 

In most cases FDA requires two adequate and well controlled Phase III clinical trials to demonstrate the efficacy of the drug. A single Phase III trial with other confirmatory evidence may be sufficient in rare instances where the trial is a large multicenter trial demonstrating internal consistency and a statistically very persuasive finding of a clinically meaningful effect on mortality, irreversible morbidity or prevention of a disease with a potentially serious outcome and confirmation of the result in a second trial would be practically or ethically impossible.

 

New Drug Application

 

Assuming successful completion of required clinical testing and other requirements, the results of the preclinical and clinical studies, together with detailed information relating to the product’s chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDA, or the TPD as part of an NDS, requesting approval to market the drug product for one or more indications. The NDS or NDA is then reviewed by the applicable regulatory body for approval to market the drug.

 

The FDA conducts a preliminary review of an NDA within 60 days of its receipt and informs the sponsor by the 74th day after the FDA’s receipt of the submission to determine whether the application is sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDA for filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA has agreed to specified performance goals in the review process of NDAs. Most such applications are meant to be reviewed within ten months from the date of filing, and most applications for “priority review” products are meant to be reviewed within six months of filing. The review process may be extended by the FDA for three additional months to consider new information or clarification provided by the applicant to address an outstanding deficiency identified by the FDA following the original submission.

 

Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is or will be manufactured. These pre-approval inspections cover all facilities associated with an NDA submission, including drug component manufacturing (such as Active Pharmaceutical Ingredients), finished drug product manufacturing, and control testing laboratories. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP.

 

The cost of preparing and submitting an NDA is substantial. The submission of most NDAs is additionally subject to a substantial application user fee, currently exceeding $2,500,000 and the manufacturer or sponsor under an approved new drug application are also subject to significant annual program and establishment user fees. These fees are typically increased annually.

 

An NDS costs roughly $322,056 per submission and will also be subject to Drug Establishment Licensing fees, which currently exceed $16,000 per established facility.

 

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On the basis of the FDA’s evaluation of the NDA and accompanying information, including the results of the inspection of the manufacturing facilities, the FDA may issue an approval letter or a complete response letter. An approval letter authorizes commercial marketing of the product with specific prescribing information for specific indications. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing or information in order for the FDA to reconsider the application. If and when those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.

 

If the FDA approves a product, it may limit the approved indications for use for the product, require that contraindications, warnings or precautions be included in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess the drug’s safety after approval, require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution restrictions or other risk management mechanisms which can materially affect the potential market and profitability of the product. The FDA may prevent or limit further marketing of a product based on the results of post-market studies or surveillance programs. After approval, many types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further testing requirements and FDA review and approval.

 

Post-Approval Requirements

 

Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverse experiences with the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims, are subject to prior FDA review and approval. There also are continuing, annual user fee requirements for any marketed products and the establishments at which such products are manufactured, as well as new application fees for supplemental applications with clinical data.

 

In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance with cGMP requirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance.

 

Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMS program. Other potential consequences include, among other things:

 

  · restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;

 

  · fines, warning letters or holds on post-approval clinical trials;

 

  · refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product license approvals;

 

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

 

  · injunctions or the imposition of civil or criminal penalties.

 

The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability.

 

In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, or PDMA, which regulates the distribution of drugs and drug samples at the federal level, and sets minimum standards for the registration and regulation of drug distributors by the states. Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure accountability in distribution.

 

Orphan Designation and Exclusivity

 

ESSA may, in the future, seek orphan drug designation for its product candidates. Under the Orphan Drug Act, the FDA may designate a drug product as an “orphan drug” if it is intended to treat a rare disease or condition (generally meaning that it affects fewer than 200,000 individuals in the United States, or more in cases in which there is no reasonable expectation that the cost of developing and making a drug product available in the United States for treatment of the disease or condition will be recovered from sales of the product). A company must request orphan product designation before submitting an NDA. If the request is granted, the FDA will disclose the identity of the therapeutic agent and its potential use. Orphan product designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.

 

If a product with orphan status receives the first FDA approval for the disease or condition for which it has such designation, the product generally will receive orphan product exclusivity. Orphan product exclusivity means that the FDA may not approve any other applications for the same product for the same indication for seven years, except in certain limited circumstances. Competitors may receive approval of different products for the indication for which the orphan product has exclusivity and may obtain approval for the same product but for a different indication. If a drug or drug product designated as an orphan product ultimately receives marketing approval for an indication broader than what was designated in its orphan product application, it may not be entitled to exclusivity.

 

C.Organizational Structure

 

The Company has one wholly-owned subsidiary, ESSA Pharmaceuticals Corp., existing under the laws of the State of Texas.

 

D.Property, Plants and Equipment

 

ESSA’s operating plan does not include building infrastructure in the form of an in-house laboratory, capital equipment, headcount, or administrative burden.

 

ESSA operates from its head office located in Vancouver, Canada. Operations related to the Aniten development program are based in Houston, Texas and South San Francisco, California. ESSA does not own any real property. The following table outlines significant properties that ESSA currently leases:

 

LOCATION   AREA
(IN SQUARE FEET)
  LEASE EXPIRATION DATE   USE
Vancouver, Canada   200   Monthly   Office Space
Houston, United States   170   Monthly   Office Space
South San Francisco,
United States
  3,021   March 31, 2021   Office Space

 

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The Canadian office space costs C$3,850 per month and is rented on a month to month basis. The Houston office space costs $1,673 per month and is rented on a month to month basis. The South San Francisco office space costs $9,516 per month. ESSA believes that its current facilities are adequate to meet its ongoing needs and that, if ESSA requires additional space, it will be able to obtain additional facilities on commercially reasonable terms.

 

ITEM 4AUNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

A. Operating Results

 

The following discussion and analysis of the financial condition and results of operations of ESSA should be read in conjunction with the audited financial statements as at and for the fiscal years ended September 30, 2018, 2017 and 2016, together with the notes thereto. The financial information contained in this Annual Report is derived from the financial statements, which were prepared in accordance with IFRS.

 

Overview

 

ESSA is a pharmaceutical company currently in preclinical stage, focused on developing novel and proprietary therapies for the treatment of prostate cancer in patients whose disease is progressing despite treatment with current therapies, including abiraterone and enzalutamide. The Company believes its Aniten series of compounds can significantly expand the interval of time in which patients suffering from CRPC can benefit from hormone-based therapies. Specifically, the Aniten compounds act by disrupting the AR signaling pathway, the primary pathway that drives prostate cancer growth, by preventing AR activation through selective binding to the Tau-5 region of the NTD of the AR. In this respect, ESSA’s Aniten compounds differ greatly from classical anti-androgens, since they interfere either with androgen synthesis, or with the binding of androgens to the LBD, which is located at the opposite end of the receptor. A functional NTD is essential for activation of the AR; blocking the NTD inhibits AR-driven transcription. We believe such transcription inhibition mechanism of the Aniten class of agents is unique, and has the advantage of bypassing identified mechanisms of resistance to the anti-androgens currently used in the treatment of CRPC. In preclinical studies, blocking the NTD has demonstrated the capability to prevent AR-driven gene expression. A recently completed Phase I clinical trial of ESSA’s first-generation agent EPI-506, demonstrated PSA declines, a sign of inhibition of AR-driven biology, at the higher dose levels.

 

According to the American Cancer Society, prostate cancer is the second most frequently diagnosed cancer among men in the United States, behind skin cancer. Using a dynamic progression model, Scher et al have projected a 2020 incidence of 546,955 and prevalence of 3,072,480 for prostate cancer in the United States4. Approximately one-third of all prostate cancer patients who have been treated for local disease will subsequently have rising serum levels of PSA, which is an indication of recurrent or advanced disease. Patients with advanced disease often undergo androgen ablation therapy using analogues of LHRH or surgical castration. Most advanced prostate cancer patients initially respond to androgen ablation therapy, however many experience a recurrence in tumor growth despite the reduction of testosterone to castrate levels, and at that point are considered to be suffering from CRPC. Following diagnosis of CRPC, patients are often treated with anti-androgens, which block the binding of androgens to the AR.

 

ESSA has never been profitable and has incurred net losses since inception. ESSA's net losses were $11,629,440, $4,499,012 and $13,139,788 for the years ended September 30, 2018, 2017 and 2016, respectively. ESSA expects to incur losses for the foreseeable future, and it expects these losses to increase as it continues the development of, and seek regulatory approvals for, its product candidate. Because of the numerous risks and uncertainties associated with product development, ESSA is unable to predict the timing or amount of increased expenses or when, or if, it will be able to achieve or maintain profitability.

 

 

4 Scher HI, Solo K, Valant J, Todd MB, Mehra M (2015) Prevalence of Prostate Cancer Clinical States and Mortality in the United States: Estimates Using a Dynamic Progression Model. PLoS ONE 10(10): e0139440. doi:10.1371/journal.pone.0139440

 

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Results of Operations

 

The following table sets forth ESSA's consolidated statements of financial position and consolidated statements of loss and comprehensive loss as at and for the fiscal years ended September 30, 2018, 2017 and 2016:

 

(US$)

Income Statement Data

  Year Ended
September 30, 2018
   Year Ended
September 30, 2017
   Year Ended
September 30, 2016
 
Revenue            
Other Income            
Total operating expenses   (11,713,965)   (11,651,870)   (19,642,164)
Research and development, net of recoveries   4,873,335    5,726,366    13,060,201 
Financing costs   911,959    784,583    937,845 
General and administration, net of recoveries   5,928,671    5,140,921    5,644,118 
Loss before income taxes   (11,602,411)   (4,382,621)   (12,988,516)
Net loss, net of income tax   (11,629,440)   (4,499,012)   (13,139,788)
Balance Sheet Data               
Cash   14,829,144    3,957,185    8,985,095 
Other current assets   767,503    1,101,578    1,034,114 
Deposits   201,399         
Deferred financing costs       211,073     
Equipment       99,882    127,730 
Intangible assets   219,028    237,326    255,623 
Total assets   16,017,074    5,607,044    10,402,562 
Accounts payable and accrued liabilities   523,669    1,641,103    3,538,761 
Income tax payable   4,722    109,521    91,191 
Long-term debt   6,316,963    7,959,680     
Derivative liability   19,648    170,743    7,309,467 
Shareholders’ equity (deficiency)   9,152,072    (4,274,003)   (536,857)
Total liabilities and shareholders’ equity (deficiency)   16,017,074    5,607,044    10,402,562 

 

Results of Operations for the Fiscal Years Ended September 30, 2018 and 2017

 

There was no revenue in any of the fiscal years as reported. The Company incurred a comprehensive loss of $11,629,440 for the year ended September 30, 2018 compared to a comprehensive loss of $4,499,012 for the year ended September 30, 2017. Variations in ESSA’s expenses and net loss for the periods resulted primarily from the following factors:

 

Research and Development Expenditures

 

R&D expense included the following major expenses by nature:

 

   Year ended
September 30, 2018
   Year ended
September 30, 2017
 
Clinical  $1,177,179   $2,623,636 
Consulting   624,879    935,151 
Legal patents and license fees   561,099    834,295 
Manufacturing   219,526    3,571,106 
Other   40,845    187,228 
Pharmacology   372,509    407,373 
Preclinical   446,748     
Research grants and administration   385,085    (38,534)
Royalties   66,929    48,863 
Salaries and benefits   845,428    2,213,655 
Share-based payments   324,528    (3,870)
Travel   37,781    140,262 
CPRIT Grant claimed on eligible expenses   (229,201)   (5,192,799)
Total  $4,873,335   $5,726,366 

 

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The overall R&D expense for the year ended September 30, 2018 was $4,873,335 compared to $5,726,366 for the year ended September 30, 2017, net of R&D recoveries of $229,201 for the year ended September 30, 2018 and $5,192,799 for the year ended September 30, 2017. The gross expense for 2018 of $5,102,536 was lower as compared to $10,919,165 in 2017 before recognition of qualifying CPRIT Grant funds of $229,201 (2017 - $5,192,799). R&D expense in 2018 was incurred primarily in preclinical research on the Company’s next-generation Aniten compounds, while R&D expense in 2017 reflects the costs related to the EPI-506 Phase I/II clinical trial, which commenced in November 2015 and terminated in September 2017, and associated chemistry, manufacturing and controls (“CMC”) costs. Manufacturing costs of $219,526 (2017 - $3,571,106) have decreased compared to the comparative period in 2017 as the Company concluded the EPI-506 Phase I/II clinical trial in September 2017. Preclinical costs of $446,748 (2017 - $nil) and pharmacology costs of $372,509 (2017 - $407,373) were incurred in the development of the Company’s next-generation Aniten compounds, while in the comparative period in 2017 costs were incurred on studies related to the characteristics of EPI-506. Clinical costs of $1,177,179 (2017 - $2,623,636) related to the winding up of the EPI-506 Phase I/II clinical trial which was concluded in September 2017. Legal patent and license fees decreased to $561,099 for the year ended September 30, 2018 (2017 - $834,295) as the Company streamlined its patent portfolio, including the abandonment of the family of patents related to the Company’s EPI-series drugs. Research grants and administration costs were $385,085 (2017 - $38,534 recovery) and relate to amounts payable pursuant to collaborative research agreements with the BCCA and UBC. In the comparative period in 2017, the Company incurred total costs of $392,704, and also negotiated a new collaborative research agreements, which superseded the previous agreements and resulted in the write off of $431,238, which had been overaccrued under the previous agreements while the new agreements were in negotiation. Consulting costs decreased to $624,879 for the year ended September 30, 2018 (2017 - $935,151) relating to fewer professionals engaged in Texas to conduct specific R&D services for the Company. Consulting costs also include regular payments made to the Company’s Chief Scientific Officer and Chief Technical Officer. Salaries and benefits of $845,428 for the year ended September 30, 2018 (2017 - $2,213,655) related to a reduced number of preclinical and clinical staff on payroll during the period as a result of the corporate restructuring in September 2017.

 

Share-based payments expense of $324,528 (2017 - $3,870 recovery) relates to the value assigned to stock options granted to key management and consultants of the Company. The expense is recognized in relation to the grant and vest of these equity instruments as measured by the Black-Scholes pricing model.

 

General and Administration Expenditures

 

General and administrative expenses include the following major expenses by nature:

 

   Year ended
September 30, 2018
   Year ended
September 30, 2017
 
Amortization  $34,488   $46,145 
Consulting and subcontractor fees   96,986    86,931 
Director fees   196,472    191,500 
Insurance   449,972    395,690 
Investor relations   235,416    230,579 
Office, insurance, IT and communications   216,714    187,364 
Professional fees   860,435    612,865 
Regulatory fees and transfer agent   150,913    74,600 
Rent   415,744    470,716 
Salaries and benefits   2,010,613    1,863,634 
Share-based payments   1,076,886    762,797 
Travel and entertainment   184,032    218,100 
Total  $5,928,671   $5,140,921 

 

General and administration expenses increased to $5,928,671 from $5,140,921 in the year ended September 30, 2017. Professional fees of $860,435 (2017 - $612,865) were incurred for legal and accounting services in conjunction with corporate activities including the voluntary downlisting from the TSX to the TSX-V, the January 2018 Financing, the annual general meeting held in March 2018, the Consolidation, and the recently filed base shelf prospectuses. Salaries and benefits expense of $2,010,613 (2017 - $1,863,634) related to an increase in administrative staff and senior management costs.

 

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Share-Based Payments

 

Share-based payments expense of $1,076,886 (2017 - $762,797) relates to the value assigned to stock options granted to key management and consultants of the Company. The expense is recognized in relation to the grant and vest of these equity instruments, net of expiries and forfeitures, and allocated to research and development, general and administration and financing expenditures relative to the activity of the underlying optionee.

 

Results of Operations for the Fiscal Years Ended September 30, 2017 and 2016

 

There was no revenue in any of the fiscal years as reported. The Company incurred a comprehensive loss of $4,499,012 for the year ended September 30, 2017 compared to a comprehensive loss of $13,477,551 for the year ended September 30, 2016. Variations in ESSA’s expenses and net loss for the periods resulted primarily from the following factors:

 

Research and Development Expenditures

 

R&D expense included the following major expenses by nature:

 

   Year ended
September 30, 2017
   Year ended
September 30, 2016
 
Clinical  $2,623,636   $2,920,104 
Consulting   935,151    1,333,323 
Legal patents and license fees   834,295    905,392 
Manufacturing   3,571,106    3,601,407 
Other   187,228    306,657 
Pharmacology   407,373    866,527 
Research grants and administration   (38,534)   381,429 
Royalties   48,863    46,228 
Salaries and benefits   2,213,655    2,194,047 
Share-based payments   (3,870)   322,160 
Travel   140,262    182,927 
CPRIT Grant claimed on eligible expenses   (5,192,799)    
Total  $5,726,366   $13,060,201 

 

The overall R&D expense for the year ended September 30, 2017 was $5,726,366 compared to $13,060,201 for the year ended September 30, 2016, net of R&D recoveries of $5,192,799 for the year ended September 30, 2017 and $nil for the year ended September 30, 2016. The gross expense for 2017 of $10,919,165 was lower as compared to $13,060,201 in 2016 due to reduced overall activity as the Company concluded Phase I of its clinical trial in September 2017. Pharmacology costs of $407,373 (2016 - $866,527) decreased compared to the comparative period in 2016 due to the completion of testing and experimentation on the Company’s EPI-series drugs. Manufacturing costs of $3,571,106 (2016 - $3,601,407) and clinical costs of $2,623,636 (2016 - $2,920,104) related to the Phase I/II clinical trial which commenced in November 2015, including manufacture of batches of EPI-506 for use in the clinical trial and work performed by the clinical research organization conducting the clinical trial. Legal patent and license fees decreased to $834,295 for the year ended September 30, 2017 (2016 - $905,392) as the Company submitted a number of patent applications for which the Company owned the rights. Research grants and administration costs were a recovery of $38,534 (2016 - $381,429) and relate to amounts payable pursuant to collaborative research agreements with the BCCA and UBC. In the current period, the Company incurred total costs of $392,704, and also negotiated a new collaborative research agreements, which superseded the previous agreements and resulted in the write off of $431,238 which had been overaccrued under the previous agreements while the new agreements were in negotiation. Consulting costs decreased to $935,151 for the year ended September 30, 2017 (2016 - $1,333,323) relating to professionals engaged in Texas to conduct specific R&D services for the Company in addition to regular payments made to the Company’s Chief Scientific Officer and Chief Technical Officer. Salaries and benefits of $2,213,655 for the year ended September 30, 2017 (2016 - $2,194,047) related to research support staff on payroll during the period.

 

Share-based payments recovery of $3,870 (2016 - $322,160 expense) relates to the value assigned to stock options granted to key management and consultants of the Company. The recovery is recognized in relation to the grant and vest of these equity instruments, net of expiries or forfeitures, as measured by the Black-Scholes pricing model.

 

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General and Administration Expenditures

 

General and administrative expenses include the following major expenses by nature:

 

   Year ended
September 30, 2017
   Year ended
September 30, 2016
 
Amortization  $46,145   $66,181 
Consulting and subcontractor fees   86,931    87,014 
Director fees   191,500    204,049 
Insurance   395,690    422,066 
Investor relations   230,579    317,822 
Office, insurance, IT and communications   187,364    288,968 
Professional fees   612,865    776,339 
Regulatory fees and transfer agent   74,600    131,302 
Rent   470,716    620,023 
Salaries and benefits   1,863,634    1,634,380 
Share-based payments   762,797    897,043 
Travel and entertainment   218,100    198,931 
Total  $5,140,921   $5,644,118 

 

General and administration expenses decreased to $5,140,921 from $5,644,118 in the year ended September 30, 2016. Significant components of the expense in 2017 included $612,865 (2016 - $776,339) in professional fees for legal and accounting services in conjunction with corporate activities including the Company’s regulatory and tax filings as compared to financing activities in the comparative period. Salaries and benefits expense of $1,863,634 (2016 - $1,634,380) related to administrative staff and senior management costs.

 

Share-Based Payments

 

Share-based payments expense of $762,797 (2016 - $897,043) relates to the value assigned to stock options granted to key management and consultants of the Company. The expense is recognized in relation to the grant and vest of these equity instruments and allocated to research and development, general and administration and financing expenditures relative to the activity of the underlying optionee.

 

Quarterly Results of Operations

 

The following table summarizes selected unaudited consolidated financial data for each of the last eight quarters, prepared in accordance with IFRS. This data should be read in conjunction with the Company’s audited financial statements and accompanying notes thereto included elsewhere in this Annual Report. These quarterly operating results are not necessarily indicative of ESSA’s operating results for a full year or any future period.

 

For the Quarters Ended

 

  

September 30,

2018

  

June 30,

2018

  

March 31,

2018

   December 31,
2017
 
                 
Research and development expense  $926,839   $987,792   $1,989,107   $969,597 
General and administration   1,211,159    1,579,420    2,179,717    958,375 
Comprehensive income (loss)   (2,276,430)   (2,880,113)   (4,382,956)   (2,089,941)
Basic and diluted earnings (loss) per share   (0.39)   (0.50)   (0.83)   (1.44)
Total assets   16,017,074    18,512,377    22,334,083    3,433,234 
Long-term liabilities   3,520,664    4,134,529    4,797,841    5,421,942 

 

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   September 30,
2017
   June 30,
2017
   March 31,
2017
   December 31,
2016
 
                 
Research and development expense  $1,165,917   $2,920,181   $2,548,761   $(908,493)
General and administration   1,105,295    1,302,314    1,363,493    1,369,819 
Comprehensive loss   (1,945,299)   3,592,404    (7,610,579)   1,464,462 
Basic and diluted earnings (loss) per share   (1.34)   2.40    (5.23)   1.01 
Diluted earnings (loss) per share   (1.34)   2.32    (5.23)   1.01 
Total assets   5,607,044    8,405,965    13,738,990    15,980,790 
Long-term liabilities   6,103,835    7,105,830    15,931,442    13,029,510 

 

The Company’s quarterly results have varied and may, in the future, vary depending on numerous factors, including the rate of expenditure relative to financial capacity and operational plans, the timing of CPRIT Grant funding, fluctuations in the Company’s derivative liabilities, and whether the Company has granted any stock options or other equity awards. Certain of these factors may not be predictable to the Company. CPRIT Grant funding is taken proportionately into income against R&D expenses incurred to date, which in some cases may have been incurred in previous quarters. Fluctuations on derivative liabilities are discussed below under the subheading “Derivative liabilities” section below. The granting of stock options and restricted share units results in share-based payment charges, reflecting the vesting of such stock options and restricted share units.

 

In the quarters ended December 31, 2016, March 31, 2017, and September 30, 2018, the Company recorded the partial receipts of the third and final tranche of the CPRIT Grant of $3,992,799, $1,200,000, and $229,201, respectively, which were recognized as recoveries of R&D expenditures. The CPRIT Grant is detailed in the accompanying consolidated financial statements.

 

In the quarter ended September 30, 2017, the Company announced the corporate restructuring which included a decrease in headcount and reduction of operational expenditures related to the clinical program. This resulted in a lower research and development expense over the following quarters. In the quarter ended March 31, 2018, the Company completed the January 2018 Financing for gross proceeds of approximately $26,040,000 resulting in an increase in assets

 

Critical Accounting Policies and Estimates

 

The Company makes estimates and assumptions about the future that affect the reported amounts of assets and liabilities. Estimates and judgments are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions.

 

The effect of a change in an accounting estimate is recognized prospectively by including it in comprehensive income in the period of the change, if the change affects that period only, or in the period of the change and future periods, if the change affects both. Significant assumptions about the future and other sources of estimation uncertainty that management has made at the statement of financial position date, that could result in a material adjustment to the carrying amounts of assets and liabilities, in the event that actual results differ from assumptions that have been made that relate to the following key estimates:

 

Intangible Assets – impairment

 

The application of the Company’s accounting policy for intangible assets expenditures requires judgment in determining whether it is likely that future economic benefits will flow to the Company, which may be based on assumptions about future events or circumstances. Estimates and assumptions may change if new information becomes available. If, after expenditures are capitalized, information becomes available suggesting that the recovery of expenditures is unlikely, the amount capitalized is written off in profit or loss in the period the new information becomes available.

 

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Intangible Assets – useful lives

 

Following initial recognition, the Company carries the value of intangible assets at cost less accumulated amortization and any accumulated impairment losses. Amortization is recorded on a straight-line basis based upon management’s estimate of the useful life and residual value. The estimates are reviewed at least annually and are updated if expectations change as a result of technical obsolescence or legal and other limits to use. A change in the useful life or residual value will impact the reported carrying value of the intangible assets resulting in a change in related amortization expense.

 

Product development and relocation grant

 

Pursuant to the terms of the Company’s CPRIT Grant, the Company has met certain terms and conditions to qualify for the grant funding. The Company has therefore taken into income a portion of the grant that represents expenses the Company has incurred to date under the grant parameters. The expenses are subject to assessment by CPRIT for compliance with the grant regulations which may result in certain expenses being denied.

 

Long-term debt

 

The Company has made certain estimates regarding the expected timing of and value of cash flows with respect to long-term debt. The estimates will fluctuate in accordance with changes in interest rates and any prepayments made, should the Company elect to do so.

 

Derivative financial instruments

 

Certain warrants are treated as derivative financial liabilities. The estimated fair value, based on the Black-Scholes model, is adjusted on a quarterly basis with gains or losses recognized in the statement of loss and comprehensive loss. The Black-Scholes model is based on significant assumptions such as volatility, dividend yield, expected term and liquidity discounts.

 

Share-based payments and compensation

 

The Company has applied estimates with respect to the valuation of shares issued for non-cash consideration. Shares are valued at the fair value of the equity instruments granted at the date the Company receives the goods or services.

 

The Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the fair value of the underlying common shares, the expected life of the share option, volatility and dividend yield and making assumptions about them. The fair value of the underlying common shares is assessed as the most recent issuance price per common share for cash proceeds.

 

JOBS Act

 

As a company with less than US$1.07 billion in revenue during the last fiscal year, ESSA qualifies as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified exemptions from various requirements that are otherwise applicable generally to public companies in the United States.

 

The JOBS Act also permits an emerging growth company such as ESSA to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. ESSA will not take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. This election is irrevocable. ESSA will remain an emerging growth company until the earliest of:

 

  · the last day of the Company’s fiscal year during which it has total annual gross revenues of at least US$1.07 billion;

 

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  · the last day of the Company’s fiscal year following the fifth anniversary of the completion of an initial public offering;

 

  · the date on which Company has, during the previous three-year period, issued more than US$1 billion in non-convertible debt securities; or

 

  · the date on which the Company is deemed to be a “large accelerated filer” under the Exchange Act, which would occur if the market value of ESSA’s Common Shares that are held by non-affiliates exceeds US$700 million as of the last business day of its most recently completed second fiscal quarter.

 

As a result of ESSA’s status as an emerging growth company, the information that the Company provides shareholders may be less comprehensive than what you might receive from other public companies that are not emerging growth companies. When ESSA is no longer deemed to be an emerging growth company, ESSA will not be entitled to the exemptions provided in the JOBS Act.

 

B.Liquidity and Capital Resources

 

ESSA is a preclinical stage company and does not currently generate revenue. In January 2018, the Company completed the January 2018 Financing of 4,321,000 Common Shares and 2,189,000 pre-funded warrants of the Company issued on January 9 and 16, 2018 at a price of US$4.00 per Common Share and pre-funded warrant for gross proceeds of US$26,040,000. In March 2016, the Company completed the March 2016 Financing for gross proceeds of approximately $5,000,000. In January 2016, the Company completed the January 2016 Financing for gross proceeds of approximately $15,000,000. On November 18, 2016, the Company completed a debt financing of up to $10,000,000, of which $8,000,000 has been advanced pursuant to the SVB Term Loan (discussed further under “Item 4.A.2. Summary Corporate History”).

 

Operational activities during the year ended September 30, 2018, were financed mainly by proceeds from the equity financings completed in January 2018, the SVB Term Loan and the CPRIT Grant. At September 30, 2018, ESSA had available cash reserves of $14,829,144 and $297,349 in accounts receivable related to the CPRIT Grant and refundable GST input tax credits, to settle current liabilities of $3,344,338. This compares to cash of $3,957,185 and $29,475 in accounts receivable related to refundable GST input tax credits at September 30, 2017, to settle current liabilities of $3,777,212.

 

As of September 30, 2018, ESSA had cash on hand of $14,829,144, up from $3,957,185 at September 30, 2017. The increase of $10,871,959 was facilitated by financing cash flows of $21,310,498, offset by operating cash outflows of $10,218,046 and investing cash outflows of $201,399. During the year ended September 30, 2017, the Company also received the partial third CPRIT tranche of $5,192,799 and the SVB Term Loan advance of $8,000,000. Management continues to seek sources of additional financing which would assure continuation of the Company’s operations and research programs. However, there is no certainty that such financing will be provided or provided on favorable terms. The Company believes that it will complete one or more of these arrangements in sufficient time to continue to execute its planned expenditures without interruption.

 

Cash Flows from Operating Activities

 

For the year ended September 30, 2018, cash used in operating activities of $10,218,046 was attributable to a net loss of $11,629,440, net non-cash credits of $2,070,951, and net change of $659,557 in ESSA's net operating assets and liabilities. The non-cash credits consisted primarily of a $1,401,414 charge in share-based payments and finance expense of $911,959 attributable to the accretion of the SVB Term Loan obtained in November 2016, offset by the remaining third CPRIT tranche of $229,201 which was recorded as a recovery against research and development expenses for the period. The change in operating assets and liabilities was primarily attributable to a $1,120,833 net decrease in accounts payable and accrued liabilities due to a decrease in overall activity, including research and development costs associated with ESSA’s EPI-506 clinical trial, which concluded in September 2017, offset by a $601,949 net decrease in prepaid expenses due primarily to a draw down of clinical trial deposits in the period.

 

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For the year ended September 30, 2017, cash used in operating activities of $17,354,811 was attributable to a net loss of $4,499,012, net non-cash credits of $10,937,756, and net change of $1,918,043 in ESSA's net operating assets and liabilities. The non-cash credits consisted primarily of a $758,927 charge in share-based payments and finance expense of $784,583 attributable to the accretion of the SVB Term Loan obtained in November 2016, offset by a $7,305,746 gain for the fair value of the derivative liability arising on Seven-Year Warrants, Two-Year Warrants and broker warrants denominated in Canadian dollars. The change in operating assets and liabilities was primarily attributable to a $1,867,853 net decrease in accounts payable and accrued liabilities due to a decrease in overall activity, including research and development costs associated with ESSA's EPI-506 clinical trial, which concluded in September 2017.

 

Cash Flows from Investing Activities

 

For the year ended September 30, 2018, cash used in investing activities was $201,399 (2017 - $nil) in relation to a deposit paid on an office lease.

 

Cash Flows from Financing Activities

 

For the year ended September 30, 2018, cash provided by financing activities was $21,310,498, consisting primarily of $26,040,000 in proceeds received from January 2018 Financing, offset by $2,174,826 in share issuance costs and $1,991,378 and $563,298 in principal and interest paid, respectively, on the SVB Term Loan.

 

For the year ended September 30, 2017, cash provided by financing activities was $12,326,784, consisting primarily of $5,192,799 in proceeds received from the partial third tranche of the CPRIT Grant, $8,000,000 in proceeds received from the SVB Term Loan obtained in November 2016, $2,939 in proceeds received from the exercise of stock options, offset by $220,937 and $436,944 in transaction costs and interest paid, respectively, on the SVB Term Loan, and $211,073 in deferred financing costs.

 

ESSA's future cash requirements may vary materially from those now expected due to a number of factors, including the costs associated with future preclinical work and to take advantage of strategic opportunities, such as partnering collaborations or mergers and acquisitions activities. In the future, it may be necessary to raise additional funds. These funds may come from sources such as entering into strategic collaboration arrangements, the issuance of shares from treasury, or alternative sources of financing. However, there can be no assurance that ESSA will successfully raise funds to continue its operational activities. See “Risk Factors” in Item 3.D elsewhere in this Annual Report.

 

C.Research and Development, Patents and Licenses, etc.

 

Research and Development

 

It is currently expected that ESSA will continue its preclinical studies, anticipating the nomination of a next-generation drug candidate in the first quarter of calendar 2019 with filing of an IND expected to occur nine to twelve months following thereafter. See “Programs and Potential Products” in Item 4 of this Annual Report for further details of each stage of development.

 

Key Patent Applications

 

See "Patents and Proprietary Rights" elsewhere in Item 4 of this Annual Report for details regarding ESSA's key patent applications.

 

Licensed Pending Applications

 

See "Pending Licensed Applications" elsewhere in Item 4 of this Annual Report for details regarding ESSA's licensed intellectual property pending applications.

 

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Research and Development Policies

 

Expenditures during the research phase of a project are recognized as expenses when incurred. Development costs are capitalized only when technical feasibility studies identify that the project will deliver future economic benefits and these benefits can be measured reliably.

 

It is not possible to always estimate the timing of project completion due to the uncertainty of preclinical research and development projects and the results of associated scientific experiments. Analysis of costs between projects are influenced by the length and nature of the study and costs of material used.

 

In 2015, the IND application was prepared and submitted to the FDA in order to receive approval to commence the Phase I/II clinical study of EPI-506. Clinical sites were identified and agreements were negotiated with sites in order that the trial could commence once FDA approval of the IND was received.  Upon approval of the IND, the Company received the second tranche of funds from CPRIT in the amount of $3,786,667.  Manufacturing of clinical supplies for early clinical trials was performed by Southwest Research Institute in San Antonio, Texas. Current formulation and cGMP production of the final product candidate for clinical trials is being performed by Catalent Pharma Solutions, St. Petersburg, Florida and SAFC, Inc. in Madison, Wisconsin.

 

In 2016, the Company continued manufacturing and formulation work as well as the ongoing Phase I clinical trial underway at five sites.   The Company has also commenced preparation for the Phase II clinical study with regard to site identification and manufacture of clinical supplies of drug product.

 

In 2017, the Company announced its decision to discontinue further clinical development of EPI-506 and to implement a corporate restructuring plan to focus R&D resources on its next-generation Anitens targeting the AR-NTD.

 

In 2018, the Company continued to support the ongoing development of its next-generation Anitens.

 

D.Trend Information

 

ESSA is a preclinical development stage company and does not currently generate revenue. The Company is focused on the development of small molecule drugs for the treatment of prostate cancer. The Company has acquired a license to certain Licensed IP. As at the date of this Annual Report, no products are in commercial production or use. The Company’s financial success will be dependent upon its ability to continue development of its compounds through preclinical and clinical stages to commercialization.

 

E.Off-Balance Sheet Arrangements

 

ESSA has no material undisclosed off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on its results of operations, financial condition, revenues or expenses, liquidity, capital expenditures or capital resources that is material to investors.

 

F.Tabular Disclosure of Contractual Obligations

 

As of September 30, 2018, and in the normal course of business, ESSA has the following obligations to make future payments, representing contracts and other commitments that are known and committed.

 

    Payments Due by Period  
Contractual Obligations   Total     Less than 1
year
    1-3 years     3-5 years     More than 5
years
 
Minimum Annual Royalty per License Agreement with UBC and BCCA (in C$)(1)(2)(3)   $ 1,105,000     $ 85,000     $ 170,000     $ 170,000     $ 680,000  
Collaborative research agreement with the BCCA (in C$) (3)     174,037       174,037                    
SVB Term Loan     7,243,084       3,210,752       4,032,332              
Lease on U.S. office space     305,959       115,906       190,053              
Total (in US$)   $ 8,507,410     $ 3,520,751     $ 4,349,764     $ 127,379     $ 509,516  

 

 

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  (1) ESSA has the worldwide, exclusive right to develop products based on the Licensed IP pursuant to the License Agreement.

 

  (2) As consideration for the License Agreement with UBC and the BCCA, there are certain cumulative milestone payments totaling C$2,400,000 for the first compound, to be paid in stages at the start of Phase II and Phase III clinical trials, at application for marketing approval, and with further milestone payments on the second and additional compounds. These milestone payments are not represented in the tabular disclosure above due to the uncertain timing of the triggering events and associated payments.

 

  (3) ESSA's agreements pertaining to the License Agreement with UBC and the BCCA, and the collaborative research agreement with the BCCA are valued in Canadian dollars. For the purposes of the calculations above, ESSA has converted the values to Canadian dollars based on the daily average rate on December 12, 2018, as reported by the Bank of Canada, being C$1.00=US$0.7493.

 

G.Safe Harbor

 

See “Cautionary Note Regarding Forward-Looking Statements” in the introduction to this Annual Report.

 

ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A.Directors and Senior Management

 

The following table sets forth the names and municipalities of residence of the Company’s directors and executive officers as well as their positions with the Company and principal occupations for the previous five years. All directors, officers and employees are required to sign standard confidentiality and non-disclosure agreements with the Company. Each director’s terms of office expires at the next annual general meeting of the shareholders of the Company.

 

Name and Place of Residence   Principal Occupations
     
Dr. Raymond Andersen
British Columbia,
Canada
 

§  Chief Technical Officer and Director (October 11, 2010 – Present),
Secretary (January 6, 2009 – Present), ESSA Pharma Inc.;

§  Professor of Chemistry and Earth, Ocean & Atmospheric Sciences (1977 – Present),
University of British Columbia

     
Franklin Berger(1)(3)
New York, USA
 

§  Director (March 2015 – Present), ESSA Pharma Inc.;

§  Director (November 2016 – Present), Kezar Life Sciences Inc.;

§  Director (February 2016 – Present), Proteostasis Therapeutics, Inc.;

§  Director (December 2015 – Present), Tocagen Inc.;

§  Director (March 2014 – Present), Immune Design Corp.;

§  Director (October 2010 – Present), Five Prime Therapeutics, Inc.;

§  Director (May 2010 – Present), Bellus Health, Inc.;

§  Director (July 2004 – May 2014), Seattle Genetics, Inc.

     
Richard M. Glickman(1)(2)
British Columbia,
Canada
 

§  Chairman of the Board (October 2010 – Present), ESSA Pharma Inc.;

§  Chief Executive Officer and Chairman of the Board (February 2014 – Present), Executive Chairman (September 2013 – February 2014), Acting Interim Chief Executive Officer and Chairman of the Board (October 2012 – November 2013), Aurinia Pharmaceuticals Inc.

§  Director (July 2018 – Present), Correvio Pharma Corp. (formerly Cardiome Pharma Corp.)

§  Chairman of the Board (October 2010 – Present), enGene Inc.;

§  Venture Partner (March 2016 – Present), Lumira Ventures

     
David Parkinson
California, USA
 

§  President and Chief Executive Officer (January 2016 – Present), Director (June 2015 – January 2016), ESSA Pharma Inc.;

§  Director (June 2017 – Present), CTI BioPharma Corp.;

§  Director (May 2015 – Present), Tocagen Inc.;

§  Director (May 2015 – Present), 3SBio Inc.;

§  Director (February 2016 – March 2018), Pierian Biosciences (formerly DiaTech Oncology, LLC);

§  Director (May 2010 – June 2017), Threshold Pharmaceuticals Inc.;

§  Venture Advisor, New Enterprise Associates (April 2012 – January 2016);

§  Director and Interim Chief Executive Officer (April 2012 – 2014), Zyngenia Inc.;

§  President and CEO, Nodality (2007 – 2012)

     
Scott Requadt(2)
Massachusetts, USA
 

§  Director, ESSA Pharma Inc. (January 14, 2016 – Present);

§  Chief Executive Officer (November 2018 – Present), Regenerex, Inc.;

§  Director (May 2016 – Present), VBI Vaccines (formerly SciVac Therapeutics);

§  Director (June 2016 – December 2018), AVROBIO, Inc.;

§  Managing Director (January 2005 – October 2018), Clarus Ventures, LLC  

 

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Dr. Marianne Sadar
British Columbia,
Canada
 

§  Director (January 2009 – Present), Chief Scientific Officer (October 2010 – Present), President (January 2009 – October 2010),
ESSA Pharma Inc.;

§  Director (November 2017 – Present), Canada Science and Technology Museum;

§  Distinguished Scientist (June 2012 – Present), Senior Scientist (April 1998 – May 2012), Michael Smith Genome Science Centre, British Columbia Cancer Agency;

§  Professor (September 2012 – Present), Honorary Associate Professor (July 2009 – August 2012), Pathology and Laboratory Medicine, University of British Columbia;

§  Provincial Program Leader for Prostate Cancer Research (April 2000 – May 2012), British Columbia Cancer Agency;

§  Officer (2007 – 2015), Past President (2014 – 2015), President (2013 – 2014), Vice President (2012 – 2013), Treasurer (2007 – 2011),
Society of Basic Urologic Research

     
Gary Sollis(1)(3)
British Columbia,
Canada
 

§  Director (April 26, 2012 – Present), ESSA Pharma Inc.; and

§  Partner (May 1, 1995 – Present), Dentons Canada LLP.

     
Otello Stampacchia(2)(3)
Massachusetts, USA
 

§  Director (October 2018 – Present), ESSA Pharma Inc.;

§  Founder (2004 – Present), Omega Funds Management;

§  Director (January 2018 – Present), Gossamer Bio, Inc.;

§  Director (May 2018 – Present), Kronos Bio Inc.;

§  Director (September 2014 – Present), Median Technologies SA; and

§  Director (September 2015 – Present), Replimune Limited.

     
Peter Virsik
California, USA
 

§  Executive Vice-President and Chief Operating Officer (August 2016 – Present), ESSA Pharma Inc.;

§  Senior Vice President (2013 – October 2015), Vice President, Corporate Development (2009 – 2013), Executive Director (2007 – 2009) and Senior Director, Business Development (2005 – 2007), XenoPort, Inc.

§  Associate Director (2004 – 2005) and Manager, Corporate Development (2000 – 2004), Gilead Sciences, Inc.

     
David Wood
British Columbia,
Canada
 

§  Chief Financial Officer (July 2013-Present), ESSA Pharma Inc.;
Head of Finance, Secretary & Treasurer (April 2003-April 2013), Celator Pharmaceuticals Inc.;

§  Senior Director, International Operations (2000-2003), Cubist Pharmaceuticals Inc.;

§  Director, Finance, Secretary & Treasurer (1996-2000), Terragen Discovery Inc.

 

 
(1)Member of the Audit Committee (as defined herein).

 

(2) Member of the Compensation Committee.

 

(3) Member of the Corporate Governance Committee.

 

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Biographies

 

Dr. Raymond Andersen, Chief Technical Officer, Secretary and Director

 

Dr. Raymond Andersen is one of ESSA's co-founders. He has served as the Secretary of the Company since January 2009, and as a director and Chief Technical Officer of the Company since October 2010. He is responsible for participating in the research and development of ESSA’s drug candidates, and with the assessment and review of business and scientific matters. As an independent consultant, he devotes approximately 20% of his time to the affairs of the Company. He is also a Professor at UBC in the departments of Chemistry and Earth & Ocean Sciences. He is internationally known for his research into the identity and structure of novel chemical compounds derived from marine organisms, the molecular routes to their biosynthesis, their role in ocean ecology, and their potential as new drugs. Among them are compounds that have anti-inflammatory and anti-cancer properties and these compounds are being developed as anti-asthma, and anti-tumour drugs. His discoveries represented core technologies of the UBC spinoff companies Aquinox Pharmaceuticals Inc. and Inflazyme Pharmaceuticals. His industrial programs have led to deals with Aventis and Wyeth and the venture capital arms of Johnson & Johnson and Pfizer. Dr. Andersen received his B.Sc. degree from the University of Alberta, a M.Sc. from the University of California, Berkeley, and Ph.D. from the University of California, San Diego. He carried out postdoctoral research at the Massachusetts Institute of Technology. In recognition of his pioneering achievements, Dr. Andersen was inducted into the Royal Society of Canada and recently received the R. U. Lemieux Award from the Canadian Society for Chemistry and the Jacob Biely Research Prize from UBC. Dr. Andersen’s consulting agreement contains non-competition and confidentiality clauses.

 

Franklin Berger, Director

 

Franklin Berger spent 12 years in sell-side equity research, most recently as Managing Director, U.S. Equity Research at J.P. Morgan Securities, Inc. (“JPM”) from May 1998 to March 2003. During his five years at as a Managing Director at JPM, he was involved with the issuance of over $12 billion in biotechnology company equity or equity-linked securities. The majority of these transactions were book-run and lead-managed by the JPM biotech team. He was associated with several notable financings in the biotechnology sector including the Genentech Inc. initial public offering, the first large Celgene Corporation financings as well as financings of several large-cap biotechnology companies in their rapid growth phase. His team covered 26 publicly-traded biotechnology companies. Mr. Berger began his career as a sell-side analyst at Josephthal & Co. in 1991, subsequently moving to Salomon Smith Barney in 1997 serving as Director, Equity Research and Senior Biotechnology Analyst. Mr. Berger currently serves on the board of directors of six other public biotechnology companies: Five Prime Therapeutics, Inc., Immune Design Corp., Bellus Health, Inc., Tocagen Inc., Protestasis Therapeutics, Inc., and Kezar Life Sciences, Inc. Mr. Berger received an AB in International Relations from Johns Hopkins University, a MA in International Economics from Johns Hopkins University for Advanced International Studies and a MBA from Harvard University.

 

Richard M. Glickman, Chairman of the Board

 

Dr. Richard M. Glickman has served as ESSA's Founding Chairman of the Board since October 2010. In this role, Dr. Glickman is responsible for the management of the Board to ensure ESSA has appropriate objectives and an effective strategy, and that ESSA is operating in accordance with a high standard of corporate governance. He currently serves as Aurinia Pharmaceuticals Inc.’s (“Aurinia”) CEO and Chairman of the Board, Chairman of the Board of enGene Inc. and Director of Correvio Pharma Corp. He is also a Venture Partner at Lumira Ventures, one of Canada’s most successful healthcare focused venture capital firms. Dr. Glickman was a co-founder, Chairman and Chief Executive Officer of Aspreva Pharmaceuticals Inc. (“Aspreva”) which was acquired by Galenica AG for $915 million. Prior to establishing Aspreva, Dr. Glickman was the co-founder and Chief Executive Officer of StressGen Biotechnologies Corporation. Dr. Glickman has served on numerous biotechnology and community boards, including as a member of the federal government’s National Biotechnology Advisory Committee, Director of the Canadian Genetic Disease Network, Chairman of Life Sciences B.C. and a member of the British Columbia Innovation Council. Dr. Glickman is the recipient of numerous awards including the Ernst and Young Entrepreneur of the Year, a recipient of both British Columbia’s and Canada’s Top 40 under 40 award, the BC Lifesciences Leadership Award and the Corporate Leadership Award from the Lupus Foundation of America.

 

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Dr. David Parkinson, President, Chief Executive Officer and Director

 

Dr. David Parkinson has served as a director of the Company since June 2015 and has been serving full-time as the Company’s President and Chief Executive Officer since January 2016.  Prior to his joining ESSA, David was a venture partner at New Enterprise Associates, Inc. From 2007 until 2012, Dr. Parkinson served as President and CEO of Nodality, a South San Francisco-based biotechnology company focused on diagnostics development. Prior to 2007, Dr. Parkinson held a series of industry positions, including heading the global clinical oncology development at Novartis, heading the Oncology Therapeutic Area at Amgen and leading Oncology Research and Development, at Biogen Idec. Prior to joining industry, Dr. Parkinson had previously held positions at the National Cancer Institute from 1990 to 1997, serving as Chief of the Investigational Drug Branch, then as Acting Associate Director of the Cancer Therapy Evaluation Program. Dr. Parkinson is a past Chairman of the FDA’s Biologics Advisory Committee, a past member of the FDA Science Board, and recipient of the FDA’s Cody medal. He currently serves as director on the boards of 3S Bio Inc., CTI BioPharma Corp. and Tocagen, Inc., public biopharma companies focused on the discovery and development of anti-cancer drugs.  Dr. Parkinson received his medical degree from the University of Toronto, has held academic positions both at Tufts and at the University of Texas MD Anderson Cancer Center, and has authored over 100 peer-reviewed publications.

 

Scott Requadt, Director

 

Scott Requadt, JD, MBA, is currently the CEO of Regenerex LLC, a private cell therapy company. From 2005 to October 2018, he was a Managing Director at Clarus, a specialist life sciences investment fund. He remains a Venture Partner with Clarus. Mr. Requadt was nominated to the Board of the Company pursuant to certain nomination rights held by Clarus. Mr. Requadt has over 17 years of operating and investment experience in the pharmaceutical industry. Prior to joining Clarus in 2005, Mr. Requadt was Director, Business Development of TransForm Pharmaceuticals, and previously practiced for several years as an M&A attorney at the NYC-based law firm of Davis Polk & Wardwell. Before that, Mr. Requadt was a law clerk for a senior judge at the Supreme Court of Canada. Mr. Requadt holds a B.Com (Jt Honors, Economics & Finance) from McGill University, an LL.B from University of Toronto and an MBA from Harvard Business School (Baker Scholar). Mr. Requadt has been involved in many investments spanning both therapeutics and medtech, including Intercept Pharmaceuticals and several R&D risk-sharing collaborations with large pharma partners. He has previously been active on the Boards of AVROBIO, TyRx, Catabasis, Oxford Immunotec, VBI Vaccines, Link Medicine and Biolex Therapeutics.

 

Dr. Marianne Sadar, Chief Scientific Officer and Director

 

Dr. Marianne Sadar is one of ESSA's co-founders. Dr. Sadar has been a director since January 2009, and has acted as ESSA's Chief Scientific Officer since October 2010. She is responsible for participating in the research and development of ESSA's product candidates, and with the assessment and review of business and scientific matters. As an independent consultant, she devotes approximately 20% of her time to ESSA's affairs. She is a Distinguished Scientist at the BCCA and a Professor of Pathology and Laboratory Medicine at UBC. Dr. Sadar is internationally known for her research on identifying mechanisms of activating the AR and developing therapeutics for advanced prostate cancer that target the N-terminal domain of the AR. Her research was the first to show that the N-terminal domain of the AR could be activated by alternative pathways and she proposed this domain as a therapeutic target in 1999. Later, Dr. Sadar provided the first proof-of-concept that targeting the N-terminus of the AR results in a therapeutic response in an in vivo model of CRPC. Dr. Sadar received her B.Sc. from Simon Fraser University, and Ph.D. from the University of Bradford, U.K. She carried out post-doctoral training at AstraZeneca (Astra Hässle), Department of Drug Metabolism and Pharmacokinetics in Mölndal, Sweden and at the BCCA. She has served on approximately 50 scientific panels and has been a recipient of awards including an Honorary Doctorate (Doctor of Letters, honoris causa), the Terry Fox Young Investigator Award, Simon Fraser University Alumni Award for Academic Excellence, and the first non- American to receive the Society of Women in Urology/Society of Basic Urologic Research “Award for Excellence in Urologic Research”. She has served as President of the Society of Basic Urologic Research (USA), member of the Scientific Advisor Boards for the Prostate Cancer Foundation (USA) and Coalition to Cure Prostate Cancer (Canada). Dr. Sadar is FY2017 Chair of the Programmatic/Integration Panel of the U.S. Army’s Department of Defence Congressionally Directed Medical Research Programs Prostate Cancer Research Program (“PCRP”).

 

Gary Sollis, Director

 

Mr. Gary Sollis, has served as a director of the Company since April 2012. Mr. Sollis is a partner at the law firm of Dentons Canada LLP. He represents clients in the areas of corporate and securities law, with a focus on acquisitions, financings, reorganizations, and corporate governance. Mr. Sollis is an adjunct professor of securities regulation at the Faculty of Law of UBC, a frequent lecturer on corporate law for the British Columbia bar admission program and a regular contributor to the American Bar Association’s mergers and acquisitions deal point studies.

 

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Dr. Otello Stampacchia, Director

 

Dr. Stampacchia has served as a director since October 2018. Dr. Stampacchia was nominated to the Board of the Company pursuant to certain nomination rights held by Omega. Dr. Stampacchia founded Omega Funds in 2004 and leads the firm's investor relations and strategic initiatives. He is a member of Omega's investment committee and is also heavily involved in a number of the firm's therapeutic areas of interest, particularly in oncology, rare diseases and inflammatory disorders. Previously, Dr. Stampacchia led life sciences direct investments and diligence for health care venture fund investments at AlpInvest Partners, one of the largest private equity asset managers worldwide. Previously, he was the portfolio manager of the Lombard Odier Immunology Fund, a $3 billion listed investment vehicle in Geneva, Switzerland, investing in public and private health care companies worldwide. Prior to this, Dr. Stampacchia was a member of the health care corporate finance and mergers and acquisitions team at Goldman Sachs (London and New York offices). Previously, he helped co-found the health care investment activities at Index Securities (now Index Ventures). Dr. Stampacchia has a PhD in molecular biology from the University of Geneva, holds a European doctorate in biotechnology from the European Union and obtained an MSc in genetics from the University of Pavia.

 

Peter Virsik, Executive Vice President and Chief Operating Officer

 

Peter Virsik joined the Company in August 2016 as Executive Vice President and Chief Operating Officer, bringing over 20 years of experience in corporate development, strategy, new product planning, alliance management, and finance. During his career, Mr. Virsik has completed over 30 licensing, M&A and financial transactions, totaling over $3 billion in value. Most recently, he served as Senior Vice President, Corporate Development for XenoPort (acquired by Arbor Pharmaceuticals), leading licensing, strategy, new product planning and alliance management for the company. During his tenure at XenoPort, Mr. Virsik played an integral role in the licensing and commercialization of Horizant® (gabapentin enacarbil). Prior to XenoPort, Mr. Virsik worked for Gilead Sciences from 2000 through 2005 in Corporate Development, where he was involved in building Gilead’s HIV franchise through the acquisition of Triangle Pharmaceuticals and the licensing of Vitekta® (elvitegravir). Before joining Gilead, Mr. Virsik spent time at J.P. Morgan in the biotechnology equity research group and as a consultant for Ernst and Young. Mr. Virsik began his career in R&D at Genentech. Mr. Virsik received an MBA from the Kellogg Graduate School of Management at Northwestern University, an MS in Microbiology from the University of Michigan, Ann Arbor, and a BA in Molecular and Cellular Biology from the University of California, Berkeley.

 

David Wood, Chief Financial Officer

 

David Wood has been ESSA's Chief Financial Officer since July 2013. He is responsible for managing all of ESSA's financial aspects, including financial reporting, treasury, and matters related to compliance and corporate governance, insurance, human resources, and facilities. Mr. Wood has over 35 years of experience in management positions in both large corporations and early stage companies in North America and the U.K. Prior to joining us in 2013, he was Head of Finance and Corporate Development, Secretary and Treasurer at Celator Pharmaceuticals Inc. from 2003 to 2013. Prior to 2003, he was Managing Director of Cubist Pharmaceuticals (UK) Ltd., Senior Director, International Operations of Cubist Pharmaceuticals Inc. and Finance Director at TerraGen Discovery, Inc., Vancouver, B.C. During over 20 years working in the biopharmaceutical industry, he has overseen several merger and acquisition transactions and numerous financings which raised over $200 million. Mr. Wood began his career in the finance and exploration departments at Chevron Corp. He received an M.B.A. from the University of Western Ontario, a B.Sc. Honors in Biology, Queen’s University, and a CPA, CMA accounting designation. Mr. Wood served on the governing body of the National Research Council of Canada from 2008 to 2014.

 

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B.Compensation

 

Executive Compensation

 

Compensation Discussion and Analysis

 

For the purposes of this Annual Report, a named executive officer (“NEO”) of the Company, using the definition contained in applicable Canadian securities laws, means each of the following individuals:

 

  (a) the Chief Executive Officer (“CEO”) of the Company;

 

  (b) the Chief Financial Officer (“CFO”) of the Company;

 

  (c) each of the three most highly compensated Executive Officers, or the three most highly compensated individuals acting in a similar capacity, other than the CEO and CFO, at the end of the most recently completed financial year whose total compensation was, individually, more than C$150,000. “Executive Officer” means the chairman, and any vice-chairman, president, secretary or any vice-president and any officer of the Company or a subsidiary who performs a policymaking function in respect of the Company; and

 

  (d) each individual who would be an NEO under paragraph (c) but for the fact that the individual was neither an executive officer of the Company, nor acting in a similar capacity, at the end of that financial year.

 

Each of Dr. David Parkinson, President and CEO, David Wood, CFO, Peter Virsik, Executive VP and Chief Operating Officer (“COO”), Dr. Raymond Andersen, Chief Technology Officer (“CTO”), and Dr. Marianne Sadar, Chief Scientific Officer (“CSO”), is an NEO of the Company for purposes of this disclosure.

 

Compensation Philosophy and Objectives

 

ESSA’s compensation philosophy for NEOs will be focused on its belief that capable and qualified employees are critical to the Company’s success. Therefore, its compensation plan is designed to attract the very best individuals in each expertise arena and to use salaries and long-term incentive compensation in the form of stock options or other suitable long-term incentives to attract and retain such employees. In making its determinations regarding the various elements of executive stock option grants, ESSA will seek to meet the following objectives:

 

  (a) to attract, retain and motivate talented executives who create and sustain ESSA’s continued success within the context of compensation paid by other companies of comparable size engaged in similar business in appropriate regions;

 

  (b) to align the interests of the ESSA’s NEO’s with the interests of shareholders of ESSA; and

 

  (c) to incent extraordinary performance from the Company’s key employees.

 

Elements of Compensation

 

Base Salary – The base salary review of any NEO will take into consideration the current competitive market conditions, experience, proven or expected performance, and the particular skills of the NEO. Base salary is not expected to be evaluated against a formal “peer group”. The base salaries for NEOs of ESSA as of the date of this Annual Report are:

 

NEO   BASE SALARY
Dr. David Parkinson (CEO)   US$451,758/year
David Wood (CFO)   US$236,900/year
Peter Virsik (EVP & COO)   US$375,950/year
Dr. Raymond Andersen (CTO)   C$180,000/year
Dr. Marianne Sadar (CSO)   C$180,000/year

 

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Performance-Based Cash Bonuses – The Company may elect to utilize cash bonus incentives where the role-related context and competitive environment suggest that such a compensation modality is appropriate. When and if utilized, the amount of cash bonus compensation will normally be paid on the basis of timely achievement of specific pre-agreed milestones. Each milestone will be selected based upon consideration of its impact on shareholder value creation and the ability of the Company to achieve the milestone during a specific interval. The amount of bonus compensation will be determined based upon achievement of the milestone, its importance to the Company’s near and long term goals at the time such bonus is being considered, the bonus compensation awarded to similarly situated executives in similarly situated development-stage life-sciences companies or any other factors the Company may consider appropriate at the time such performance-based bonuses are decided upon. The quantity of bonus will normally be a percentage of base salary not to exceed 100%. However, in exceptional circumstances, the quantity of bonus paid may be connected to the shareholder value creation embodied in the pre-agreed milestones.

 

The bonuses available to the NEOs as of the date of this Annual Report are:

 

NEO   BONUS PAYABLE
Dr. David Parkinson (CEO)   Up to 50% of Base Salary
David Wood (CFO)   Up to 40% of Base Salary
Peter Virsik (EVP & COO)   Up to 40% of Base Salary
Dr. Raymond Andersen (CTO)   Up to 25% of Base Salary
Dr. Marianne Sadar (CSO)   Up to 25% of Base Salary

 

Up to the date of this Annual Report, the Company has generally relied on a flexible and informal approach to executive compensation for certain NEOs. Accordingly, the bonuses noted above of up to a certain percentage of base salary available to Mr. Wood, and Mr. Virsik were selected based on the Board’s collective agreement regarding an appropriate bonus range and on discussions with Mr. Wood about his expectations as CFO.

 

Stock Options and Restricted Share Units (as defined below) – Stock options and restricted share units are a key compensation element for companies such as ESSA. Because many of the most capable employees in ESSA’s industry work for pharmaceutical companies who can offer attractive cash and bonus compensation and a high level of employment security, stock options and restricted share units represent a compensation element that balances the loss of employment security that such employees must accept when moving to a small development-stage company like ESSA. Stock options and restricted share units are also an important component of aligning the objectives of ESSA employees with those of shareholders. ESSA has issued significant stock options positions to senior employees and lesser amounts to lower-level employees. The precise amount of stock options to be offered was governed by the importance of the role within ESSA, by the competitive environment within which ESSA operates and by the regulatory limits on stock option and restricted share unit grants that cover organizations such as ESSA. This reflects ESSA’s commitment to attracting and retaining world-level expertise to the Company. The stock options granted to the Company’s NEOs as of the date of this Annual Report are:

 

NEO   OPTIONS
Dr. David Parkinson (CEO)  

2,500 Options ($4.00 exercise price per Common Share, expiring June 23, 2025)

30,000 Options ($4.00 exercise price per Common Share, expiring January 12, 2026)

235,000 Options ($4.00 exercise price per Common Share, expiring February 21, 2028)

David Wood (CFO)  

3,750 Options (C$4.90 exercise price per Common Share, expiring July 30, 2024)

10,000 Options (C$4.90 exercise price per Common Share, expiring July 30, 2024)

66,250 Options (C$4.90 exercise price per Common Share, expiring February 21, 2028)

Peter Virsik (EVP & COO)  

14,500 Options ($4.00 exercise price per Common Share, expiring August 9, 2026)

173,000 Options ($4.00 exercise price per Common Share, expiring February 21, 2028)

Dr. Raymond Andersen (CTO)   80,000 Options (C$4.90 exercise price per Common Share, expiring February 21, 2028)
Dr. Marianne Sadar (CSO)   80,000 Options (C$4.90 exercise price per Common Share, expiring February 21, 2028)

 

The Company has not granted any restricted share units to its NEOs as of the date of this Annual Report. 

 

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Compensation Risks

 

In making its compensation-related decisions, the Board carefully considers the risks implicitly or explicitly connected to such decisions. These risks include the risks associated with employing executives who are not world-class in their capabilities and experience, the risk of losing capable but under-compensated executives, and the financial risks connected to the Company’s operations, of which executive compensation is an important part.

 

In adopting the compensation philosophy described above, the principal risks identified by ESSA are:

 

  · that the Company will be forced to raise additional funding (causing dilution to shareholders) in order to attract and retain the calibre of executive employees that it seeks; and

 

  · that the Company will have insufficient funding to achieve its objectives.

 

After careful consideration of these risks, the Board has adopted the compensation policy described above.

 

Stock Option Plan

 

On September 4, 2014, ESSA adopted a stock option plan, which was later amended and restated on May 21, 2015, March 10, 2016, March 8, 2017 and on April 25, 2018 (the “Plan”). The stock option plan is administered by the Chief Financial Officer of ESSA on the instructions of the Board or such director or other senior officer or employee of ESSA as may be designated by the Board from time to time.

 

The Plan was adopted as the successor to ESSA’s previously amended and restated stock option plan as of March 8, 2017 (the “Prior Plan”). Pursuant to the Plan, all outstanding option awards granted prior to February 28, 2017 will be governed by the terms and conditions of the Prior Plan. With any award granted on or after February 28, 2017 being governed by the terms and conditions of the Plan.

 

The Board may grant stock options (the “Options”) to any director, officer, employee, consultants or affiliates. Option grants are contingent upon the determination by the Board that such grants and the exercise of such Options will not violate the securities laws of the jurisdiction in which the recipient of the Option (“Optionee”) resides. Grants of Options to “Insiders” (as defined in the policy manual of the TSX-V) are subject to the policies of the TSX-V, so long as the Common Shares are listed on the TSX-V.

 

A person can receive grants of no more than 5% of ESSA’s issued and outstanding share capital in any 12 month period, with the exception of a consultant who may not receive grants of more than 2% of ESSA’s issued and outstanding share capital in any 12 month period; and, no more than an aggregate of 2% of ESSA’s issued and outstanding Common Shares may be reserved for issue to persons engaged in investor relations activities at any one time.

 

The Options granted under the Plan must not have an exercise price that is less than the “Market Price”, meaning an amount which is not less than the closing market price for the ESSA’s Common Shares on the trading day prior to the date of the grant. Further, an Option shall not establish a minimum exercise price until it has been awarded to a particular person. Any reduction in the exercise price of Options granted to Insiders, provided that the Optionee is an Insider at the time of the proposed reduction, requires Disinterested Shareholder Approval (as defined in the policy manual of the TSX-V).

 

The Options granted under the Plan are prohibited from having an exercise period in excess of ten years following their award date. No Option may be granted under the Plan following April 25, 2028 unless ESSA’s shareholders have approved an extension of the Plan. The maximum number of Common Shares that will be available to directors, officers, employees, consultants and affiliates may be reserved and made available for issuance, under the Plan, is 1,155,218 Common Shares of which no more than 1,000,000 will be available for employees to acquire pursuant to an incentive stock option plan (within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, of the United States. The Common Shares may be subject to a four month resale restriction imposed by the TSX-V on certain shares.

 

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Options will be granted by the Board and the Board may determine and impose terms upon which the Option shall vest, provided that if the Common Shared are listed on the TSX-V, Options granted to persons employed to conduct investor relations activities must vest in stages over 12 months with no more than 25% of the Options vesting in any three month period.

 

The Options are non-assignable and non-transferable except in limited circumstances, including but not limited to the case of death or disability of an Optionee. If an Option expires, cancels or otherwise terminates without having been exercised in full, the number of Common Shares in respect of which the Option was not exercised will again be available for the purposes of the Plan.

 

The Plan provides for adjustments to the Options in various circumstances, including adjustments to the number of Common Shares available under the Plan, the number of Common Shares subject to any Option and the exercise price therefore in the event of a declaration of a stock dividend, or a consolidation, subdivision or reclassification of the Common Shares, and adjustments in the Common Shares receivable on the exercise of an Option in the event of an amalgamation, merger or entry into a plan of arrangement by ESSA. Further, upon a “Change of Control” (as defined in the Plan), all Options become immediately exercisable, notwithstanding any contingent vesting provisions to which such Options may have otherwise been subject.

 

ESSA’s administration of the Plan is consistent with the policies and rules of the TSX-V and the Nasdaq and will comply with such other stock exchanges on which the Common Shares may be listed in the future. Subject to the acceptance of the TSX-V and any other applicable regulatory authorities, the Board can terminate, suspend or amend the terms of the Plan, however, the Board may not do so without first obtaining, within 12 months either before or after the Boards adoption of a resolution authorizing such action, approval by the affirmative votes of the holders of a majority of the voting securities of ESSA. Further, certain amendments to the Options require Disinterested Shareholder Approval, including, but are not limited to: the maximum number of Common Shares that may be reserved under the Plan; a grant to Insiders (within a 12 month period) of Options exceeding 10% of the issued and outstanding Common Shares; an issue to any Optionee (within a 12 month period) of Common Shares exceeding 5% of ESSA’s Common Shares; and an extension of the duration of the Plan.

 

Certain other amendments including amendments that are administrative in nature, any amendment necessary to comply with applicable law or any amendment required to clarify an existing provision of the Plan (provided that such changes do not affect the scope, nature, or intent of the Plan) may be made by the Board without consent or approval from any participant or shareholder of ESSA.

 

Restricted Share Unit Plan

 

On February 21, 2018, ESSA adopted a restricted share unit plan (the “RSU Plan”) for the benefit of the Company’s directors, officers, employees and consultants. The RSU Plan has been established as a vehicle by which equity-based incentives may be awarded to the employees, consultants, directors and officers of the Company, to recognize and reward their significant contributions to the long-term success of the Company, including to align the employees’, consultants’, directors’ and officers’ interests more closely with the shareholders of the Company.

 

The Board intends to use Restricted Share Units (“RSUs”) issued under the RSU Plan, as well as the Options issued under the Plan as part of the Company’s overall executive compensation plan. Since the value of RSUs increase or decrease with the price of the Common Shares, RSUs reflect a philosophy of aligning the interests of holders thereof with those of the shareholders by tying compensation to share price performance. In addition, RSUs assist in the retention of qualified and experienced persons by rewarding those individuals who make a long-term commitment to the Company.

 

The RSU Plan is administered by the Compensation Committee or such other committee as the Board determines.

 

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Pursuant to the RSU Plan, RSUs may be granted to any director, officer, employee or consultant (collectively, the “Eligible Persons”), from time to time by the Board, subject to the limitations set forth in the RSU Plan, but may not be granted when that grant would be prohibited by or in breach of applicable laws or any blackout period then in effect.

 

The number of Common Shares which may be reserved for issuance under the RSU Plan shall not exceed 1,155,218 Common Shares, provided that at no time may the number of Common Shares issuable under any and all of the Company’s equity incentive plans in existence, including the Plan, exceed 1,155,218 Common Shares.

 

The RSU Plan provides for the following limits on grants, unless approval by disinterested shareholders in accordance with the rules of the TSX-V is obtained:

 

(a)the maximum number of Common Shares which may be issuable to insiders of the Company under the RSU Plan and all of the Company’s other share compensation arrangements in existence from time to time may not exceed 10% of the issued and outstanding Common Shares;

 

(b)the maximum number of Common Shares which may be issuable to any one Eligible Person under the RSU Plan and all of the Company’s other share compensation arrangements in existence from time to time may not exceed 5% of the issued and outstanding Common Shares;

 

(c)the maximum number of Common Shares which may be issuable to any one consultant under the RSU Plan and all of the Company’s other share compensation arrangements in existence from time to time may not exceed 2% of the issued and outstanding Common Shares; and

 

(d)the maximum number of Common Shares which may be issuable to all Eligible Persons retained by the Company to provide investor relations activities (as defined by the policies of the TSX-V) as a group, under the RSU Plan and all of the Company’s other share compensation arrangements in existence from time to time may not exceed 2% of the issued and outstanding Common Shares.

 

The Compensation Committee may in its own discretion, at any time, and from time to time, grant RSUs to Eligible Persons as it determines appropriate, subject to the limitations set out in the RSU Plan.

 

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Unless redeemed earlier in accordance with the RSU Plan and subject to any blackout periods then in effect, each one RSU will be redeemed by the Company on or about its applicable vesting date and, at such time, the holder thereof will be entitled to receive (i) one Common Share, (ii) cash representing the fair market value of such Common Share on the vesting date or (iii) a combination of (i) and (ii) above, as determined by the Compensation Committee in its sole discretion.

 

RSUs are non-assignable and non-transferable except by will or by the laws of descent and distribution. All benefits and rights granted under the RSU Plan may only be exercised by the Eligible Persons.

 

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The RSU Plan contains provisions for the adjustment in the number of Common Shares subject to the RSU Plan and issuable on redemption of RSUs in the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, recapitalization, amalgamation, plan of arrangement, reorganization, spin-off or other distribution (other than ordinary dividends) of the Company assets to shareholders or any other similar corporate transaction or event which the Board determines affects the Common Shares such that an adjustment is appropriate to prevent dilution or enlargement of the rights of Eligible Persons under the RSU Plan.

 

ESSA’s administration of the RSU Plan is consistent with the policies of the TSX-V and the Nasdaq and will comply with such other stock exchanges on which the Common Shares may be listed in the future.

 

Subject to applicable laws and regulatory approvals, the RSU Plan may be amended without shareholder approval for the following:

 

(a)amendments to the terms and conditions of the RSU Plan necessary to ensure that the RSU Plan complies with the applicable regulatory requirements, including the rules of the TSX-V and Nasdaq, in place from time to time;

 

(b)amendments to the provisions of the RSU Plan respecting administration of the RSU Plan and eligibility for participation under the RSU Plan;

 

(c)amendments to the provisions of the RSU Plan respecting the terms and conditions on which RSUs may be granted pursuant to the plan, including the provisions relating to the payment of the RSUs; and

 

(d)minor changes of a “house-keeping nature”.

 

Disinterested shareholder approval is required for any amendments related to:

 

(a)the number or percentage of issued and outstanding Common Shares available for grant under the RSU Plan;

 

(b)a change in the method of calculation of redemption of RSUs held by Eligible Persons; and

 

(c)an extension to the term for redemption of RSUs held by Eligible Persons.

 

NEO Compensation

 

As of September 30, 2018, ESSA had five NEOs: Dr. David Parkinson, President and CEO, David Wood, CFO, Peter Virsik, EVP & COO, Dr. Raymond Andersen, CTO, and Dr. Marianne Sadar, CSO.

 

Defined Benefits Plans

 

ESSA currently does not intend to have a defined benefits pension plan.

 

Defined Contribution Plans

 

ESSA currently does not intend to have a defined contribution plan.

 

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Deferred Compensation Plans

 

ESSA currently does not intend to have a deferred compensation plan.

 

Termination and Change of Control Benefits

 

Except as described below, there are no contracts, agreements, plans or arrangements that provide for payments to a NEO at, following, or in connection with any termination (whether voluntary, involuntary or constructive), resignation, retirement, a change in control of the Company or its subsidiary or a change in a NEO’s responsibilities (excluding perquisites and other personal benefits if the aggregate of this compensation is less than $50,000).

 

The Company has entered into employment agreements with certain NEOs, which provide for certain rights upon termination of employment or a change of control of ESSA. ESSA believes that these provisions of the NEO employment agreements are reasonable in the context of similar-sized biopharmaceutical companies. The Company expects to offer similar provisions to executive-level employees in the future.

 

Specific termination and change-of-control provisions of each NEO include:

 

For Dr. David Parkinson:

 

  · A payment of one year of base salary upon termination without cause. This amount increases to 18 months if the termination without cause occurs after a change of control event or within 60 days prior to a change of control event where such event was under consideration at the time of termination. Had Dr. Parkinson’s employment been terminated without cause on September 30, 2018, he would have received $451,758. Had Dr. Parkinson’s employment been terminated without cause after a change of control event or within 60 days prior to a change of control event where such event was under consideration at the time of termination, he would have received $677,637.

 

  · Immediate vesting of all stock options upon occurrence of a change of control event. Dr. Parkinson held 267,500 options as of the date of this Annual Report.

 

For Mr. David Wood:

 

  · A payment to the employee of up to one year of base salary for termination without cause, whether or not the termination was caused by a change of control event. Had Mr. Wood been terminated without cause on September 30, 2018, whether or not the termination was caused by a change of control event, he would have received up to $236,900.

 

  · Immediate vesting of all stock options upon occurrence of a change of control event. Mr. Wood held 80,000 options as of the date of this Annual Report.

 

For Mr. Peter Virsik:

 

  · A payment of one year of base salary upon termination without cause. This amount increases to 18 months if the termination without cause occurs within 18 months after a change of control event. Had Mr. Virsik’s employment been terminated without cause on September 30, 2018, he would have received $375,950. Had Mr. Virsik’s employment been terminated without cause within 18 months after a change of control event, he would have received $563,925.

 

  · Immediate vesting of all stock options upon occurrence of a change of control event. Mr. Virsik held 187,500 options as of the date of this Annual Report.

 

 91 

 

 

For Dr. Raymond Andersen:

 

  · Immediate vesting of all stock options upon occurrence of a change of control event. Dr. Andersen held 80,000 options as of the date of this Annual Report.

 

For Dr. Marianne Sadar:

 

  · Immediate vesting of all stock options upon occurrence of a change of control event. Dr. Sadar held 80,000 options as of the date of this Annual Report.

 

Summary Compensation Table

 

ESSA's key management personnel for the periods indicated below include Dr. David Parkinson, CEO, David Wood, CFO, Peter Virsik, EVP & COO, Dr. Frank Perabo, former EVP & CMO, Dr. Paul Cossum, former EVP of R&D, Dr. Marianne Sadar, CSO and Director and Dr. Raymond Andersen, CTO and Director. Compensation paid to key management personnel are as follows:  

 

($)  

YEAR ENDED

SEPTEMBER 30,
2018

   

YEAR ENDED

SEPTEMBER 30,
2017

   

YEAR ENDED

SEPTEMBER 30,
2016

 
                   
Salaries and consulting fees     2,242,950       1,988,326       2,454,401  
                         
Share-based payments     1,340,513       756,154       975,927  
                         
Total compensation     3,583,463       2,744,480       3,430,328  

 

Director Compensation

 

On January 1, 2015, ESSA adopted a compensation plan for independent members of the Board. Pursuant to this compensation plan, both cash payments and Options are offered to independent directors. Each independent director will receive a retainer of $25,000 per annum. In addition, the Chair of the Board will receive a premium of $25,000 per annum and the Chair of each sub-committee will receive a premium of $10,000 per annum. Independent directors will also be paid a cash fee of $1,500 per in-person meeting, and $1,000 per teleconference meeting, $1,000 per sub-committee meeting, and receive an Option grant of 12,000 Options, vesting in 48 equal monthly instalments beginning on the first month anniversary of the grant. Directors who are ESSA’s officers, employees or consultants will receive no compensation under the terms of this compensation plan.

 

Incentive Plan Awards Outstanding

 

As at September 30, 2018, the end of the Company’s last fiscal year, non-NEO directors held 48,000 Options in the Company, granted in current and prior years, resulting in $88,541 vested or earned in the year ended September 30, 2018.

 

Options to Purchase Securities

 

As at the date of this Annual Report, 900,709 outstanding Options are held by directors, consultants, employees and executive officers of the Company. Of these Options, 12,000 are exercisable at a price of $3.58 per Common Share, 572,748 are exercisable at a price of $4.00 per Common Share, 12,500 are exercisable at a price of $4.10 per Common Share, 286,000 are exercisable at a price of C$4.90 per Common Share, 250 are exercisable at a price of C$16.00 per Common Share, and 28,961 are exercisable at a price of C$40.00 per Common Share. The table below summarizes the Options issued and outstanding to directors and senior management as at the date of this Annual Report.

 

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Class of Optionee
(Number)
  Number of Common
Share Options Held
    Exercise Price   Expiry Date
Dr. Marianne Sadar     80,000 (1)   C$4.90/Common Share   February 21, 2028
Chief Scientific Officer                
                 
Dr. Raymond Andersen     80,000 (1)   C$4.90/Common Share   February 21, 2028
Chief Technical Officer                
                 
Gary Sollis     6,000 (1)   C$4.90/Common Share   May 21, 2024
Director     6,000 (1)   C$4.90/Common Share   February 21, 2028
                 
David Wood     3,750 (1)   C$4.90/Common Share   October 1, 2023
Chief Financial Officer     10,000 (1)   C$4.90/Common Share   July 30, 2024
      66,250 (1)   C$4.90/Common Share   February 21, 2028
                 
Richard Glickman     3,750 (1)   C$4.90/Common Share   May 21, 2024
Chairman     8,250 (1)   C$4.90/Common Share   February 21, 2028
                 
Dr. Frank Perabo
Former EVP & Chief Medical Officer
    8,000 (1)   $4.00/Common Share   September 8, 2024
                 
Franklin Berger     2,500 (1)   $4.00/Common Share   March 5, 2025
Director     9,500 (1)   $4.00/Common Share   February 21, 2028
                 
David Parkinson     2,500 (1)   $4.00/Common Share   June 23, 2025
Chief Executive Officer     30,000 (1)   $4.00/Common Share   January 12, 2026
      235,000 (1)   $4.00/Common Share   February 21, 2028
                 
Peter Virsik     14,500 (1)   $4.00/Common Share   August 9, 2026
EVP & Chief Operating Officer     173,000 (1)   $4.00/Common Share   February 21, 2028
                 
Scott Requadt
Director
    12,000 (1)   $4.00/Common Share   February 21, 2028

 

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Class of Optionee
(Number)
    Number of Common
Share Options Held
    Exercise Price   Expiry Date
                 
Michele Benjamin     4,750 (1)   $4.00/Common Share   February 21, 2028
Senior Director, Administration     7,250 (2)   $4.00/Common Share   April 4, 2028
                 

Dr. Otello Stampacchia

Director

    12,000 (3)   $3.58/Common Share   October 18, 2028

 

 
(1)These Options vest in 48 equal monthly installments with the first installment of Options vesting on March 21, 2018.

 

(2)These Options vest in 48 equal monthly installments with the first installment of Options vesting on May 4, 2018.

 

(3)These Options vest in 48 equal monthly installments with the first installment of Options vesting on November 18, 2018.

 

C.Board Practices

 

Item 6.A., “Directors, Senior Management and Employees – Directors and Senior Management” above sets out each directors’ and officers’ date of expiration of their current term of office, as applicable, and the period during which such person has served in that office.

 

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For specific termination and change-of-control provisions for the Company’s five NEO’s, Dr. David Parkinson, David Wood, Peter Virsik, Dr. Raymond Andersen, and Dr. Marianne Sadar, see Item 6.B “Compensation.

 

As of the date of this Annual Report, Richard Glickman, Gary Sollis, Franklin Berger, Scott Requadt and Dr. Otello Stampacchia are not engaged in a contract providing for benefits upon termination of employment with the Company.

 

Audit Committee

 

The audit committee of the Board (the “Audit Committee”) is comprised of Franklin Berger (chair), Richard Glickman, and Gary Sollis, all of whom are “financially literate” as defined in National Instrument 52-110 – Audit Committees (“NI 52-110”) and the rules of the Nasdaq. Each member of the Audit Committee is considered independent pursuant to NI 52-110, Rule 10A-3 under the U.S. Exchange Act and the rules of the Nasdaq. Franklin Berger served as the Audit Committee’s financial expert for the 2018 fiscal year. A description of the education and experience of each Audit Committee member that is relevant to the performance of his responsibilities as an Audit Committee member may be found above under the heading “Directors, Senior Management and Employees – Directors and Senior Management”.

 

The Audit Committee is responsible for reviewing the Company’s financial reporting procedures, internal controls and the performance of the financial management and the Auditor. The Audit Committee also reviews the annual audited financial statements and makes recommendations to the board. A copy of the Audit Committee’s charter is set out below.

 

Audit Committee Charter

 

I.Purpose

 

The main objective of the Audit Committee is to act as a liaison between the Board and the Company’s independent auditor and to assist the Board in fulfilling its oversight responsibilities with respect to the financial statements and other financial information provided by the Company to its shareholders and others.

 

II.Organization

 

The Committee shall consist of three or more directors and shall satisfy the laws governing the Company and the independence, financial literacy, expertise and experience requirements under applicable securities law, stock exchange requests and any other regulatory requirements applicable to the Audit Committee of the Company.

 

The members of the Committee and the Chair of the Committee shall be appointed by the Board. A majority of the members of the Committee shall constitute a quorum. A majority of the members of the Committee shall be empowered to act on behalf of the Committee. Matters decided by the Committee shall be decided by majority votes.

 

Any member of the Committee may be removed or replaced at any time by the Board and shall cease to be a member of the Committee as soon as such member ceases to be a director.

 

The Committee may form and delegate authority to subcommittees when appropriate.

 

III.Meetings

 

The Committee shall meet as frequently as circumstances require.

 

The Committee may invite, from time to time, such persons as it may see fit to attend its meetings and to take part in discussion and consideration of the affairs of the Committee.

 

IV.Responsibilities

 

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(1)The Committee shall recommend to the Board:

 

(a)the external auditor to be nominated for the purpose of preparing or issuing an auditor’s report or performing other audit, review or attest services for the Company; and

 

(b)the compensation of the external auditor.

 

(2)The Committee shall be directly responsible for overseeing the work of the external auditor engaged for the purpose of preparing or issuing an auditor’s report or performing other audit, review or attest services for the Company, including the resolution of disagreements between management and the external auditor regarding financial reporting.

 

(3)The Committee must pre-approve all non-audit services to be provided to the Company or its subsidiary entities by the Company’s external auditor.

 

(4)The Committee must review the Company’s financial statements, MD&A and annual and interim earnings press releases before the Company publicly discloses this information.

 

(5)The Committee must be satisfied that adequate procedures are in place for the review of the Company’s public disclosure of financial information extracted or derived from the Company’s financial statements, other than the public disclosure referred to in subsection (4), and must periodically assess the adequacy of those procedures.

 

(6)The Committee must establish procedures for:

 

(a)the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls, or auditing matters; and

 

(b)the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters.

 

V.Authority

 

The Committee shall have the following authority:

 

  (a) to engage independent counsel and other advisors as it determines necessary to carry out its duties,

 

  (b) to set and pay the compensation for any auditor or tax advisors employed by the Committee, and

 

  (c) to communicate directly with the external auditor.

 

Audit Committee Oversight

 

Since the commencement of the Company’s most recently completed financial year, there has not been a recommendation of the Audit Committee to nominate or compensate an external auditor which was not adopted by the Company’s Board.

 

Pre-Approval Policies and Procedures

 

The Audit Committee has the authority and responsibility for pre-approval of all non-audit services to be provided to the Company or its subsidiary entities by the external auditor or the external auditor of the Company’s subsidiary entities, unless such pre-approval is otherwise appropriately delegated or if appropriate specific policies and procedures for the engagement of non-audit services have been adopted by the Audit Committee.

 

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External Auditor Service Fees by Category

 

The aggregate fees billed by the Company’s external auditor in each of the last three fiscal years for audit fees are set out in the table below. In the table, “Audit Fees” are fees billed by the Company’s external auditor for services provided in auditing the Company’s annual financial statements for the subject year. “Audit-Related Fees” are fees not included in audit fees that are billed by the auditor for assurance and related services that are reasonably related to the performance of the audit review of the Company’s financial statements. “Tax Fees” are fees billed by the auditor for professional services rendered for tax compliance, tax advice and tax planning. “All other fees” are fees billed by the auditor for products and services not included in the foregoing categories. All amounts in the table are expressed in Canadian dollars.

 

 Financial Year Ending   Audit Fees     Audit-
Related Fees
    Tax Fees     All Other Fees  
September 30, 2018   C$ 74,215     $ 17,120     $ nil     $ nil   
September 30, 2017   C$ 55,080     $ nil     $ nil     $ nil   
September 30, 2016   C$ 56,610     $ nil     $ nil     $ nil   

 

Compensation Committee

 

Prior to December 19, 2014, compensation matters were determined by the entire Board. At a meeting held on December 19, 2014, the Board formed a Compensation Committee. The Compensation Committee is currently comprised of Scott Requadt (chair), Richard Glickman and Dr. Otello Stampacchia. Under SEC and Nasdaq rules, there are heightened independence standards for members of the compensation committee. ESSA follows applicable Canadian laws with respect to compensation committee composition, which do not mandate a compensation committee composed entirely of independent directors, as permitted by the Nasdaq Marketplace Rules. See Item 16G “Corporate Governance” below. The Compensation Committee is responsible for reviewing the compensation plans and severance arrangements for management, to ensure they are commensurate with comparable companies. Factors that are taken into consideration when making compensation decisions include:

 

  · the financial resources available or expected to be available to the Company;

 

  · comparative compensations levels for companies of ESSA’s size in the biopharmaceutical industry;

 

  · the capabilities of individual contributors to the Company’s success;

 

  · the reasonable compensation expectations of the individual contributor; and

 

  · relative equity with other ESSA contributors.

 

Statement of Corporate Governance Practices

 

On June 30, 2005, National Instrument 58-101 – Disclosure of Corporate Governance Practices (“NI 58-101”) and National Policy 58-201 – Corporate Governance Guidelines (the “Guidelines”), came into force. The Guidelines address matters such as the constitution of and the functions to be performed by the Board. NI 58-101 requires that the Company disclose its approach to corporate governance with reference to the Guidelines. The Board is committed to ensuring that the Company has an effective corporate governance system, which adds value and assists the Company in achieving its objectives.

 

The Company’s approach to corporate governance is set forth below.

 

Mandate of the Board

 

The Board assumes responsibility for the stewardship of the Company and the creation of shareholder value. The Board is responsible for:

 

 97 

 

 

  (a) ensuring that management develops and implements a strategic plan that takes into account market realities and regulatory compliance;

 

  (b) upholding a comprehensive policy for communications with shareholders and the public at large;

 

  (c) developing and formalizing the responsibilities for each member of the board, including the responsibilities of the CEO vis-à-vis corporate objectives;

 

  (d) ensuring that the risk management of ESSA is prudently addressed; and

 

  (e) overseeing succession planning for management.

 

The frequency of meetings of the Board and the nature of agenda items may change from year to year depending upon the activities of ESSA. However, the Board meets at least quarterly and at each meeting there is a review of the business of ESSA.

 

The Board facilitates its exercise of independent supervision over the Company’s management through frequent meetings of the Board being held to obtain an update on significant corporate activities and plans, both with and without members of the Company’s management being in attendance. Further, the independent directors of the Board hold, at a minimum, two meetings annually without the presence of non-independent directors.

 

Composition of the Board

 

The Board is composed of eight directors, three of whom qualify as independent directors. For this purpose, a director is independent if he or she has no direct or indirect “material relationship” with ESSA. A “material relationship” is a relationship which could, in the view of the Board, be reasonably expected to interfere with the exercise of the director’s independent judgment. An individual who has been an employee or executive officer of the Company within the last three years is considered to have a material relationship with the Company.

 

Of the directors, Franklin Berger, Richard Glickman, and Gary Sollis are considered independent under Rule 5605(a)(2) of the Nasdaq listing standards. Five directors: (i) Dr. David Parkinson, President and Chief Executive Officer of the Company; (ii) Dr. Marianne Sadar, Chief Scientific Officer of the Company; (iii) Dr. Raymond Andersen, Secretary and Chief Technical Officer of the Company; (iv) Scott Requadt, Venture Partner of Clarus (a major shareholder); and (v) Dr. Otello Stampacchia, Founder of Omega Funds (a major shareholder), are considered not independent. The size of the Company is such that all the Company’s operations are conducted by a small management team which is also represented on the Board. The Board believes that management is effectively supervised by the three independent directors, as the independent directors are actively and regularly involved in reviewing the operations of the Company and have regular and full access to management not represented on the Board.

 

Directorships

 

Currently, the following directors serve on the following boards of directors of other public companies:

 

DIRECTOR   PUBLIC CORPORATION BOARD MEMBERSHIP
Richard Glickman   Correvio Pharma Corp. (formerly Cardiome Pharma Corp.), Aurinia Pharmaceuticals Corp.
Franklin Berger   Five Prime Therapeutics, Inc., Immune Design Corp., Bellus Health, Inc., Tocagen Inc., Proteostasis Therapeutics, Inc., Kezar Life Sciences Inc.
David Parkinson   3SBio Inc., Tocagen Inc., CTI BioPharma Corp.
Scott Requadt   VBI Vaccines Inc., AVROBIO Inc.
Dr. Otello Stampacchia   Median Technologies SA, Replimune Limited

 

 

 

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Orientation and Education

 

ESSA will provide new directors with copies of relevant financial, technical and other information regarding its R&D programs. Board members are also encouraged to communicate with management and the Auditor and, to keep themselves current with industry trends and developments. Board members have full access to the Company’s records.

 

Nomination of Directors

 

ESSA has adopted a director nomination policy to ensure that it identifies nominees for the Board in compliance with applicable securities laws and regulations and exchange requirements.

 

Director nominees will be recommended for the Board’s selection by a minimum of three independent directors constituting a majority of the Board’s independent directors in a vote in which only independent directors participate. The term “independent director” has the meaning given to such term in the listing standards of the Nasdaq. In making nominee recommendations, such independent directors will consider:

 

  (a) the competencies and skills considered necessary for the Board as a whole to possess;

 

  (b) the competencies and skills that each existing director possesses;

 

  (c) the competencies and skills each new nominee will bring to the Board; and

 

  (d) whether the nominee will be an independent director.

 

In addition, such independent directors will consider whether each new nominee can devote sufficient time and resources to his or her duties as a member of the Board.

 

Assessments

 

The Board and each individual director will be regularly assessed regarding his or its effectiveness and contribution. The assessment will consider and take into account:

 

  · in the case of the Board, its mandate and charter; and

 

  · in the case of an individual director, the competencies and skills each individual director is expected to possess.

 

D.Employees

 

As of the date of this Annual Report, ESSA has a total of 15 employees and consultants on a full-time or part-time basis. ESSA has in the past, and may in the future, retain additional expert consultants on an ad-hoc basis if required in connection with the Company’s development program. None of ESSA’s employees are represented by a union. The following table sets forth the total number of ESSA’s employees at September 30, 2018, 2017 and 2016, respectively, and a breakdown of persons employed by category of activity and geographic location for the corresponding periods.

 

    September 30,
2018
    September 30,
2017
    September 30,
2016
 
Employees and consultants by category of activity:                        
Management     3       4       5  
Administration     7       6       8  
Research     5       5       12  
Total Number of Employees and Consultants     15       15       25  
Employees and consultants by geographic location:                        
Canada     8       8       8  
United States     7       7       17  
Total Number of Employees and Consultants     15       15       25  

 

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E.Share Ownership

 

As at the date of this Annual Report, as a group, the Company’s directors and executive officers beneficially owned, directly or indirectly, or exercised control over 805,468 Common Shares being 12.7% of the 6,311,098 Common Shares issued and outstanding.

 

The following table states the number of Common Shares beneficially owned by each person, directly or indirectly, or over which each person exercised control or direction as at December 13, 2018. The persons listed below are deemed to be the beneficial owners of Common Shares underlying stock options that are exercisable within 60 days from the above date.

 

Name of Beneficial Owner   Common Shares(1)     Percent of Common Shares(2)  
Dr. David Parkinson     73,803       1.13 %
Richard M. Glickman     45,250       *  
Dr. Marianne Sadar     162,802       2.48 %
Dr. Raymond Andersen     162,802       2.48 %
Gary Sollis     8,749       *  
David Wood     34,676       *  
Franklin Berger     177,182       2.70 %
Peter Virsik     42,966       *  
Scott Requadt     2,750       *  
Dr. Otello Stampacchia     750       *  

 

 

  (1) These numbers include Common Shares underlying stock options that are exercisable within 60 days from December 13, 2018.

 

  (2) Based on an aggregate total of 6,555,383 Common Shares, being the 6,311,098 Common Shares issued and outstanding as at December 13, 2018 plus the 244,285 Common Shares underlying stock options that are exercisable within 60 days from December 13, 2018.

 

  (3) Less than 1% of Common Shares issued and outstanding as at December 13, 2018.

 

Item 6.B., “Directors, Senior Management and Employees – Compensation” above sets out more detailed information regarding options granted to members of the Board of Directors and describes arrangements for involving employees in the capital of the Company.

 

ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

  A. Major Shareholders

 

The following table shows the name and information about ESSA’s voting securities owned by each person or company which, as at December 13, 2018, owned of record, or which, to ESSA’s knowledge, owned beneficially, directly or indirectly, more than 5% of any class or series of the Company’s voting securities:

 

Name  Number and Type of Securities  Type of Ownership  Percentage of
Class(1)
   Percentage of Class 
on a Diluted Basis(2)
 
Clarus Ventures LLC  1,668,560 Common Shares  Beneficial   26.44%   17.84%
Omega Fund IV, LP  1,084,848 Common Shares  Beneficial   17.19%   11.60%
BVF Partners, LP  580,367 Common Shares  Beneficial   9.20%   6.21%
Eventide Asset Management, LLC   481,970 Common Shares  Beneficial   7.64%   5.15%

 

 

  (1) Based on 6,311,098 outstanding Common Shares as of December 13, 2018.

 

 

 100 

 

 

  (2) Based on an aggregate total of 9,352,493 outstanding Common Shares on a fully diluted basis as of December 13, 2018, being the 6,311,098 Common Shares issued and outstanding as at December 13, 2018, and assuming the exercise of all outstanding 912,459 Options, 1,654,000 pre-funded warrants, 1,250 Bloom Burton Warrants, 227,273 7-Year Warrants, 7,477 SVB Warrants and 238,938 broker warrants, each on a one-to-one basis.

 

On October 1, 2018, Omega exercised its 10,700,000 pre-funded pre-Consolidation common share purchase warrants, which were issued in connection with the Company’s January 2018 Financing, for a total of 535,000 Common Shares (after giving effect to the Consolidation), representing approximately 9.3% of the issued and outstanding Common Shares.

 

No major shareholders have different voting rights.

 

The information in the table above was supplied by Computershare Trust Company of Canada, the Company’s registrar and transfer agent, and by the individuals themselves.

 

As of December 13, 2018, the number of registered shareholders of record (and the number and percentage of shares held by such shareholders) is as follows:

 

Location:   Number of registered
shareholders of record
    Number of Common Shares     Percentage of total Common
Shares
 
Canada     6       5,202,994       82.44 %
United States     2       1,108,104       17.56 %
Other     nil       nil       nil %
Total     8       6,311,098 %     100 %

 

The Company is not aware that it is directly owned or controlled by another corporation, any foreign government or any other natural or legal person(s) severally or jointly. The Company is not aware of any arrangement, the operation of which may result in a change of control of the Company.

 

B.Related Party Transactions

 

In addition to the compensation arrangements discussed under Item 6.B “Compensation”, the following is a description of the material terms of those transactions with related parties to which ESSA is a party and which it is required to disclose pursuant to the disclosure rules of the SEC and the British Columbia Securities Commission.

 

Agreements with Directors and Officers

 

Indemnity Agreements

 

ESSA has entered into indemnity agreements with its directors and certain officers which provide, among other things, that it will indemnify him or her to the fullest extent permitted by law from and against all liabilities, costs, charges and expenses incurred as a result of his or her actions in the exercise of his or her duties as a director or officer.

 

Employment Agreements

 

ESSA has entered into employment agreements with Dr. David Parkinson, President and Chief Executive Officer, David Wood, Chief Financial Officer, and Peter Virsik, Executive Vice President and Chief Operating Officer. For more information regarding certain of these agreements, see “Compensation” in Item 6.B of this Annual Report.

 

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Consulting Agreements

 

ESSA has entered into consulting agreements with Dr. Marianne Sadar, Chief Scientific Officer, and Dr. Raymond Andersen, Chief Technical Officer. The specific provisions of each consulting agreement include:

 

For Dr. Marianne Sadar:

 

  · The term of this consulting agreement expires on February 1, 2022 and may be extended for additional periods of one year each by mutual written agreement between the parties.
  · An annual fee to the consultant of C$180,000 (C$15,000 monthly) for the first and second year of the term and an annual consulting fee of C$120,000 (C$10,000 monthly) for the third and fourth year of the term.
  · In connection with consulting services performed, on February 21, 2018 Dr. Sadar received options to purchase 80,000 Common Shares at an exercise price of C$4.90 per share. Such options vest monthly in 48 equal installments of 1,666 Common Shares and vested options shall be exercisable any time and from time to time until February 21, 2028.
  · Dr. Sadar may receive an annual bonus of up to 25% of the annual fee upon accomplishment of objectives as determined by the Company and agreed to by Dr. Sadar.
  · At all times during the term of the consulting agreement, and for a period of 3 months thereafter, Dr. Sadar will be restricted from competing against us.

 

For Dr. Raymond Andersen:

 

  · The term of this consulting agreement expires on February 1, 2022 and may be extended for additional periods of one year each by mutual written agreement between the parties.
  · An annual fee to the consultant of C$180,000 (C$15,000 monthly) for the first and second year of the term and an annual consulting fee of C$120,000 (C$10,000 monthly) for the third and fourth year of the term.
  · In connection with consulting services performed, on February 21, 2018 Dr. Andersen received options to purchase 80,000 Common Shares at an exercise price of C$4.90 per share. Such options vest monthly in 48 equal installments of 1,666 Common Shares and vested options shall be exercisable any time and from time to time until February 21, 2028.
  · Dr. Andersen may receive an annual bonus of up to 25% of the annual fee upon accomplishment of objectives as determined by the Company and agreed to by Dr. Andersen.
  · At all times during the term of the consulting agreement, and for a period of 3 months thereafter, Dr. Andersen will be restricted from competing against us.

 

Equity Awards

 

Since ESSA's inception, it has granted equity awards to certain of its directors and officers. ESSA describes its equity plans under “Executive Compensation” in Item 6 of this Annual Report.

 

Included in accounts payable and accrued liabilities at September 30, 2018 is $128,035 (compared to $219,031 on September 30, 2017 and $276,399 on September 30, 2016) due to related parties with respect to the transactions described under “Executive Compensation” in Item 6 of this Annual Report and expense reimbursements. Amounts due to related parties are non-interest bearing, with no fixed terms of repayment.

 

Indebtedness of Directors, Executive Officers and Employees

 

None of ESSA's directors, executive officers, employees, former directors, former executive officers or former employees, and none of their associates, is indebted to ESSA or another entity whose indebtedness is the subject of a guarantee, support agreement, letter of credit or other similar agreement or understanding provided by ESSA, except for routine indebtedness as defined under applicable securities legislation.

 

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Significant Influence

 

The Company previously completed the January 2018 Financing for gross proceeds of approximately $26,040,000. For greater detail see Item 4.A “History and development of the Company.”

 

As a result of the January 2018 Financing, Hugo Beekman of Omega was appointed to the Board of the Company. Pursuant to the terms of a nomination rights agreement between the Company and Omega, Omega is entitled to nominate one director to the board of directors of the Company, who must be an independent director and preapproved by the Company. These nomination rights will continue for so long as Omega holds at least 9.99% of the issued and outstanding common shares of the Company. Mr. Beekman resigned from the Board on May 30, 2018 and Dr. Otello Stampacchia was appointed to the Board on October 18, 2018 pursuant to Omega’s nomination rights. As of the date of this Annual Report, Omega has significant influence on the Company, beneficially owning 1,084,848 Common Shares, representing 17.19% of the issued and outstanding Common Shares.

 

The Company previously completed the January 2016 Financing for gross proceeds of approximately $15,000,000. For greater detail see Item 4.A “History and development of the Company.”

 

As a result of the January 2016 Financing, Scott Requadt, then Managing Director of Clarus, was appointed to the Board of the Company. Pursuant to the terms of a subscription agreement between the Company and Clarus in connection with the January 2016 Financing, Clarus is entitled to nominate two directors to the board of directors of the Company, one of which must be an independent director and pre-approved by the Company. The nomination rights will continue for so long as Clarus holds greater than or equal to 53,030 common shares, subject to adjustment in certain circumstances. As of the date of this Annual Report, Clarus has significant influence on the Company beneficially owning 1,668,561 Common Shares, representing 26.44% of the issued and outstanding Common Shares.

 

C.Interests of Experts and Counsel

 

Not applicable.

 

ITEM 8.FINANCIAL INFORMATION

 

A.Consolidated Statements and Other Financial Information

 

The Company’s audited consolidated financial statements as at and for the years ended September 30, 2018, 2017, and 2016, as required under this Item 8, are attached hereto and found immediately following the text of this Annual Report. The audit report of Davidson & Company LLP is included herein immediately preceding the consolidated financial statements and schedules.

 

Legal Proceedings

 

From time to time, ESSA may become involved in legal or regulatory proceedings arising in the ordinary course of business. ESSA is not currently a party to any material litigation or regulatory proceeding and it is not aware of any pending or threatened litigation or regulatory proceeding against it that could have a material adverse effect on its business, operating results, financial condition or cash flows.

 

Dividend Policy

 

ESSA has never declared or paid any dividends on its securities. ESSA does not have any present intention to pay cash dividends on its Common Shares and it does not anticipate paying any cash dividends on its Common Shares in the foreseeable future. ESSA currently intends to invest its future earnings, if any, to fund its growth. However, any future determination as to the declaration and payment of dividends will be at the discretion of ESSA's board of directors and will depend on its financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors its board of directors may deem relevant.

 

B.Significant Changes

 

There have been no significant changes in the Company’s financial condition since the most recent consolidated financial statements for the fiscal year ended September 30, 2018. See “Summary Corporate History and Intercorporate Relationships” in Item 4 of this Annual Report.

 

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ITEM 9.THE OFFER AND LISTING

 

A.Offer and Listing Details

 

As at the date of this Annual Report, the Company had 6,311,098 Common Shares outstanding. On January 27, 2015, the Common Shares began trading on the TSX-V under the symbol “EPI”. On July 28, 2015, ESSA delisted from the TSX-V and began trading its Common Shares on the TSX under the same symbol, “EPI”. On July 9, 2015, the Common Shares began trading on the Nasdaq under the symbol “EPIX”. On November 27, 2017, ESSA delisted from the TSX and began trading its Common Shares on the TSX-V under the same symbol, “EPI”.

 

B.Plan of Distribution

 

Not applicable.

 

C.Markets

 

The Company’s Common Shares are listed on the Nasdaq under the symbol “EPIX”. The Company’s Common Shares commenced trading on the TSX under the symbol “EPI” on July 28, 2015, while the Company’s Common Shares were concurrently delisted from the TSX-V. On November 27, 2017, the Company downlisted from the TSX and began trading its Common Shares on the TSX-V under the same symbol “EPI”. The Company’s Common Shares trade in U.S. dollars on the Nasdaq and in Canadian dollars on the TSX-V.

 

D.Selling Shareholders

 

Not applicable.

 

E.Dilution

 

Not applicable.

 

F.Expenses of the Issue

 

Not applicable.

 

ITEM 10.ADDITIONAL INFORMATION

 

A.Share Capital

 

Not applicable.

 

B.Memorandum and Articles of Association

 

The Company incorporates by reference into this Annual Report the information contained in the Company’s registration statement on Form 20-F (File No. 377-00939) originally filed with the SEC on February 24, 2015, as amended.

 

C.Material Contracts

 

Except for contracts entered into in the ordinary course of business, the only contracts entered into by ESSA within two years immediately preceding this Annual Report that are still in effect, which may be regarded as material, are as follows:

 

1.Cancer Research Grant Contract between CPRIT and the Company dated July 9, 2014.

 

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2.License Agreement between the BC Cancer Agency, UBC and the Company dated December 22, 2010, as amended on February 10, 2011 and May 27, 2014.

 

3.Employment Agreement for David Wood.

 

4.Employment Agreement for Dr. David Parkinson.

 

5.Employment Agreement for Peter Virsik.

 

6.Loan and Security Agreement between the Company and Silicon Valley Bank dated November 18, 2016.

 

  7. Subscription Agreement between the Company and Clarus Lifesciences III, L.P. dated January 14, 2016.

 

  8. Nomination Rights Agreement between the Company and Omega Fund IV, L.P. dated January 15, 2018.

 

  9. Consulting agreement for Dr. Marianne Sadar dated February 1, 2018.

 

  10. Consulting agreement for Dr. Raymond Andersen dated February 1, 2018.

 

  11. Lease for 400 Oyster Point Boulevard, South San Francisco, California, United States dated March 5, 2018.

 

D.Exchange Controls

 

The Company is not aware of any Canadian federal or provincial laws, decrees, or regulations that restrict the export or import of capital, including foreign exchange controls, or that affect the remittance of dividends, interest or other payments to non-Canadian holders of the Common Shares. There are no limitations under the laws of Canada or by the charter or other constituent documents of the Company, except the Investment Canada Act which may require review and approval by the Minister of Industry (Canada) of certain acquisition of control of the Company by non-Canadians. The threshold for acquisitions of control is generally defined as being one-third or more of ESSA’s voting shares. If the investment is potentially injurious to national security it may be subject to review under the Investment Canada Act notwithstanding the percentage interest acquired or amount of the investment. “Non-Canadian” generally means an individual who is not a Canadian citizen, or a corporation, partnership, trust or joint venture that is ultimately controlled by non-Canadians.

 

E.Taxation

 

U.S. Federal Income Tax Considerations

 

The following is a summary of the anticipated U.S. federal income tax consequences generally applicable to U.S. Holders (as defined below) of the ownership and disposition of Common Shares. This summary addresses only holders who acquire and hold Common Shares as “capital assets” (generally, assets held for investment purposes).

 

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The following summary does not purport to address all U.S. federal income tax consequences that may be relevant to a U.S. Holder (as defined below) as a result of the ownership and disposition of Common Shares, nor does it take into account the specific circumstances of any particular holder, some of which may be subject to special tax rules (including, but not limited to, brokers, dealers in securities or currencies, traders in securities that elect to use a mark-to-market method of accounting for securities holdings, tax-exempt organizations, insurance companies, banks, thrifts and other financial institutions, persons liable for alternative minimum tax, persons that hold an interest in an entity that holds the Common Shares, persons that will own, or will have owned, directly, indirectly or constructively 10% or more (by vote or value) of ESSA’s stock, persons that hold the common shares as part of a hedging, integration, conversion or constructive sale transaction or a straddle, or persons whose functional currency is not the U.S. dollar).

 

This summary is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury regulations, administrative pronouncements and rulings of the United States Internal Revenue Service (the “IRS”) and judicial decisions, all as in effect on the date hereof, and all of which are subject to change (possibly with retroactive effect) and to differing interpretations. Except as specifically set forth below, this summary does not discuss applicable income tax reporting requirements. This summary does not describe any state, local or foreign tax law considerations, or any aspect of U.S. federal tax law other than income taxation (e.g., estate or gift tax or the Medicare contribution tax). U.S. Holders (as defined below) should consult their own tax advisers regarding such matters.

 

No legal opinion from U.S. legal counsel or ruling from the IRS has been requested, or will be obtained, regarding the U.S. federal income tax consequences of the ownership or disposition of Common Shares. This summary is not binding on the IRS, and the IRS is not precluded from taking a position that is different from, and contrary to, the positions taken in this summary. In addition, because the authorities on which this summary is based are subject to various interpretations, the IRS and U.S. courts could disagree with one or more of the positions taken in this summary.

 

As used in this summary, a “U.S. Holder” is a beneficial owner of Common Shares who, for U.S. federal income tax purposes, is (i) a citizen or individual resident of the United States, (ii) a corporation (or other entity that is classified as a corporation for U.S. federal income tax purposes) that is created or organized in or under the laws of the United States, any State thereof or the District of Columbia, (iii) an estate whose income is subject to U.S. federal income tax regardless of its source, or (iv) a trust if (A) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust, or (B) the trust has a valid election in effect to be treated as a U.S. person for U.S. federal income tax purposes.

 

The tax treatment of a partner in a partnership (or other entity or arrangement classified as a partnership for U.S. federal income tax purposes) may depend on both the partnership’s and the partner’s status and the activities of the partnership. Partnerships (or other entities or arrangements classified as a partnership for U.S. federal income tax purposes) that are beneficial owners of Common Shares, and their partners and other owners, should consult their own tax advisers regarding the tax consequences of the ownership and disposition of Common Shares.

 

Taxation of Common Shares

 

Distributions on Common Shares

 

In general, subject to the passive foreign investment company rules discussed below, the gross amount of any distribution received by a U.S. Holder with respect to the Common Shares (including amounts withheld to pay Canadian withholding taxes) will be included in the gross income of the U.S. Holder as a dividend to the extent attributable to the Company’s current and accumulated earnings and profits, as determined under U.S. federal income tax principles. The Company does not intend to calculate its earnings and profits under U.S. federal income tax rules. Accordingly, U.S. Holders should expect that a distribution generally will be treated as a dividend for U.S. federal income tax purposes. Subject to the passive foreign investment company rules discussed below, distributions on Common Shares to certain non-corporate U.S. Holders that are treated as dividends may be taxed at preferential rates. Such dividends will not be eligible for the “dividends received” deduction ordinarily allowed to corporate shareholders with respect to dividends received from U.S. corporations.

 

The amount of any dividend paid in Canadian dollars (including amounts withheld to pay Canadian withholding taxes) will equal the U.S. dollar value of the Canadian dollars calculated by reference to the exchange rate in effect on the date the dividend is received by the U.S. Holder, regardless of whether the Canadian dollars are converted into U.S. dollars. A U.S. Holder will have a tax basis in the Canadian dollars equal to their U.S. dollar value on the date of receipt. If the Canadian dollars received are converted into U.S. dollars on the date of receipt, the U.S. Holder should generally not be required to recognize foreign currency gain or loss in respect of the distribution. If the Canadian dollars received are not converted into U.S. dollars on the date of receipt, a U.S. Holder may recognize foreign currency gain or loss on a subsequent conversion or other disposition of the Canadian dollars. Such gain or loss will be treated as U.S. source ordinary income or loss.

 

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Distributions on Common Shares that are treated as dividends generally will constitute income from sources outside the United States and generally will be categorized for U.S. foreign tax credit purposes as “passive category income.” A U.S. Holder may be eligible to elect to claim a U.S. foreign tax credit against its U.S. federal income tax liability, subject to applicable limitations and holding period requirements, for Canadian tax withheld, if any, from distributions received in respect of the Common Shares. A U.S. Holder that does not elect to claim a U.S. foreign tax credit may instead claim a deduction for Canadian tax withheld, but only for a taxable year in which the U.S. Holder elects to do so with respect to all foreign income taxes paid or accrued in such taxable year. The rules relating to U.S. foreign tax credits are complex, and each U.S. Holder should consult its own tax adviser regarding the application of such rules.

 

Sale, Exchange or Other Taxable Disposition of Common Shares

 

A U.S. Holder generally will recognize gain or loss on the sale, exchange or other taxable disposition of Common Shares in an amount equal to the difference, if any, between the amount realized on the sale, exchange or other taxable disposition and the U.S. Holder’s adjusted tax basis in the Common Shares exchanged therefor. Subject to the passive foreign investment company rules discussed below, such gain or loss will be capital gain or loss and will be long-term capital gain (currently taxable at a reduced rate for non-corporate U.S. Holders) or loss if, on the date of the sale, exchange or other taxable disposition, the Common Shares have been held by such U.S. Holder for more than one year. The deductibility of capital losses is subject to limitations. Such gain or loss generally will be sourced within the United States for U.S. foreign tax credit purposes.

 

Passive Foreign Investment Company Rules

 

A foreign corporation will be considered a passive foreign investment company (“PFIC”) for any taxable year in which (1) 75% or more of its gross income is “passive income” under the PFIC rules or (2) 50% or more of the average quarterly value of its assets produce (or are held for the production of) “passive income.” For this purpose, “passive income” generally includes interest, dividends, rents, royalties, and certain gains. Interest, dividends, rents and royalties received from a related person (within the meaning of the PFIC rules) are excluded from passive income to the extent such payments are properly allocable to the active income of such related person. Moreover, for purposes of determining if the foreign corporation is a PFIC, if the foreign corporation owns, directly or indirectly, at least 25%, by value, of the shares of another corporation, it will be treated as if it holds directly its proportionate share of the assets and receives directly its proportionate share of the income of such other corporation. If a corporation is treated as a PFIC with respect to a U.S. Holder for any taxable year, the corporation will continue to be treated as a PFIC with respect to that U.S. Holder in all succeeding taxable years, regardless of whether the corporation continues to meet the PFIC requirements in such years, unless certain elections are made.

 

The determination as to whether a foreign corporation is a PFIC is based on the application of complex U.S. federal income tax rules, which are subject to differing interpretations, and the determination will depend on the composition of the income, expenses and assets of the foreign corporation from time to time and the nature of the activities performed by its officers and employees. The Company believes that it was classified as a PFIC for the taxable year ending September 30, 2018, and the Company believes it will be classified as a PFIC for the current taxable year and in future taxable years. However, the Company’s actual PFIC status for the current or any future taxable year is uncertain and cannot be determined until after the end of such taxable year.

 

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If the Company is classified as a PFIC, a U.S. Holder that does not make any of the elections described below would be required to report any gain on the disposition of Common Shares as ordinary income, rather than as capital gain, and to compute the tax liability on the gain and any “Excess Distribution” (as defined below) received in respect of Common Shares as if such items had been earned rateably over each day in the U.S. Holder’s holding period (or a portion thereof) for the Common Shares. The amounts allocated to the taxable year during which the gain is realized or distribution is made, and to any taxable years in such U.S. Holder’s holding period that are before the first taxable year in which the Company is treated as a PFIC with respect to the U.S. Holder, would be included in the U.S. Holder’s gross income as ordinary income for the taxable year of the gain or distribution. The amount allocated to each other taxable year would be taxed as ordinary income in the taxable year during which the gain is realized or distribution is made at the highest tax rate in effect for the U.S. Holder in that other taxable year and would be subject to an interest charge as if the income tax liabilities had been due with respect to each such prior year. For purposes of these rules, gifts, exchanges pursuant to corporate reorganizations and use of Common Shares as security for a loan may be treated as a taxable disposition of the Common Shares. An “Excess Distribution” is the amount by which distributions during a taxable year in respect of a Common Share exceed 125% of the average amount of distributions in respect thereof during the three preceding taxable years (or, if shorter, the U.S. Holder’s holding period for the Common Shares).

 

Certain additional adverse tax rules will apply to a U.S. Holder for any taxable year in which the Company is treated as a PFIC with respect to such U.S. Holder and any of its subsidiaries is also treated as a PFIC (a “Subsidiary PFIC”). In such a case, the U.S. Holder will generally be deemed to own its proportionate interest (by value) in any Subsidiary PFIC and be subject to the PFIC rules described above with respect to the Subsidiary PFIC regardless of such U.S. Holder’s percentage ownership in the Company.

 

The adverse tax consequences described above may be mitigated if a U.S. Holder makes a timely “qualified electing fund” election (a “QEF election”) with respect to its interest in the PFIC. Consequently, if the Company is classified as a PFIC, it would likely be advantageous for a U.S. Holder to elect to treat the Company as a “qualified electing fund” (a “QEF”) with respect to such U.S. Holder in the first year in which it holds Common Shares. If a U.S. Holder makes a timely QEF election with respect to the Company, the electing U.S. Holder would be required in each taxable year that the Company is considered a PFIC to include in gross income (i) as ordinary income, the U.S. Holder’s pro rata share of the ordinary earnings of the Company and (ii) as capital gain, the U.S. Holder’s pro rata share of the net capital gain (if any) of the Company, whether or not the ordinary earnings or net capital gain are distributed. An electing U.S. Holder’s basis in Common Shares will be increased to reflect the amount of any taxed but undistributed income. Distributions of income that had previously been taxed will result in a corresponding reduction of basis in the Common Shares and will not be taxed again as distributions to the U.S. Holder.

 

A QEF election made with respect to the Company will not apply to any Subsidiary PFIC; a QEF election must be made separately for each Subsidiary PFIC (in which case the treatment described above would apply to such Subsidiary PFIC). If a U.S. Holder makes a timely QEF election with respect to a Subsidiary PFIC, it would be required in each taxable year to include in gross income its pro rata share of the ordinary earnings and net capital gain of such Subsidiary PFIC, but may not receive a distribution of such income. Such a U.S. Holder may, subject to certain limitations, elect to defer payment of current U.S. federal income tax on such amounts, subject to an interest charge (which would not be deductible for U.S. federal income tax purposes if the U.S. Holder were an individual).

 

If the Company determines that it, and any subsidiary in which the Company owns, directly or indirectly, more than 50% of such subsidiary’s total aggregate voting power, is likely a PFIC in any taxable year, the Company intends to make available to U.S. Holders, upon request and in accordance with applicable procedures, a “PFIC Annual Information Statement” with respect to the Company and any such subsidiary for such taxable year. The “PFIC Annual Information Statement” may be used by U.S. Holders for purposes of complying with the reporting requirements applicable to a QEF election with respect to the Company and any Subsidiary PFIC.

 

The U.S. federal income tax on any gain from the disposition of Common Shares or from the receipt of Excess Distributions may be greater than the tax if a timely QEF election is made. It is recommended that, if the Company were to be classified as a PFIC, a U.S. Holder make a QEF election with respect to the Company and any Subsidiary PFIC.

 

Alternatively, if the Company were to be classified as a PFIC, a U.S. Holder could also avoid certain of the rules described above by making a mark-to-market election (instead of a QEF election), provided the Common Shares are treated as regularly traded on a qualified exchange or other market within the meaning of the applicable Treasury regulations. However, a U.S. Holder will not be permitted to make a mark-to-market election with respect to a Subsidiary PFIC. U.S. Holders should consult their own tax advisers regarding the potential availability and consequences of a mark-to-market election, as well as the advisability of making a protective QEF election in case the Company is classified as a PFIC in any taxable year.

 

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During any taxable year in which the Company or any Subsidiary PFIC is treated as a PFIC with respect to a U.S. Holder, that U.S. Holder generally may be required to file IRS Form 8621. U.S. Holders should consult their own tax advisers concerning annual filing requirements.

 

Required Disclosure with Respect to Foreign Financial Assets

 

Certain U.S. Holders are required to report information relating to an interest in Common Shares, subject to certain exceptions (including an exception for Common Shares held in accounts maintained by certain financial institutions), by attaching a completed IRS Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for each year in which they hold an interest in Common Shares. U.S. Holders should consult their own tax advisers regarding information reporting requirements relating to their ownership of Common Shares.

 

Certain Material Canadian Federal Income Tax Considerations

 

The following is a summary, as of today’s date, of the principal Canadian federal income tax considerations under the Income Tax Act (Canada) (“Tax Act”) that generally apply to an investor who acquires Common Shares, who, for the purposes of the Tax Act and at all relevant times, deals at arm’s length, and is not affiliated with ESSA and who acquires and holds Common Shares, as capital property (a “Holder”). Generally, Common Shares will be considered to be capital property to a Holder provided that the Holder does not use Common Shares in the course of carrying on a business of trading or dealing in securities and such Holder has not acquired them or been deemed to have acquired them in one or more transactions considered to be an adventure or concern in the nature of trade.

 

This summary is based upon the current provisions of the Canada-United States Income Tax Convention (1980) (“Treaty”), the Tax Act and its regulations and the current published administrative policies and assessing practices of the Canada Revenue Agency (“CRA”). This summary takes into account all specific proposals to amend the Tax Act and its regulations publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof (the “Tax Proposals”) and assumes that the Tax Proposals will be enacted in the form proposed, although no assurance can be given that the Tax Proposals will be enacted in their current form or at all. This summary does not otherwise take into account any changes in law or in the administrative policies or assessing practices of the CRA, whether by legislative, governmental or judicial decision or action, nor does it take into account or consider any provincial, territorial or foreign income tax considerations, which considerations may differ significantly from the Canadian federal income tax considerations discussed in this summary.

 

This summary only applies to Holders who (i) for the purposes of the Tax Act, have not and will not be resident in Canada at any time, (ii) do not use or hold the common shares in carrying on a business in Canada, and (iii) are resident in the United States for income tax purposes and entitled to benefits under the Treaty. Special rules, which are not discussed in this summary, may apply to such a Holder that is an insurer that carries on business in Canada and elsewhere.

 

This summary is of a general nature only, is not exhaustive of all possible Canadian federal income tax considerations and is not intended to be, nor should it be construed to be, legal or tax advice to any particular Holder. Holders should consult their own tax advisors with respect to their particular circumstances.

 

Currency

 

For purposes of the Tax Act, all amounts relating to the acquisition, holding or disposition of Common Shares must be expressed in Canadian dollars. Amounts denominated in any other currency must be converted into Canadian dollars using the rate of exchange quoted by the Bank of Canada on the day the amount first arose, or such other rate of exchange as is acceptable to the CRA.

 

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Dividends

 

Dividends paid or credited or deemed to be paid or credited to a Holder by ESSA are subject to Canadian withholding tax at the rate of 25% on the gross amount of the dividend unless such rate is reduced by the terms of the Treaty. The rate of withholding tax on dividends paid or credited to a Holder who is resident in the U.S. for purposes of the Treaty, entitled to benefits under the Treaty, and is the beneficial owner of the dividend is generally limited to 15% of the gross amount of the dividend (or 5% in the case of such a Holder that is a company beneficially owning at least 10% of ESSA’s voting shares). Holders should consult their own tax advisors regarding the application of the Treaty to dividends based on their particular circumstances.

 

Dispositions of Common Shares

 

A Holder generally will not be subject to tax under the Tax Act in respect of a capital gain realized on the disposition or deemed disposition of Common Shares, nor will capital losses arising therefrom be recognized under the Tax Act, unless Common Shares constitute “taxable Canadian property” to the Holder for purposes of the Tax Act, and the gain is not exempt from tax pursuant to the terms of the Treaty.

 

Provided Common Shares are listed on a “designated stock exchange”, as defined in the Tax Act (which currently includes the TSX-V and the Nasdaq), at the time of disposition, the Common Shares generally will not constitute taxable Canadian property of a Holder at that time, unless at any time during the 60 month period immediately preceding the disposition the following two conditions are met concurrently:

 

(i) the Holder, persons with whom the Holder did not deal at arm’s length, and partnerships in which the Holder or such non-arm’s length person holds a membership interest (either directly or indirectly through one or more partnerships), or the Holder together with all such persons, owned 25% or more of the issued shares of any class or series of ESSA’s shares; and

 

(ii) more than 50% of the fair market value of the Common Shares was derived directly or indirectly from one or any combination of real or immovable property situated in Canada, “Canadian resource properties” (as defined in the Tax Act), “timber resource properties” (as defined in the Tax Act) or an option, an interest or right in such property, whether or not such property exists.

 

Notwithstanding the foregoing, a Common Share may otherwise be deemed to be taxable Canadian property to a Holder for purposes of the Tax Act in particular circumstances.

 

Holders whose Common Shares are taxable Canadian property should consult their own tax advisors.

 

F.Dividends and Paying Agents

 

Not applicable.

 

G.Statement by Experts

 

Not applicable.

 

H.Documents on Display

 

This Annual Report and the related exhibits are available for viewing at the offices of ESSA, 999 West Broadway, Suite 720, Vancouver, BC V5Z 1K5, telephone: (778) 331-0962. Copies of ESSA’s financial statements and other continuous disclosure documents required under the Securities Act (Ontario) are available for viewing on SEDAR at www.sedar.