10-Q 1 achv-10q_20180630.htm 10-Q achv-10q_20180630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED June 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 ____________.

Commission file number 033-80623

Achieve Life Sciences, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

95-4343413

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification Number)

1001 W. Broadway, Suite 400, Vancouver, British Columbia, V6H 4B1

(Address of Principal Executive Offices)

(604) 736-3678

(Registrant’s telephone number, including area code)

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

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

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company  

 

 

 

 

Emerging growth company  

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at August 8, 2018

Common Stock, $0.001 par value

 

4,551,005

 

 


Achieve Life Sciences, Inc.

Index to Form 10-Q

 

 

Page
Number

 

 

Part I.   Financial Information

3

 

 

 

Item 1

Consolidated Financial Statements (unaudited)

3

 

 

 

 

Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017

3

 

 

 

 

Consolidated Statements of Loss and Comprehensive Loss (unaudited) for the three and six months ended June 30, 2018 and June 30, 2017

4

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2018 and June 30, 2017

5

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

6

 

 

 

Item 2.

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

20

 

 

 

 

 

 

Item 4.

Controls and Procedures

27

 

 

Part II.   Other Information

29

 

 

 

Item 1A.

Risk Factors

29

 

 

 

Item 6.

Exhibits

50

 

 

Items 2, 3 and 4 are not applicable and therefore have been omitted.

 

 

 

Signatures

51

2


PART I. FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements

Achieve Life Sciences, Inc.

Consolidated Balance Sheets

(Unaudited)

(In thousands, except per share and share amounts) 

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents [note 6]

 

$

15,280

 

 

$

5,284

 

Restricted cash [note 6 and note 9]

 

 

 

 

 

222

 

Amounts receivable

 

 

124

 

 

 

9

 

Prepaid expenses

 

 

168

 

 

 

393

 

Total current assets

 

 

15,572

 

 

 

5,908

 

Restricted cash [note 6]

 

 

50

 

 

 

50

 

Property and equipment, net

 

 

42

 

 

 

59

 

Other assets

 

 

101

 

 

 

309

 

License agreement [note 2, 4 and 5]

 

 

2,421

 

 

 

2,532

 

Goodwill [note 2 and 5]

 

 

1,034

 

 

 

1,034

 

Total assets

 

$

19,220

 

 

$

9,892

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

251

 

 

$

213

 

Accrued liabilities other

 

 

966

 

 

 

438

 

Accrued clinical liabilities

 

 

782

 

 

 

877

 

Accrued compensation

 

 

750

 

 

 

458

 

Current portion of long-term obligations [note 9]

 

 

11

 

 

 

27

 

Total current liabilities

 

 

2,760

 

 

 

2,013

 

Long-term obligations, less current portion [note 9]

 

 

18

 

 

 

 

Total liabilities

 

 

2,778

 

 

 

2,013

 

Commitments and contingencies [note 9]

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Series A convertible preferred stock, $0.001 par value, 5,000,000 shares authorized, 3,283 issued and outstanding at June 30, 2018 and zero issued and outstanding at December 31, 2017.

 

 

 

 

 

 

Common stock, $0.001 par value, 150,000,000 shares authorized, 4,238,526 and

   1,195,675 issued at June 30, 2018 and December 31, 2017, respectively, and

   4,238,526 and 1,194,793 outstanding at June 30, 2018 and December 31, 2017, respectively.

 

 

15

 

 

 

12

 

Additional paid-in capital

 

 

34,926

 

 

 

20,556

 

Accumulated deficit

 

 

(18,504

)

 

 

(12,694

)

Accumulated other comprehensive income

 

 

5

 

 

 

5

 

Total stockholders' equity

 

 

16,442

 

 

 

7,879

 

Total liabilities and stockholders' equity

 

 

19,220

 

 

 

9,892

 

Going concern [note 1]

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

3


Achieve Life Sciences, Inc.

Consolidated Statements of Loss and Comprehensive Loss

(Unaudited)

(In thousands, except per share and share amounts)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

1,045

 

 

 

62

 

 

 

2,246

 

 

 

123

 

General and administrative

 

 

1,751

 

 

 

93

 

 

 

3,564

 

 

 

352

 

Total operating expenses

 

 

2,796

 

 

 

155

 

 

 

5,810

 

 

 

475

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

17

 

 

 

 

 

 

27

 

 

 

 

Other expenses

 

 

(9

)

 

 

(11

)

 

 

(27

)

 

 

(20

)

Total other income (expense)

 

 

8

 

 

 

(11

)

 

 

 

 

 

(20

)

Net loss before income taxes

 

$

(2,788

)

 

$

(166

)

 

$

(5,810

)

 

$

(495

)

Recovery of deferred income taxes [note 4]

 

 

 

 

 

 

 

 

 

 

 

124

 

Net loss

 

 

(2,788

)

 

 

(166

)

 

 

(5,810

)

 

 

(371

)

OTHER COMPREHENSIVE LOSS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on foreign exchange

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

Total other comprehensive income

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

Comprehensive loss

 

$

(2,788

)

 

$

(167

)

 

$

(5,810

)

 

$

(372

)

Basic and diluted net loss per common share

 

$

(1.82

)

 

$

(78.66

)

 

$

(4.18

)

 

$

(175.22

)

Shares used in computation of basic and diluted net loss per

   common share

 

 

1,529,532

 

 

 

2,123

 

 

 

1,389,209

 

 

 

2,123

 

 

See accompanying notes

 

 

4


Achieve Life Sciences, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2018

 

 

2017

 

Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(5,810

)

 

$

(371

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization [note 4]

 

 

154

 

 

 

111

 

Deferred income tax (recovery) [note 2 and note 4]

 

 

 

 

 

(124

)

Stock-based compensation [note 7 [c] and note 7 [d]]

 

 

378

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Amounts receivable

 

 

(21

)

 

 

 

Prepaid expenses and other assets

 

 

433

 

 

 

2

 

Accounts payable

 

 

38

 

 

 

417

 

Accrued liabilities other

 

 

528

 

 

 

(64

)

Accrued clinical liabilities

 

 

(95

)

 

 

 

Accrued compensation

 

 

292

 

 

 

 

Lease obligation

 

 

2

 

 

 

 

Net cash used in operating activities

 

 

(4,101

)

 

 

(29

)

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from the sale of preferred stock, common stock and warrants, net of issuance costs

 

 

12,193

 

 

 

 

Proceeds from exercise of warrants, net of issuance costs

 

 

428

 

 

 

 

Stockholder loans

 

 

 

 

 

20

 

Proceeds from purchase agreement with Lincoln Park Capital, net of issuance costs

 

 

1,280

 

 

 

 

Net cash provided by financing activities

 

 

13,901

 

 

 

20

 

Investing Activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(36

)

 

 

 

Proceeds on disposal of assets

 

 

10

 

 

 

 

Net cash provided by  investing activities

 

 

(26

)

 

 

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

9,774

 

 

 

(9

)

Cash, cash equivalents and restricted cash at beginning of the period

 

 

5,556

 

 

 

15

 

Cash, cash equivalents and restricted cash at end of the period

 

$

15,330

 

 

$

6

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Non cash financing activities

 

 

 

 

 

 

 

 

Interest expense accrued but not yet paid

 

$

 

 

$

14

 

 

See accompanying notes.

 

5


Achieve Life Sciences, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Achieve Life Sciences, Inc. (referred to as “Achieve,” “we,” “us,” or “our”) is a clinical-stage pharmaceutical company committed to the global development and commercialization of cytisine for smoking cessation. We were incorporated in the state of Delaware, and operate out of Vancouver, British Columbia and Seattle, Washington.

 

On May 23, 2018, we effected a one-for-ten reverse stock split on our shares of common stock. Unless otherwise noted, impacted amounts and share information included in the financial statements and notes thereto have been retroactively adjusted for the stock split as if such stock split occurred on the first day of the first period presented. Certain amounts in the notes to the financial statements may be slightly different than previously reported due to rounding of fractional shares as a result of the reverse stock split.

On August 1, 2017, OncoGenex Pharmaceuticals, Inc., or OncoGenex, completed a transaction, or the Arrangement, with Achieve Life Science, Inc., or ALS, as contemplated by the Merger Agreement between ALS and OncoGenex dated January 5, 2017, or the Merger Agreement. Under the terms of the Merger Agreement, OncoGenex changed its name to Achieve Life Sciences, Inc., instituted an one-for-eleven reverse stock split, issued shares of its common stock (after accounting for the elimination of resulting fractional shares) in exchange for all of the outstanding preferred shares, common shares and convertible debentures of ALS, and as a result ALS became a wholly-owned subsidiary of OncoGenex, and is listed on the Nasdaq Capital Market under the ticker symbol ACHV. These consolidated financial statements account for the Arrangement between OncoGenex and ALS as a reverse merger, whereby ALS is deemed to be the acquiring entity from an accounting perspective. The consolidated results of operations for the three and six month periods ended June 30, 2018 include the results of operations of the combined company. The consolidated results of operations for the three and six month periods ended June 30, 2017 include only our consolidated results of operations and do not include historical results of OncoGenex.

The unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required to be presented for complete financial statements. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting only of normal recurring items) which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The accompanying consolidated Balance Sheet at December 31, 2017 has been derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year then ended. The unaudited consolidated financial statements and related disclosures have been prepared with the assumption that users of the interim financial information have read or have access to the audited consolidated financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2017 and filed with the United States Securities and Exchange Commission, or the SEC, on March 1, 2018.

The consolidated financial statements include the accounts of Achieve and our wholly owned subsidiaries, Achieve Life Sciences Technologies Inc., Achieve Life Science, Inc., Extab Corporation, and Achieve Pharma UK Limited. All intercompany balances and transactions have been eliminated.

Liquidity and Going Concern Uncertainty

We have historically experienced recurring losses from operations that have generated an accumulated deficit of $18.5 million through June 30, 2018. During the three and six months ended June 30, 2018, we incurred a net loss of $2.8 million and $5.8 million, respectively. As of June 30, 2018, we had a cash and cash equivalents balance of $15.3 million and a positive working capital balance of $12.8 million.

The accompanying financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and liabilities and commitments in the normal course of business.

 

Substantial doubt exists as to our ability to continue as a going concern. Our ability to continue as a going concern is uncertain and dependent on our ability to obtain additional financing. There is no assurance that we will obtain financing from other sources. We have, thus far, financed our operations through the closing of the Arrangement (Note 2—Reverse Merger), debt and equity financing (Note 7—Common Stock). Without additional funds, we may be forced to delay, scale back or eliminate some of our research and development activities or other operations and potentially delay product development in an effort to provide sufficient funds to continue our operations. If any of these events occurs, our ability to achieve our development and commercialization goals would be adversely affected.

6


Our current resources are insufficient to fund our planned operations for the next 12 months. We will continue to require substantial additional capital to continue our clinical development activities. Accordingly, we will need to raise substantial additional capital to continue to fund our operations from the sale of our securities, partnering arrangements or other financing transactions in order to finance the commercialization of our product candidate. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our clinical development efforts. Failure to raise capital as and when needed, on favorable terms or at all, will have a negative impact on our financial condition and our ability to develop our product candidate. We expect our research and development expenses to substantially increase in connection with our ongoing activities, particularly as we advance our product candidate in clinical development.

The consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that might be necessary should we be unable to continue as a going concern. Such adjustments could be material.

 

 

2. REVERSE MERGER

The consolidated financial statements account for the Arrangement between us and OncoGenex, whereby OncoGenex acquired all of our outstanding common shares, as a reverse merger wherein we are deemed to be the acquiring entity from an accounting perspective. The consolidated results of operations include the results of operations of the combined company for the three and six months period ended June 30, 2018. The consolidated results of operations for the three and six months ended June 30, 2017 include only our consolidated results of operations and do not include historical results of OncoGenex.

On August 1, 2017, our stockholders approved the Arrangement described above and on the same date, OncoGenex stockholders approved the Arrangement and a one-for-eleven reverse stock split of its common stock. The reverse stock split occurred immediately prior to the closing of the Arrangement. Resulting fractional shares were eliminated.

Under the purchase method of accounting, OncoGenex’s outstanding shares of common stock were valued using the closing price on The Nasdaq Capital Market of $46.20 as at August 1, 2017. There were 273,670 shares of common stock outstanding on August 1, 2017, immediately prior to closing. The fair value of the OncoGenex outstanding stock options was determined using the Black-Scholes pricing model with the following assumptions: stock price of $46.20, volatility of 97.23% to 106.63%, risk-free interest rate of 1.31% to 1.54%, and expected lives ranging from 1.82 to 3.31 years. The fair value of the OncoGenex outstanding warrants was determined using the Black-Scholes pricing model with the following assumptions: stock price of $46.20, volatility of 90.33% to 106.08%, risk-free interest rate of 1.32% to 1.53%, and expected lives ranging from 1.91 to 3.24 years.

The final purchase price is summarized as follows (dollars in thousands, except per share amounts):

 

Shares of the combined company to be owned by OncoGenex equity holders

 

 

273,671

 

Multiplied by the price per share of OncoGenex stock

 

$

46.20

 

Value of shares of the combined company owned by OncoGenex equity holders

 

$

12,643

 

Fair value of options and warrants assumed

 

$

207

 

Fair value of contingent value rights assumed

 

$

200

 

Total purchase price

 

$

13,050

 

 

Under the purchase method of accounting, the total purchase price as shown in the table above is allocated to the OncoGenex net tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of the date of the completion of the Arrangement. The final purchase price allocation is as follows (in thousands):

 

Cash, cash equivalents and marketable securities

 

 

12,376

 

Prepaid expenses and other assets

 

 

518

 

Intangible assets license agreements

 

 

8,610

 

Accounts payable, accrued expenses and other liabilities

 

 

(4,054

)

Deferred tax liability

 

 

(2,928

)

Contingent value rights

 

 

(200

)

Excess negative goodwill

 

 

(1,272

)

Total purchase price

 

 

13,050

 

 

7


In accordance with ASC 805, “Business Combinations,” any excess of fair value of acquired net assets over purchase price (negative goodwill) has been recognized as a gain in the period the Arrangement was completed. We have reassessed whether all acquired assets and assumed liabilities have been identified and recognized and performed remeasurements to verify that the consideration paid, assets acquired, and liabilities assumed have been properly valued. The remaining excess has been recognized as a gain. There was no other impact to other comprehensive income.

 

OncoGenex issued contingent value rights, or each, a CVR and collectively, the CVRs, on July 31, 2017 to their existing stockholders as of July 27, 2017. One CVR was a non-transferable right to potentially receive certain cash, equity or other consideration received by us in the event that we received any such consideration during the five-year period after consummation of the Arrangement as a result of the achievement of certain clinical milestones, regulatory milestones, sales-based milestones and/or up-front payment milestones relating to apatorsen, or the Milestones, upon the terms and subject to the conditions set forth in a contingent value rights agreement to be entered into between us and an as of yet unidentified third party, as rights agent, or the CVR Agreement. The aggregate consideration to be distributed to the holders of the CVRs would have been equal to 80% of the consideration received by us as a result of the achievement of the Milestones less certain agreed to offsets, as determined pursuant to the CVR Agreement.

The contingent value rights expired on August 17, 2017, as we did not enter into any term sheets or agreement with third parties for the development or commercialization of apatorsen. A recovery of $0.2 million was recognized on our Consolidated Statements of Loss and Comprehensive Loss in 2017.

Pro Forma Results of Operations

The results of operations of OncoGenex are included in our consolidated financial statements from the date of the completion of the transaction on August 1, 2017. The following table presents pro forma results of operations and gives effect to the business combination transaction as if the transaction was consummated at the beginning of the period presented. The unaudited pro forma results of operations are not necessarily indicative of what would have occurred had the business combination been completed at the beginning of the retrospective periods or of the results that may occur in the future.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss applicable to common shareholders

 

$

(4,747

)

 

$

(3,163

)

 

$

(7,769

)

 

$

(6,637

)

Net loss per share-basic and diluted

 

$

(3.10

)

 

$

(11.50

)

 

$

(5.59

)

 

$

(24.08

)

Weighted average shares

 

 

1,529,532

 

 

 

275,093

 

 

 

1,389,209

 

 

 

275,612

 

 

 

3. ACCOUNTING POLICIES

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed those estimates that we believe are critical and require the use of complex judgment in their application in our audited financial statements for the year ended December 31, 2017 in our Annual Report on Form 10-K filed with the SEC, on March 1, 2018. Since December 31, 2017, there have been no material changes to our critical accounting policies or the methodologies or assumptions we apply under them.

Pending Adoption of Recent Accounting Pronouncements

On February 2016, the Financial Accounting Standards Board, or FASB, issued its new leases standard, ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02. ASU 2016-02 is aimed at putting most leases on lessees’ balance sheets, but it would also change aspects of lessor accounting. ASU 2016-02 is effective for public business entities for annual periods beginning after December 15, 2019 and interim periods within that year.  This standard is expected to have a significant impact on our accounting for our lease arrangements, particularly our current operating lease arrangements, as well as our disclosures. 

 

Recently Adopted Accounting Policies

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606): Revenue from Contracts with Customers, which guidance in this update will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance when it becomes effective. ASU No. 2014-09 affects any entity that enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principal of ASU No. 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount

8


of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which will be our fiscal year 2018 (or December 31, 2018), and entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Early adoption is permitted. We have updated our policies and procedures to reflect the adoption of ASU No. 2014-09. The adoption of this standard did not have an impact on our financial position or results of operations.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. For public business entities, the amendments in this Update are effective for annual periods beginning after 15 December 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after 15 December 2017, and interim periods within annual periods beginning after 15 December 2018. The adoption of this standard did not have a significant impact on our financial position or results of operations.

 

 

4. INTANGIBLES

All of our intangible assets are subject to amortization and are amortized using the straight-line method over their estimated useful life.

We acquired license agreements, related to OncoGenex’s product candidate apatorsen, upon the acquisition of OncoGenex on August 1, 2017. As at the date of the acquisition, the agreements were determined to have a fair value of $8.6 million with an estimated useful life of 6 years. (Note 2—Reverse Merger)

In August 2017, we discontinued further development of apatorsen. We provided a notice of discontinuance to our former development partners for apatorsen, Ionis Pharmaceuticals, Inc., or Ionis, and a letter of termination to the University of British Columbia, or UBC, notifying them that we have discontinued development of apatorsen resulting in termination of all licensing agreements related to this product candidate. We believe that all financial obligations, other than continuing mutual indemnification obligations and our requirement to pay for out-of-pocket patent expenses incurred up to the date of termination and for abandoning the apatorsen patents and patent applications, under all apatorsen related agreements with Ionis and UBC, are no longer owed and no further payments are due. We recognized a loss on disposition of apatorsen of $8.6 million and a deferred income tax recovery of $2.9 million as a result of discontinuing the development program and providing a notice of discontinuance of the license agreements with Ionis.

We acquired license and supply agreements, in relation to cytisine upon the acquisition of Extab Corporation, or Extab, on May 18, 2015. The agreements were determined to have a fair value of $3.1 million with an estimated useful life of 14 years.

The components of intangible assets were as follows:

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

Gross Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

Gross Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

 

Value

 

 

Amortization

 

 

Value

 

 

Value

 

 

Amortization

 

 

Value

 

License Agreements

 

$

3,117

 

 

$

(696

)

 

$

2,421

 

 

$

3,117

 

 

$

(585

)

 

$

2,532

 

 

For the three and six months ended June 30, 2018 we recorded license agreement amortization expense of $0.1 million and $0.1 million. For the three and six months ended June 30, 2017 we recorded license agreement amortization expense of $0.1 million and $0.1 million. The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2018:

 

Year Ending December 31,

 

 

 

 

2018

 

 

111

 

2019

 

 

223

 

2020

 

 

223

 

2021

 

 

223

 

2022

 

 

223

 

Thereafter

 

 

1,418

 

Total

 

$

2,421

 

9


 

We evaluate the carrying amount of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful life or that indicate the asset may be impaired. We conducted an impairment analysis for long lived assets, including the license and supply agreements for the active pharmaceutical ingredient cytisine, and concluded no impairment has occurred as of June 30, 2018.

 

 

5. LICENSE AGREEMENTS

Sopharma License and Supply Agreements

In 2009 and 2010, we entered into a license agreement, or the Sopharma License Agreement, and a supply agreement, or the Sopharma Supply Agreement, with Sopharma, AD, or Sopharma. Pursuant to the Sopharma License Agreement, we were granted access to all available manufacturing, efficacy and safety data related to cytisine, as well as a granted patent in several European countries including Germany, France and Italy related to new oral dosage forms of cytisine providing enhanced stability. Additional rights granted under the Sopharma License Agreement include the exclusive use of, and the right to sublicense, the trademark Tabex in all territories—other than certain countries in Central and Eastern Europe, Scandinavia, North Africa, the Middle East and Central Asia, as well as Vietnam, where Sopharma or its affiliates and agents already market Tabex—in connection with the marketing, distribution and sale of products. Under the Sopharma License Agreement, we agreed to pay a nonrefundable license fee. In addition, we agreed to make certain royalty payments equal to a mid-teens percentage of all net sales of Tabex branded products in our territory during the term of the Sopharma License Agreement, including those sold by a third party pursuant to any sublicense which may be granted by us. We have agreed to cooperate with Sopharma in the defense against any actual or threatened infringement claims with respect to Tabex. Sopharma has the right to terminate the Sopharma License Agreement upon the termination or expiration of the Sopharma Supply Agreement. The Sopharma License Agreement will also terminate under customary termination provisions including bankruptcy or insolvency and material breach. To date, we have paid Sopharma $10 pursuant to the Sopharma License Agreement.

A cross-license exists between us and Sopharma whereby we grant to Sopharma rights to any patents or patent applications or other intellectual property rights filed by us in Sopharma territories.

On May 14, 2015, we and Sopharma entered into an amendment to the Sopharma License Agreement. Among other things, the amendment to the Sopharma License Agreement reduced the royalty payments payable by us to Sopharma from a percentage in the mid-teens to a percentage in the mid-single digits and extended the term of the Sopharma License Agreement until May 26, 2029.

On July 28, 2017, we and Sopharma entered into the amended and restated Sopharma Supply Agreement. Pursuant to the amended and restated Sopharma Supply Agreement, for territories as detailed in the licensing agreement, we will exclusively purchase all of our cytisine from Sopharma, and Sopharma agrees to exclusively supply all such cytisine requested by us, and we extended the term to 2037. In addition, Achieve will have full access to the cytisine supply chain and Sopharma will manufacture sufficient cytisine to meet a forecast for a specified demand of cytisine for the five years commencing shortly after the commencement of the agreement, with the forecast to be updated regularly thereafter. Each of us and Sopharma may terminate the Sopharma Supply Agreement in the event of the other party’s material breach or bankruptcy or insolvency.

University of Bristol License Agreement

In July 2016, we entered into a license agreement with the University of Bristol, or the University of Bristol License Agreement. Under the University of Bristol License Agreement, we received exclusive and nonexclusive licenses from the University of Bristol to certain patent and technology rights resulting from research activities into cytisine and its derivatives for use in smoking cessation, including a number of patent applications related to novel approaches to cytisine binding at the nicotinic receptor level. Any patents issued in connection with these applications would be scheduled to expire on February 5, 2036 at the earliest.

In consideration of rights granted by the University of Bristol, we agreed to pay amounts of up to $3.2 million, in the aggregate, tied to a financing milestone and to specific clinical development and commercialization milestones resulting from activities covered by the University of Bristol License Agreement. Additionally, if we successfully commercialize product candidates subject to the University of Bristol License Agreement, we are responsible for royalty payments in the low-single digits and payments up to a percentage in the mid-teens of any sublicense income, subject to specified exceptions, based upon net sales of such licensed products.

On January 22, 2018, we and the University of Bristol entered into an amendment to the University of Bristol License Agreement. Pursuant to the amended University of Bristol License Agreement, we received exclusive rights for all human medicinal uses of cytisine across all therapeutic categories from the University of Bristol from research activities into cytisine and its derivatives. In consideration of rights granted by the amended University of Bristol License Agreement, we agreed to pay an initial amount of $37,500 upon the execution of the amended University of Bristol License Agreement, and additional amounts of up to $1.7 million, in

10


the aggregate, tied to a financing milestone and to specific clinical development and commercialization milestones resulting from activities covered by the amended University of Bristol License Agreement, in addition to amounts under the original University of Bristol License Agreement of up to $3.2 million in the aggregate, tied to specific financing, development and commercialization milestones. Additionally, if we successfully commercialize any product candidate subject to the amended University of Bristol License Agreement or to the original University of Bristol License Agreement, we will be responsible, as provided in the original University of Bristol License Agreement, for royalty payments in the low-single digits and payments up to a percentage in the mid-teens of any sublicense income, subject to specified exceptions, based upon net sales of such licensed products. Up to June 30, 2018, we have paid the University of Bristol $50,000 pursuant to the University of Bristol License Agreement.

Unless otherwise terminated, the University of Bristol License Agreement will continue until the earlier of July 2036 or the expiration of the last patent claim subject to the University of Bristol License Agreement. We may terminate the University of Bristol License Agreement for convenience upon a specified number of days’ prior notice to the University of Bristol. The University of Bristol License Agreement will terminate under customary termination provisions including bankruptcy or insolvency or its material breach of the agreement. Under the terms of the University of Bristol License Agreement, we had provided 100 grams of cytisine to the University of Bristol as an initial contribution.

Ionis and UBC License Agreements

In August 2017, we discontinued further development of apatorsen. We provided a notice of discontinuance to our former development partners for apatorsen, Ionis Pharmaceuticals, Inc., or Ionis, and a letter of termination to the University of British Columbia, or UBC, notifying them that we have discontinued development of apatorsen resulting in termination of all licensing agreements related to this product candidate. We believe that all financial obligations, other than continuing mutual indemnification obligations and our requirement to pay for out-of-pocket patent expenses incurred up to the date of termination and for abandoning the apatorsen patents and patent applications, under all apatorsen related agreements with Ionis and UBC, are no longer owed and no further payments are due.

 

 

6. FAIR VALUE MEASUREMENTS

Assets and liabilities recorded at fair value in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. For certain of our financial instruments including amounts receivable and accounts payable the carrying values approximate fair value due to their short-term nature.

ASC 820 “Fair Value Measurements and Disclosures” specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with ASC 820, these inputs are summarized in the three broad levels listed below:

 

Level 1 – Quoted prices in active markets for identical securities.

 

Level 2 – Other significant inputs that are observable through corroboration with market data (including quoted prices in active markets for similar securities).

 

Level 3 – Significant unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability.

As quoted prices in active markets are not readily available for certain financial instruments, we obtain estimates for the fair value of financial instruments through third-party pricing service providers.

In determining the appropriate levels, we performed a detailed analysis of the assets and liabilities that are subject to ASC 820.

We invest our excess cash in accordance with investment guidelines that limit the credit exposure to any one financial institution other than securities issued by the U.S. Government. These securities are not collateralized and mature within one year.

A description of the valuation techniques applied to our financial instruments measured at fair value on a recurring basis follows.

Financial Instruments

Cash

Significant amounts of cash are held on deposit with large well-established U.S. and Canadian financial institutions.

11


Money Market Securities

Money market securities are classified within Level I of the fair value hierarchy and are valued based on quoted prices in active markets for identical securities.

U.S. Government and Agency Securities

U.S. Government Securities U.S. government securities are valued using quoted market prices. Valuation adjustments are not applied. Accordingly, U.S. government securities are categorized in Level 1 of the fair value hierarchy.

U.S. Agency Securities U.S. agency securities are comprised of two main categories consisting of callable and non-callable agency issued debt securities. Non-callable agency issued debt securities are generally valued using quoted market prices. Callable agency issued debt securities are valued by benchmarking model-derived prices to quoted market prices and trade data for identical or comparable securities. Actively traded non-callable agency issued debt securities are categorized in Level 1 of the fair value hierarchy. Callable agency issued debt securities are categorized in Level 2 of the fair value hierarchy.

Corporate and Other Debt

Corporate Bonds and Commercial Paper The fair value of corporate bonds and commercial paper is estimated using recently executed transactions, market price quotations (where observable), bond spreads or credit default swap spreads adjusted for any basis difference between cash and derivative instruments. The spread data used are for the same maturity as the bond. If the spread data does not reference the issuer, then data that reference a comparable issuer are used. When observable price quotations are not available, fair value is determined based on cash flow models with yield curves, bond or single name credit default swap spreads and recovery rates based on collateral values as significant inputs. Corporate bonds and commercial paper are generally categorized in Level 2 of the fair value hierarchy; in instances where prices, spreads or any of the other aforementioned key inputs are unobservable, they are categorized in Level 3 of the hierarchy.

Warrants

As of June 30, 2018, the fair value of the warrant liability was insignificant. We reassess the fair value of the common stock warrants classified as liabilities at each reporting date utilizing a Black-Scholes pricing model. Inputs used in the pricing model include estimates of stock price volatility, expected warrant life and risk-free interest rate. The computation of expected volatility was based on the historical volatility of comparable companies from a representative peer group selected based on industry and market capitalization for a period that coincides with the expected life of the warrants that are classified as liabilities. Warrants that are classified as liabilities are categorized in Level 3 of the fair value hierarchy. A small change in the estimates used may have a relatively large change in the estimated valuation. Warrants that are classified as equity are not considered liabilities and therefore are not reassessed for their fair values at each reporting date.

The following table presents information about our assets and liabilities that are measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value (in thousands):

 

June 30, 2018

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

1,083

 

 

$

 

 

$

 

 

$

1,083

 

Money market securities (cash equivalents)

 

 

14,197

 

 

 

 

 

 

 

 

 

14,197

 

Restricted cash (Note 6)

 

 

50

 

 

 

 

 

 

 

 

 

50

 

Total assets

 

$

15,330

 

 

$

 

 

$

 

 

$

15,330

 

 

Cash, cash equivalents and short-term investments consist of the following (in thousands):

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

June 30, 2018

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Cash

 

$

1,083

 

 

$

 

 

$

 

 

$

1,083

 

Money market securities

 

 

14,197

 

 

 

 

 

 

 

 

 

14,197

 

Total cash and cash equivalents

 

$

15,280

 

 

$

 

 

$

 

 

$

15,280

 

Money market securities (restricted cash)

 

 

50

 

 

 

 

 

 

 

 

 

50

 

Total restricted cash

 

$

50

 

 

$

 

 

$

 

 

$

50

 

 

12


Our gross realized gains and losses on sales of available-for-sale securities were not material for the three and six months ended June 30, 2018 and 2017.

We only invest in A (or equivalent) rated securities. All securities included in cash and cash equivalents had maturities of 90 days or less at the time of purchase. All securities included in short-term investments have maturities of within one year of the balance sheet date.  The cost of securities sold is based on the specific identification method.

 

 

7. COMMON STOCK

[a]

Authorized

150,000,000 authorized common shares, par value of $0.001, and 5,000,000 preferred shares, par value of $0.001. 

 

On May 22, 2018, the Company filed an amendment to its Articles of Incorporation and effected as of May 23, 2018 a one-for-ten reverse stock split of its issued and outstanding shares of common stock, $0.001 par value and a certificate of amendment to its Second Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 75,000,000 to 150,000,000.

[b]

Issued and outstanding shares

 

Purchase Agreement and Financing with Lincoln Park Capital

On September 14, 2017 we and Lincoln Park Capital Fund, LLC, or LPC, entered into a share and unit purchase agreement, or Purchase Agreement, pursuant to which we have the right to sell to LPC up to $11.0 million in shares of our common stock, par value $0.001 per share, subject to certain limitations and conditions set forth in the Purchase Agreement. On May 22, 2018 we obtained the requisite stockholder authorization to sell shares of our common stock to LPC in excess of 20% of our outstanding shares of common stock (as of the date we entered into the purchase agreement) in order to be able to sell to LPC the full amount remaining under the purchase agreement. 

Pursuant to the Purchase Agreement, LPC initially purchased 32,895 of our units, or the Units, at a purchase price of $30.40 per unit, with each Unit consisting of (a) one share of our Common Stock and (b) one warrant to purchase one-quarter of a share of Common Stock at an exercise price of $34.96 per share, or Warrant.  Each Warrant is exercisable six months following the issuance date until the date that is five years and six months after the issuance date and is subject to customary adjustments.  The Warrants were issued only as part of the Units in the initial purchase of $1.0 million and no warrants shall be issued in connection with any other purchases of common stock under the Purchase Agreement.

After the initial purchase, if our stock price is above $1.00, as often as every other business day over the 30-month term of the Purchase Agreement, and up to an aggregate amount of an additional $10.0 million (subject to certain limitations) of shares of common stock, we have the right, from time to time, in our sole discretion and subject to certain conditions to direct LPC to purchase up to 8,000 shares of common stock with such amounts increasing as the closing sale price of our common stock as reported on The Nasdaq Capital Market increases. The purchase price of shares of common stock pursuant to the Purchase Agreement will be based on prevailing market prices of common stock at the time of sales without any fixed discount, and we will control the timing and amount of any sales of common stock to LPC. In addition, we may direct LPC to purchase additional amounts as accelerated purchases if on the date of a regular purchase the closing sale price of the common stock is not below $20.00 per share. As consideration for entering into the Purchase Agreement, we issued to LPC 12,352 shares of common stock; no cash proceeds were received from the issuance of these shares.

From September 14, 2017 through June 30, 2018, we offered and sold 183,378 shares of our common stock pursuant to our Purchase Agreement with LPC, including the 32,895 shares that were part of the initial purchase of Units. These sales resulted in gross proceeds to us of approximately $3.6 million and offering expenses of $0.5 million. As of June 30, 2018 shares of our common stock having an aggregate value of approximately $7.4 million remained available for sale under this offering program.

 

June 2018 Public Offering

On June 19, 2018, we completed an underwritten registered public offering, pursuant to which we sold 710,500 Class A Units at a price per unit of $4.00 and 9,158 Class B Units at a price per unit of $1,000.

Each Class A Unit consisted of one share of our common stock and a warrant to purchase one share of common stock.

13


Each Class B Unit consisted of one share of Series A Convertible Preferred Stock par value $0.001 per share convertible into 250 shares of common stock and warrants to purchase 250 shares of common stock.

Each Warrant was immediately exercisable, expires on the five year anniversary of the date of issuance and is exercisable at a price per share of common stock of $4.00. Additionally, subject to certain exceptions, if, after the June 19, 2018, (i) the volume weighted average price of our common stock for each of 30 consecutive trading days, or the Measurement Period, which Measurement Period commences on June 19, 2018, exceeds 300% of the exercise price (subject to adjustments for stock splits, recapitalizations, stock dividends and similar transactions), (ii) the average daily trading volume for such Measurement Period exceeds $500,000 per trading day and (iii) certain other equity conditions are met, and subject to a beneficial ownership limitation, then we may call for cancellation of all or any portion of the Warrants then outstanding.

The Class A Units and Class B Units were not certificated and the shares of common stock, Series A Convertible Preferred Stock and warrants comprising such Units were immediately separable and were issued separately in the public offering. The Class A and B Units were offered by us pursuant to (i) the registration statement on Form S-1 (File No. 333-224840), and each amendment thereto, which was initially filed with the SEC, on May 10, 2018 and declared effective by the SEC on June 14, 2018 and the registration statement on Form S-1 (File No. 333- 225649) filed by the us with the SEC pursuant to Rule 462(b) of the Securities Act of 1933 on June 14, 2018.

In addition, pursuant to the Underwriting Agreement we entered into with Ladenburg Thalmann & Co. Inc., or the Underwriter, on June 15, 2018, we granted the Underwriter a 45 day option, or the Overallotment Option, to purchase up to 450,000 additional shares of common stock and/or warrants to purchase up to 450,000 shares of Common Stock solely to cover over-allotments. The Overallotment Option was exercised in full on June 18, 2018.

The public offering raised total gross proceeds of $13.8 million and after deducting $1.6 million in underwriting discounts and commissions and offering expenses, we received net proceeds of $12.2 million

The underwriting discounts and commissions and offering expenses have been charged against the gross proceeds.

As of June 30, 2018, 6,627 shares of the Series A Convertible Preferred Stock had been converted into 1,656,750 shares of common stock, and 2,531 shares of the Series A Convertible Preferred Stock remained outstanding.

Equity Award Issuances and Settlements

During the three and six months ended June 30, 2018 and 2017, we issued no shares of common stock to satisfy stock options exercises and no shares of common stock to satisfy restricted stock unit settlements.

[c]

Stock options

2017 Equity Incentive Plan

As of June 30, 2018, we had reserved, pursuant to the 2017 Equity Incentive Plan, or the 2017 Plan, 104,910 common shares for issuance upon exercise of stock options, currently outstanding, by employees, directors and officers of ours.

Under the 2017 Plan, we may grant options to purchase common shares or restricted stock units to our employees, directors, officers and consultants. The exercise price of the options is determined by our board of directors but will be at least equal to the fair value of the common shares at the grant date. The options vest in accordance with terms as determined by our board of directors, typically over three to four years for options issued to employees and consultants, and over one to three years for members of our board of directors. The expiry date for each option is set by our board of directors with a maximum expiry date of ten years from the date of grant. In addition, the 2017 Plan allows for accelerated vesting of outstanding equity awards in the event of a change in control. The terms for accelerated vesting, in the event of a change in control, is determined at our discretion and defined under the employment agreements for our officers and certain of our employees.

2010 Performance Incentive Plan

As of June 30, 2018, we had reserved, pursuant to the 2010 Performance Incentive Plan, or the 2010 Plan, 26,317 common shares for issuance upon exercise of stock options and settlement of restricted stock units by employees, directors, officers and consultants of ours, of which 5,923 were reserved for options currently outstanding and 20,394 were reserved for restricted stock units currently outstanding.

Under the 2010 Plan we granted options to purchase common shares and restricted stock units to our employees, directors, officers and consultants. The exercise price of the options was determined by our board of directors and was at least equal to the fair value of the common shares at the grant date. The options vest in accordance with terms as determined by our board of directors, typically over three to four years for options issued to employees and consultants, and over one to three years for members of our board of directors.

14


The expiry date for each option is set by our board of directors with a maximum expiry date of ten years from the date of grant. In addition, the 2010 Plan allows for accelerated vesting of outstanding equity awards in the event of a change in control. The terms for accelerated vesting, in the event of a change in control, is determined at our discretion and defined under the employment agreements for our officers and certain of our employees.

Stock Option Summary

We grant stock options that vest over time in accordance with terms as determined by our Board of Directors, or the Board, which terms are typically four years for employee and consultant grants and one to three years for Board option grants. We also grant stock option awards that vest in conjunction with certain performance conditions to executive officers, employees and consultants. At each reporting date, we are required to evaluate whether achievement of the performance conditions is probable. Compensation expense is recorded over the appropriate service period based upon our assessment of accomplishing each performance condition. The expiry date for each option is set by the Board, which is typically seven to ten years. The exercise price of the options is determined by the Board.

Stock option transactions and the number of stock options outstanding are summarized below:

 

 

 

Number of

 

 

Weighted

 

 

 

Optioned

 

 

Average

 

 

 

Common

 

 

Exercise

 

 

 

Shares

 

 

Price

 

Balance,  December 31, 2017

 

 

111,578

 

 

$

80.01

 

Forfeited

 

 

(393

)

 

 

160.79

 

Balance,  June 30, 2018

 

 

111,185

 

 

$

79.73

 

 

The fair value of each stock award for employees and directors is estimated on the grant date and for consultants at each reporting period, using the Black-Scholes option-pricing model based on the weighted-average assumptions. No stock options were granted for the three and six months ended June 30, 2018 and 2017.

 

 The expected life was calculated based on the simplified method as permitted by the SEC’s Staff Accounting Bulletin 110, Share-Based Payment. We consider the use of the simplified method appropriate because of the lack of sufficient historical exercise data following the Arrangement. The computation of expected volatility was based on the historical volatility of comparable companies from a representative peer group selected based on industry and market capitalization. The risk-free interest rate is based on a U.S. Treasury instrument whose term is consistent with the expected life of the stock options. In addition to the assumptions above, as required under ASC 718, management made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest. Forfeiture rates are estimated using historical actual forfeiture rates. These rates are adjusted on a quarterly basis and any change in compensation expense is recognized in the period of the change. We have never paid or declared cash dividends on our common stock and do not expect to pay cash dividends in the foreseeable future.

The results for the periods set forth below included share-based compensation expense for stock options and restricted stock units in the following expense categories of the consolidated statements of loss (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Research and development

 

$

63

 

 

$

 

 

$

120

 

 

$

 

General and administrative

 

$

134

 

 

 

 

 

 

258

 

 

 

 

Total stock-based compensation

 

$

197

 

 

$

 

 

$

378

 

 

$

 

 

As of June 30, 2018 and December 31, 2017, the total unrecognized compensation expense related to stock options granted was $1.6 million and $2.0 million, respectively, which is expected to be recognized as expense over a period of approximately 3.0 years from June 30, 2018.

For the three and six months ended June 30, 2018, a total of 3.4 million shares, consisting of  3.3 million warrants, 0.1 million options and 20,394 restricted stock units, have not been included in the loss per share computation, as their effect on diluted per share amounts would have been anti-dilutive. For the same period in 2017, we had no shares underlying options, restricted stock units or warrants.

15


[d]

Restricted Stock Unit Awards

We grant restricted stock unit awards that generally vest and are expensed over a four year period. We also grant restricted stock unit awards that vest in conjunction with certain performance conditions to certain executive officers, key employees and consultants. At each reporting date, we are required to evaluate whether achievement of the performance conditions is probable. Compensation expense is recorded over the appropriate service period based upon our assessment of accomplishing each performance condition. For the three and six months ended June 30, 2018, we recorded a compensation expense of $37,000, related to these awards. We did not have any restricted stock units outstanding during the three and six months ended June 30, 2017.

The following table summarizes our restricted stock unit award activity during the six months ended June 30, 2018:

 

 

 

 

 

 

 

Weighted

 

 

 

Number

 

 

Average

 

 

 

of

 

 

Grant Date

 

 

 

Shares

 

 

Fair Value

 

Balance,  December 31, 2017

 

 

21,066

 

 

$

38.87

 

Forfeited or expired

 

 

(672

)

 

 

141.57

 

Balance,  June 30, 2018

 

 

20,394

 

 

$

35.48

 

 

As of June 30, 2018, we had approximately $0.5 million in total unrecognized compensation expense related to our restricted stock unit awards that is to be recognized over a weighted-average period of approximately 3.0 years.

[e]

Non-employee options and restricted stock units

We recognize non-employee stock-based compensation expense over the period of expected service by the non-employee. As the service is performed, we are required to update our valuation assumptions, re-measure unvested options and restricted stock units and record the stock-based compensation using the valuation as of the vesting date. This differs from the accounting for employee awards where the fair value is determined at the grant date and is not subsequently adjusted. This re-measurement may result in higher or lower stock-based compensation expense in the Consolidated Statements of Loss and Comprehensive Loss. As such, changes in the market price of our stock could materially change the value of an option or restricted stock unit and the resulting stock-based compensation expense.

[f]

Common Stock Warrants

The following is a summary of outstanding warrants to purchase common stock at June 30, 2018:

 

 

 

Total

 

 

 

 

 

 

 

 

 

Outstanding

 

 

Exercise

 

 

 

 

 

and

 

 

price per

 

 

 

 

 

Exercisable

 

 

Share

 

 

Expiration Date

(1) Series A Warrants issued in July 2014 financing

 

 

25,272

 

 

 

440.00

 

 

July 2019

(2) Series B Warrants issued in July 2014 financing

 

 

6,093

 

 

 

440.00

 

 

July 2019

(3) Series A-1 Warrants issued in April 2015 financing

 

 

2,175

 

 

 

264.00

 

 

October 2020

(4) Warrants issued in September 2017 financing

 

 

8,224

 

 

 

34.96

 

 

March 2023

(5) Warrants issued in June 2018 financing

 

 

3,287,500

 

 

 

4.00

 

 

June 2023

 

For the three and six months ended June 30, 2018, 130,500 of the warrants issued in the June 2018 financing were exercised at a per unit price of $4.00, for proceeds of $0.5 million of which $0.1 million was receivable as at June 30, 2018. No warrants were exercised during the three and six months ended June 30, 2017. The Series A-1 Warrants assumed by us as part of the Arrangement, the warrants issued in the September 2017 financing and the warrants issued in the June 2018 financing, are classified as equity. The Series A and Series B warrants assumed by us as part of the Arrangement are classified as liabilities. The estimated fair value of warrants classified as liabilities is reassessed at each reporting date using the Black-Scholes pricing model. As at June 30, 2018 and Dec 31, 2017, the fair value of the warrants was insignificant.

 

8. RELATED PARTY TRANSACTION

We entered into a consulting agreement with Ricanto, Ltd., or Ricanto, on September 17, 2015 to provide strategic consulting and advice concerning clinical development, regulatory matters and business planning. Richard Stewart and Anthony Clarke together own 100% of Ricanto. Richard Stewart is our Chief Executive Officer, or CEO, Chairman of the Board, and a principal stockholder. Anthony Clarke is our Chief Scientific Officer, President, a board director, and a principal stockholder. We incurred consulting fees from Ricanto of $0.1 million during the nine months ended September 30, 2016. The consulting agreement with Ricanto was terminated on August 1, 2017, immediately prior to the closing of the Arrangement. We did not incur any consulting fees from

16


Ricanto in 2017. As of December 31, 2016, we recorded amounts payable to Ricanto of $0.6 million in accrued liabilities on our balance sheet. On July 18, 2017, Ricanto converted all amounts owed to it, totaling $0.6 million, into 475 shares of our common stock, prior to the closing of the Arrangement, par value $0.01. Pursuant to the terms of the Arrangement, each share was converted into, approximately 17,067 shares of common stock post-conversion. As of June 30, 2018 we had no outstanding amounts payable to Ricanto.

During 2016 we borrowed $0.2 million in total principal amount through two notes payable dated April 20, 2016 and December 8, 2016 from Richard Stewart. The notes mature and are payable upon demand one year from the date of issuance. Interest accrues at an annual rate of 3.5%. As of December 31, 2016 the outstanding principal, included in shareholder loans with related parties, was $0.2 million and accrued interest payable was $3,000. On July 24, 2017, Richard Stewart converted the $0.2 million, representing the entire amounts of principal and accrued interest owed, into 146 shares of our common stock, prior to the closing of the Arrangement , par value $0.01. Pursuant to the terms of the Arrangement, each share was converted into, approximately, 5,246 shares of common stock post-conversion As of June 30, 2018 we had no outstanding principal or accrued interest with the related party.

We borrowed $2.7 million on May 18, 2015, through a convertible promissory note payable to a Lender of ours. The note matures and is payable upon demand one year from the date of the note. Interest accrues at an annual rate of 3.5%. On September 30, 2015 the Lender converted $2.0 million in principal into 4,500 shares of our common stock, prior to the closing of the Arrangement, par value $0.01, and became a principal stockholder. On March 7, 2017 we borrowed $20,000 through a note payable to the Lender. The note matures and is payable upon demand one year from the date of issuance. Interest accrues at an annual rate of 3.5%. As of December 31, 2016, the outstanding principal balance, included in shareholder loans with related parties, was $0.7 million and had accrued interest payable of $35,000. On July 24, 2017, the Lender converted the remaining amounts in principal and accrued interest, totaling $0.8 million, into 586 shares of our common stock, prior to the closing of the Arrangement, par value $0.01. Pursuant to the terms of the Arrangement, each share was converted into, approximately, 182,743 shares of common stock post-conversion. As of June 30, 2018 we had no outstanding principal or accrued interest with the related party.

We entered into an employment agreement on May 11, 2015 with one of our principal stockholders to serve as our CEO. We terminated the employment agreement on December 31, 2016. From May 11, 2015 to December 31, 2016, we had not paid any salary specified in the employment agreement. Salary otherwise payable as at December 31, 2016 was $0.7 million and was accrued on our balance sheet as Accrued compensation. On July 19, 2017 we entered into a separation agreement with our former CEO. Pursuant to the separation agreement, for settlement of all salaries owed, we paid 238 shares of our common stock, prior to the closing of the Arrangement, representing 50% of the total amounts owed as accrued compensation and paid $0.4 million for the remaining 50%, subsequent to the closing of the Arrangement. Pursuant to the terms of the Arrangement, each share was converted into, approximately, 8,551 shares of common stock post-conversion. As of June 30, 2018 we had no outstanding principal or accrued interest with the related party.

We entered into an employment agreement on August 17, 2015 with one of our principal stockholders to serve as our Chief Financial Officer, or CFO. We terminated the employment agreement on December 31, 2016. From August 17, 2015 to December 31, 2016, we had not paid any salary specified in the employment agreement. Salary otherwise payable as at December 31, 2016 was $0.3 million and was accrued on our balance sheet as Accrued compensation. On July 20, 2017 we entered into a separation agreement with our former CFO. Pursuant to the separation agreement, for settlement of all salaries owed and as a separation payment, we paid 127 shares of our common stock, prior to the closing of the Arrangement, representing 50% of the total amounts owed as accrued compensation and paid $0.2 million for the remaining 50%, subsequent to the closing of the Arrangement. Pursuant to the terms of the Arrangement, each share was converted into, approximately, 4,563 shares of common stock post-conversion. As of June 30, 2018 we had no outstanding principal or accrued interest with the related party.

Michelle Griffin, the spouse of Scott Cormack, OncoGenex’s former CEO and a current member of our board of directors, entered into a consulting agreement in 2013 with OncoGenex, which was amended thereafter. Immediately prior to the closing of the Arrangement, the consulting agreement was terminated. Pursuant to the consulting agreement, OncoGenex was obligated to pay to the consultant a termination fee of $0.6 million, which was accrued in OncoGenex’s accrued liabilities immediately prior to the closing of the Arrangement. Subsequent to the closing of the Arrangement, we paid the full amount of the termination fees and no amounts were accrued on our balance sheet as at June 30, 2018.

 

 

17


9. COMMITMENTS AND CONTINGENCIES

The following table summarizes our contractual obligations as of June 30, 2018 (in thousands):

 

 

 

Total

 

 

Less than 1 year

 

 

1-3 years

 

 

3-5 years

 

 

More than 5 years

 

Vancouver office operating lease

 

$

23

 

 

$

23

 

 

$

 

 

$

 

 

$

 

Seattle office operating lease

 

$

387

 

 

$

106

 

 

$

281

 

 

$

 

 

$

 

Total

 

$

410

 

 

$

129

 

 

$

281

 

 

$

 

 

$

 

 

Lease Arrangements

We have an operating lease agreement for office space being used in Vancouver, Canada, which expires in September 2018. Pursuant to the operating lease agreement, we have the option to terminate the lease early without penalty at any time after January 1, 2018 so long as we provide three months prior written notice to the landlord.

Future minimum lease payments under the Vancouver lease are as follows (in thousands):

 

2018

 

 

23

 

Total

 

$

23

 

 

In July 2018, we entered into an amendment of our operating lease agreement for office space in Vancouver, Canada, on the same financial terms, to extend the lease through the end of January 2019.

 

In February 2015, we entered into an office lease with Grosvenor International (Atlantic Freeholds) Limited, or Landlord, pursuant to which we leased approximately 11,526 square feet located at 19820 North Creek Parkway, Bothell, Washington, 98011, which commenced on February 15, 2015. The initial term of this lease was set to expire on April 30, 2018, with an option to extend the term for one approximately three-year period. Our monthly base rent for the premises started at approximately $18,000 which commenced on May 1, 2015 and increased on an annual basis up to approximately $20,000. We received a construction allowance, for leasehold improvements that we made, of approximately $0.1 million. We were responsible for 17% of taxes levied upon the building during each calendar year of the term. We delivered to the Landlord a letter of credit in the amount of $0.2 million, in accordance with the terms of the lease, which the Landlord may draw upon for base rent or other damages in the event of our default under this lease. In August 2015 we exercised our expansion option for an additional 2,245 square feet of office space, which commenced on August 1, 2015. We did not exercise our renewal option under the lease agreement. We negotiated an early termination and the lease expired on March 31, 2018.

 

On December 11, 2017, we entered into a lease, or the Seattle Lease, with 520 Pike Street, Inc., or Pike, pursuant to which we leased approximately 3,187 square feet located at Suite 2250 at 520 Pike Tower, Seattle, Washington, 98101, which commenced on March 1, 2018. The initial term of the Seattle Lease will expire at the end of the month on the third anniversary of the Seattle Lease.

 

Our monthly base rent for the premises started at approximately $11,685 which commenced on March 1, 2018 and will increase on an annual basis up to approximately $12,397. In addition, we paid a security deposit to Pike in the amount of $37,192, subject to periodic reductions in the amount of $12,397 after each of the first and second anniversaries of the Seattle Lease, which Pike may retain for base rent or other damages, in the event of our default under the Seattle Lease.

 

We may not assign or sublet all or any portion of the premises without the consent of Pike, and Pike shall be entitled to 50% of any profit which we may receive above and beyond the rental price of the Seattle Lease. Upon receipt of notice of our intent to assign or sublease any portion of the leased premises, Pike may terminate that portion of the premises within 30 days, and provided, that if such portion constitutes 50% or more of the total square footage of the premises, Pike may terminate the Seattle Lease in its entirety.

 

The future minimum annual lease payments under the Seattle Lease are as follows (in thousands):

 

2018

 

 

70

 

2019

 

 

144

 

2020

 

 

148

 

2021

 

 

25

 

Total

 

$

387

 

 

 

18


Consolidated rent and operating expense relating to the Vancouver, Canada, Bothell, Washington and Seattle, Washington offices for the three and six months ended June 30, 2018 was $0.1 million and $0.2 million, respectively. There was no rent related expense in the three and six months ended June 30, 2017.  

Guarantees and Indemnifications

We indemnify our officers, directors and certain consultants for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at its request in such capacity. The term of the indemnification period is equal to the officer’s or director’s lifetime.

The maximum amount of potential future indemnification is unlimited; however, we have obtained director and officer insurance that limits our exposure and may enable us to recover a portion of any future amounts paid. We believe that the fair value of these indemnification obligations is minimal. Accordingly, we have not recognized any liabilities relating to these obligations as of June 30, 2018.

We have certain agreements with certain organizations with which we do business that contain indemnification provisions pursuant to which we typically agrees to indemnify the party against certain types of third-party claims. We accrue for known indemnification issues when a loss is probable and can be reasonably estimated. There were no accruals for or expenses related to indemnification issues for any period presented.

 

 

10. SEVERANCE CHARGES

 

As a requirement for the closing of the Arrangement, OncoGenex terminated the employment of one senior executive. Severance payable at the date of the transaction was $1.2 million and has been accounted for in accordance with EITF No. 95-3 , “Recognition of Liabilities in Connection with a Purchase Business Combination” as part of the purchase price allocation (Note 4—Intangibles). The severance payable was settled following the completion of the Arrangement and no amounts were owing as at June 30, 2018.  

 

 

11. SUBSEQUENT EVENTS

From July 1, 2018 through August 8, 2018, 500 shares of the Series A Convertible Preferred Stock had been converted into 125,000 shares of common stock, and 3,283 shares of the Series A Convertible Preferred Stock remained outstanding.

 

From July 1, 2018 through August 8, 2018, 187,500 of the warrants issued in the June 2018 financing were exercised at a per unit price of $4.00, for proceeds of approximately $0.8 million.

 

 

 

19


Item 2.

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

INFORMATION REGARDING FORWARD LOOKING STATEMENTS

This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of risks and uncertainties. We caution readers that any forward-looking statement is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking statement. These statements are based on current expectations of future events. Such statements include, but are not limited to, statements about future financial and operating results, plans, objectives, expectations and intentions, costs and expenses, interest rates, outcome of contingencies, financial condition, results of operations, liquidity, business strategies, cost savings, objectives of management and other statements that are not historical facts. You can find many of these statements by looking for words like “believes,” “expects,” “anticipates,” “estimates,” “may,” “should,” “will,” “could,” “plan,” “intend” or similar expressions in this document or in documents incorporated by reference into this document. We intend that such forward-looking statements be subject to the safe harbors created thereby. Examples of these forward-looking statements include, but are not limited to:

 

progress and preliminary and future results of any clinical trials;

 

our anticipated future capital requirements and the terms of any capital financing agreements;

 

anticipated regulatory filings, requirements and future clinical trials;

 

timing and amount of future contractual payments, product revenue and operating expenses; and

 

market acceptance of our products and the estimated potential size of these markets.

These forward-looking statements are based on the current beliefs and expectations of our management and are subject to significant risks and uncertainties. If underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results may differ materially from current expectations and projections. Factors that might cause such a difference include those discussed in Item 1A “Risk Factors,” as well as those discussed elsewhere in the Quarterly Report on Form 10-Q.  You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document or, in the case of documents referred to or incorporated by reference, the date of those documents.

All subsequent written or oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events, except as may be required under applicable U.S. securities law. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. 

Reverse Stock Split

On May 22, 2018, we filed a certificate of amendment to our Second Amended and Restated Certificate of Incorporation and effected as of May 23, 2018 a one-for-ten reverse stock split of our issued and outstanding shares of common stock. We also filed a certificate of amendment to our Second Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 75,000,000 to 150,000,000.

Arrangement Agreement

 

As discussed in the notes to the financial statements above, during 2017, we completed the Arrangement with OncoGenex. For more information concerning the Arrangement, see the discussion of the Arrangement in Note 2 to the Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Overview

We are a clinical-stage pharmaceutical company committed to the global (excluding Central & Eastern Europe plus other territories) development and commercialization of cytisine for smoking cessation. Our focus is to address the global smoking health epidemic, which is a leading cause of preventable death and is responsible for approximately seven million deaths annually worldwide.

Cytisine is an established 25-day smoking cessation treatment that has been approved and marketed in Central and Eastern Europe by Sopharma AD for over 20 years under the brand name Tabex™. It is estimated that over 20 million people have used cytisine to help treat nicotine addiction, including over 2,000 patients in investigator-conducted, Phase 3 clinical trials in Europe and New Zealand. Both trials were published in the New England Journal of Medicine in September 2011 and December 2014, respectively.  

20


Cytisine is a naturally occurring, plant-based alkaloid from the seeds of the Laburnum anagyroides plant. Cytisine is structurally similar to nicotine and has a well-defined, dual-acting mechanism of action that is both agonistic and antagonistic. It is believed to aid in smoking cessation by interacting with nicotine receptors in the brain by reducing the severity of nicotine withdrawal symptoms through agonistic binding to nicotine receptors and by reducing the reward and satisfaction associated with smoking through antagonistic properties. The cytisine dosing schedule reflects that of an anti-addiction medication, with downward dose titration over a period of 25 days.

Investigational New Drug, or IND-enabling, non-clinical toxicology studies completed to date have been sponsored by the National Center for Complementary and Integrative Health, or NCCIH, division of the National Institutes of Health, or NIH, in addition to the National Cancer Institute. In June 2017, we filed our IND application for cytisine with the U.S Food and Drug Administration, or FDA, which included NCCIH sponsored non-clinical studies.

In August 2017, we initiated a study evaluating the effect of food on the bioavailability of cytisine in normal healthy volunteers. We completed the food effect study and announced the results in November of 2017 demonstrating similar bioavailability of cytisine in fed and fasted subjects.

In October 2017, we initiated a study assessing the repeat-dose Pharmacokinetics, or PK, and Pharmacodynamics, or PD, effects of 1.5mg and 3mg cytisine in 36 healthy volunteer smokers when administered over the standard 25-day course of treatment. Of the 36 subjects, 24 were to be 18-65 years and 12 were to be greater than 65 years of age. Preliminary results on the 24 smokers (18-65 years) were announced in February 2018. The PK results indicated expected increases in plasma concentration with higher doses of cytisine. Smokers in the study were not required to have a designated or predetermined quit date, however, 58% of the subjects in the trial achieved biochemically verified smoking abstinence by day 26. Subjects who did not achieve abstinence had a significant reduction in number of daily cigarettes smoked by day 26. The adverse events observed were mostly mild with transient headaches as the most commonly reported event. No serious adverse events were observed in the study. The study is ongoing for enrolling subjects greater than 65 years of age. We expect final data results to be available in the first quarter of 2019.

In December 2017, we initiated a series of drug metabolism, drug-to-drug interaction, and transporter studies of cytisine and results from these studies were submitted with the IND in the first quarter of 2018 and announced in June 2018. These studies demonstrated that cytisine has no clinically significant interaction with any of the hepatic enzymes commonly responsible for drug metabolism nor clinically significant interaction with drug transporters. This suggests that cytisine may be administered with other medications without the need to modify the dose of the co-administered drug.

We have met with the FDA and with other national regulatory authorities in Europe to identify the steps required for the approval of cytisine. Our most recent meeting was an end of Phase 2 meeting with the FDA in May of 2018 to review and receive guidance on our Phase 3 clinical program and overall development plans for cytisine to support a New Drug Application, or NDA. This recent review included submitted results from non-clinical studies, standard drug-to-drug interaction and reproductive/teratogenicity studies. Detailed plans for chronic toxicology, carcinogenicity studies, and additional human studies regarding renal impairment, QT interval prolongation, longer term exposure and adequate demonstration of safety and efficacy from our planned randomized, placebo-controlled, Phase 3 clinical trials were also discussed.

We plan to initiate a Phase 2b optimization study in the fourth quarter of 2018 to further evaluate our dosing regimens, efficacy, and safety in approximately 250 smokers in the United States. The study will evaluate the safety, efficacy, and compliance profiles of 1.5mg and 3mg of cytisine dosing versus placebo and will include behavioral support for all subjects. The primary endpoint of the study will be an assessment of reduction in overall cigarettes smoking during the study. Secondary endpoints will include smoking abstinence and quit rates at various time points. The study would be used to further define our pivotal Phase 3 clinical trial plans for dosing, compliance and behavioral support in United States subjects. We expect top line results in the second quarter of 2019.

A new cytisine tablet with improved shelf life has been formulated. In May 2018, we initiated another study to evaluate the effect of food on the bioavailability of cytisine in volunteer smokers using this new formulation. We expect the results of this study to be available in the third quarter of 2018.

We previously were developing apatorsen, of which we discontinued further development in August 2017. We provided a notice of discontinuance to our former development partners for apatorsen, Ionis Pharmaceuticals, Inc., or Ionis, and a letter of termination to the University of British Columbia, or UBC, notifying them that we have discontinued development of apatorsen resulting in termination of all licensing agreements related to this product candidate. We believe that all financial obligations, other than continuing mutual indemnification obligations and our requirement to pay for out-of-pocket patent expenses incurred up to the date of termination and for abandoning the apatorsen patents and patent applications, under all apatorsen related agreements with Ionis and UBC, are no longer owed and no further payments are due.

We have no products approved for commercial sale and have not generated any revenue from product sales to date. We have never been profitable and have incurred operating losses in each year since inception. Our net loss was $2.8 million and $5.8 million for the three and six months ended June 30, 2018, respectively. Our net loss was $0.2 million and $0.4 million for the three and six months

21


ended June 30, 2017, respectively. As of June 30, 2018, we had an accumulated deficit of $18.5 million, cash and cash equivalents balance of $15.3 million and a positive working capital balance of $12.8 million. Substantially all of our operating losses resulted from expenses incurred from general and administrative costs associated with our operations and research and development costs from our clinical development programs.

Substantial doubt exists as to our ability to continue as a going concern. Our ability to continue as a going concern is uncertain and dependent on our ability to obtain additional financing. We expect to incur significant expenses and increasing operating losses for at least the next several years as we continue our clinical development of, and seek regulatory approval for, cytisine and add personnel necessary to operate as a public company with an advanced clinical candidate. We expect that our operating losses will fluctuate significantly from quarter to quarter and year to year due to timing of clinical development programs and efforts to achieve regulatory approval. Without additional funds, we may be forced to delay, scale back or eliminate some of our research and development activities or other operations and potentially delay product development in an effort to provide sufficient funds to continue our operations. If any of these events occurs, our ability to achieve our development and commercialization goals would be adversely affected.

Our current resources are insufficient to fund our planned operations for the next 12 months. We will continue to require substantial additional capital to continue our clinical development activities. Accordingly, we will need to raise substantial additional capital to continue to fund our operations from the sale of our securities, partnering arrangements or other financing transactions in order to finance the commercialization of our product candidate. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our clinical development efforts. Failure to raise capital as and when needed, on favorable terms or at all, will have a negative impact on our financial condition and our ability to develop our product candidate.

The accompanying financial results have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and liabilities and commitments in the normal course of business. The financial results do not include any adjustments to the amounts and classification of assets and liabilities that might be necessary should we be unable to continue as a going concern. Such adjustments could be material.

Recent Corporate History

On August 1, 2017, OncoGenex Pharmaceuticals, Inc., or OncoGenex, completed a transaction, or the Arrangement, with Achieve Life Science, Inc., or ALS, as contemplated by the Merger Agreement between ALS and OncoGenex dated January 5, 2017, or the Merger Agreement. Under the terms of the Merger Agreement, OncoGenex changed its name to Achieve Life Sciences, Inc., instituted an one-for-eleven reverse stock split, issued shares of its common stock (after accounting for the elimination of resulting fractional shares) in exchange for all of the outstanding preferred shares, common shares and convertible debentures of ALS, and as a result ALS became a wholly-owned subsidiary of OncoGenex, and is listed on the Nasdaq Capital Market under the ticker symbol ACHV. More information concerning the Arrangement is contained in our Current Report on Form 8-K filed on August 2, 2017 and our Amendment No. 3 to the Registration Statement on Form S-4/A filed with the SEC on June 6, 2017.

The consolidated financial statements account for the Arrangement between us and OncoGenex, whereby OncoGenex acquired all of our outstanding common shares, as a reverse merger wherein we are deemed to be the acquiring entity from an accounting perspective. The consolidated results of operations include the results of operations of the combined company for the three and six month period ended June 30, 2018. The consolidated results of operations for the three and six month period ended June 30, 2017 include only our consolidated results of operations and do not include historical results of OncoGenex. This treatment and presentation is in accordance with ASC 805, “Business Combinations”.

In connection with the Arrangement, OncoGenex issued contingent value rights, or CVRs, on July 31, 2017 to their existing stockholders as of July 27, 2017. One CVR was issued for each share of their common stock outstanding as of the record date for such issuance.  The CVRs expired on August 17, 2017. A recovery of $0.2 million was recognized on our Consolidated Statements of Loss and Comprehensive Loss in 2017.

License Agreements

Sopharma License and Supply Agreements

We are party to a license agreement, or the Sopharma License Agreement, and a supply agreement, or the Sopharma Supply Agreement, with Sopharma, AD, or Sopharma. Pursuant to the Sopharma License Agreement, we were granted access to all available manufacturing, efficacy and safety data related to cytisine, as well as a granted patent in several European countries related to new oral dosage forms of cytisine providing enhanced stability. Additional rights granted under the Sopharma License Agreement include the exclusive use of, and the right to sublicense, the trademark Tabex in all territories described in the Sopharma License Agreement. Under the Sopharma License Agreement, we agreed to pay a nonrefundable license fee. In addition, we agreed to make certain royalty payments equal to a mid-single digit percentage

22


of all net sales of Tabex branded products in our territory during the term of the Sopharma License Agreement, including those sold by a third party pursuant to any sublicense which may be granted by us. To date, any amounts paid to Sopharma pursuant to the Sopharma License Agreement have been immaterial.

University of Bristol License Agreement

In July 2016, we entered into a license agreement with the University of Bristol, or the University of Bristol License Agreement. Under the University of Bristol License Agreement, we received exclusive and nonexclusive licenses from the University of Bristol to certain patent and technology rights resulting from research activities into cytisine and its derivatives, including a number of patent applications related to novel approaches to cytisine binding at the nicotinic receptor level.

In consideration of rights granted by the University of Bristol, we paid a nominal license fee and agreed to pay amounts of up to $3.2 million, in the aggregate, tied to a financing milestone and to specific clinical development and commercialization milestones resulting from activities covered by the University of Bristol License Agreement. Additionally, if we successfully commercialize any product candidates subject to the University of Bristol License Agreement, we are responsible for royalty payments in the low-single digits and payments up to a percentage in the mid-teens of any sublicense income, subject to specified exceptions, based upon net sales of such licensed products.

On January 22, 2018, we and the University of Bristol entered into an amendment to the University of Bristol License Agreement. Pursuant to the amended University of Bristol License Agreement we received exclusive rights for all human medicinal uses of cytisine across all therapeutic categories from the University of Bristol from research activities into cytisine and its derivatives. In consideration of rights granted by the amended University of Bristol License Agreement, we agreed to pay an initial amount of $37,500 upon the execution of the amended University of Bristol License Agreement, and additional amounts of up to $1.7 million, in the aggregate, tied to a financing milestone and to specific clinical development and commercialization milestones resulting from activities covered by the amended University of Bristol License Agreement, in addition to amounts under the original University of Bristol License Agreement of up to $3.2 million in the aggregate, tied to specific financing, development and commercialization milestones. Additionally, if we successfully commercialize any product candidate subject to the amended University of Bristol License Agreement or to the original University of Bristol License Agreement, we will be responsible, as provided in the original University of Bristol License Agreement, for royalty payments in the low-single digits and payments up to a percentage in the mid-teens of any sublicense income, subject to specified exceptions, based upon net sales of such licensed products. Up to June 30, 2018, we have paid the University of Bristol $50,000 pursuant to the University of Bristol License Agreement.

Research and Development Expenses

Research and development, or R&D, expenses consist primarily of costs for clinical trials, contract manufacturing, personnel costs, milestone payments to third parties, facilities, regulatory activities, preclinical studies and allocations of other R&D-related costs. External expenses for clinical trials include fees paid to clinical research organizations, clinical trial site costs and patient treatment costs.

We manage our clinical trials through contract research organizations and independent medical investigators at our sites and at hospitals and expect this practice to continue. Due to our ability to utilize resources across several projects, we do not record or maintain information regarding the indirect operating costs incurred for our research and development programs on a program-specific basis. In addition, we believe that allocating costs on the basis of time incurred by our employees does not accurately reflect the actual costs of a project.

We expect our research and development expenses to increase for the foreseeable future as we continue to conduct our ongoing pre-clinical studies, and initiate new clinical trials and registration-enabling activities. The process of conducting clinical trials and pre-clinical studies necessary to obtain regulatory approval is costly and time consuming and we may never succeed in achieving marketing approval for cytisine. (See “Item 1A. Risk Factors—Risks Related to the Development of Our Product Candidate Cytisine.”)

Successful development of cytisine is highly uncertain and may not result in an approved product. We cannot estimate completion dates for development activities or when we might receive material net cash inflows from our R&D projects, if ever. We anticipate we will make determinations as to which markets, and therefore, which regulatory approvals, to pursue and how much funding to direct toward achieving regulatory approval in each market on an ongoing basis in response to our ability to enter into new strategic alliances with respect to each program or potential product candidate, the scientific and clinical success of each future product candidate, and ongoing assessments as to each future product candidate’s commercial potential. We will need to raise additional capital and may seek additional strategic alliances in the future in order to advance its various programs.

23


Our projects or intended R&D activities may be subject to change from time to time as we evaluate results from completed studies, our R&D priorities and available resources.

General and Administrative Expenses

General and administrative, or G&A, expenses consist primarily of salaries and related costs for our personnel in executive, finance and accounting, corporate communications and other administrative functions, as well as consulting costs, including market research, business consulting, human resources and intellectual property. Other costs include professional fees for legal and auditing services, insurance and facility costs.  

Warrant Liability

The following is a summary of outstanding warrants to purchase common stock that are classified as liabilities at June 30, 2018:

 

 

 

Total

 

 

 

 

 

 

 

 

 

Outstanding

 

 

Exercise

 

 

 

 

 

and

 

 

price per

 

 

 

 

 

Exercisable

 

 

Share

 

 

Expiration Date

(1) Series A Warrants issued in July 2014 financing

 

 

25,272

 

 

 

440.000

 

 

July 2019

(2) Series B Warrants issued in July 2014 financing

 

 

6,093

 

 

 

440.000

 

 

July 2019

 

No warrants classified as liabilities were exercised during the three and six months ended June 30, 2018 or 2017.

We reassess the fair value of the common stock warrants classified as liabilities at each reporting date utilizing a Black-Scholes pricing model. Inputs used in the pricing model include estimates of stock price volatility, expected warrant life and risk-free interest rate. The computation of expected volatility was based on the historical volatility of comparable companies from a representative peer group selected based on industry and market capitalization.

Results of Operations

For the three and six months ended June 30, 2018 and 2017

Research and development expenses

Our research and development expenses for our clinical development program for the three and six months ended June 30, 2018 and 2017 are as follows (in thousands):

 

 

 

Three months ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Clinical development programs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cytisine

 

$

1,045

 

 

$

62

 

 

$

2,246

 

 

$

123

 

Total research and development expenses

 

$

1,045

 

 

$

62

 

 

$

2,246

 

 

$

123

 

 

 

Research and development expenses for the three and months ended June 30, 2018 increased to $1.0 million and $2.2 million from $0.1 million and $0.1 million for the three and six months ended June 30, 2017, respectively. The increase in 2018 as compared to 2017 was due to increased research and development activity for our cytisine clinical development program, including costs associated with the repeat dose pharmacokinetics trial and toxicology studies and increased employee expenses and facilities costs resulting from the Arrangement.

General and administrative expenses

General and administrative expenses for the three and six months ended June 30, 2018 increased to $1.8 million and $3.6 million from $0.1 million and $0.4 million for the three and six months ended June 30, 2017. The increase in 2018 as compared to 2017 was due to increases in employee headcount, consulting fees, legal fees and professional fees as a result of the closing of the Arrangement and the integration of OncoGenex with our operations.

24


Liquidity and Capital Resources

We have incurred an accumulated deficit of $18.5 million through June 30, 2018 and we expect to incur substantial additional losses in the future as we operate our business and continue or expand our R&D activities and other operations. We have not generated any revenue from product sales to date, and we may not generate product sales revenue in the near future, if ever. As of June 30, 2018, we had a cash and cash equivalents balance of $15.3 million and a positive working capital balance of $12.8 million

The financial results have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and liabilities and commitments in the normal course of business.

Substantial doubt exists as to our ability to continue as a going concern. Our ability to continue as a going concern is uncertain and dependent on our ability to obtain additional financing. There is no assurance that we will obtain financing from other sources. We have, thus far, financed our operations through payments from former collaborators and equity financings. Without additional funds, we may be forced to delay, scale back or eliminate some of our research and development activities or other operations and potentially delay product development in an effort to provide sufficient funds to continue our operations. If any of these events occurs, our ability to achieve our development and commercialization goals would be adversely affected. In addition, we expect to incur significant expenses and increasing operating losses for at least the next several years as we continue our clinical development of, and seek regulatory approval for, cytisine and add personnel necessary to operate as a public company with an advanced clinical candidate. We expect that our operating losses will fluctuate significantly from quarter to quarter and year to year due to timing of clinical development programs and efforts to achieve regulatory approval.

Our current resources are insufficient to fund our planned operations for the next 12 months. We will continue to require substantial additional capital to continue our clinical development activities. Accordingly, we will need to raise substantial additional capital to continue to fund our operations from the sale of our securities, partnering arrangements or other financing transactions in order to finance the commercialization of our product candidate. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our clinical development efforts. Failure to raise capital as and when needed, on favorable terms or at all, will have a negative impact on our financial condition and our ability to develop our product candidate.

 

The consolidated financial results do not include any adjustments to the amounts and classification of assets and liabilities that might be necessary should we be unable to continue as a going concern. Such adjustments could be material.

 

Lincoln Park Capital Equity Line

On September 14, 2017, we and Lincoln Park Capital Fund, LLC, or LPC, entered into a share and unit purchase agreement, or Purchase Agreement, pursuant to which we have the right to sell to LPC up to $11.0 million in shares of our common stock, par value $0.001 per share, subject to certain limitations and conditions set forth in the Purchase Agreement. On May 22, 2018 we obtained the requisite stockholder authorization to sell shares of our common stock to LPC in excess of 20% of our outstanding shares of common stock (as of the date we entered into the purchase agreement) in order to be able to sell to LPC the full amount remaining under the purchase agreement.

Pursuant to the Purchase Agreement, LPC initially purchased 32,895 of our units, or the Units, purchase price of $30.40 per unit, with each Unit consisting of (a) one share of our Common Stock and (b) one warrant to purchase one-quarter of a share of Common Stock at an exercise price of $34.96 per share, or Warrant. Each Warrant is exercisable six months following the issuance date until the date that is five years and six months after the issuance date and is subject to customary adjustments. The Warrants were issued only as part of the Units in the initial purchase of $1.0 million and no warrants shall be issued in connection with any other purchases of common stock under the Purchase Agreement.

After the initial purchase, if our stock price is above $1.00, as often as every other business day over the 30-month term of the Purchase Agreement, and up to an aggregate amount of an additional $10.0 million (subject to certain limitations) of shares of common stock, we have the right, from time to time, in our sole discretion and subject to certain conditions to direct LPC to purchase up to 8,000 shares of common stock with such amounts increasing as the closing sale price of our common stock as reported on The Nasdaq Capital Market increases. The purchase price of shares of common stock pursuant to the Purchase Agreement will be based on prevailing market prices of common stock at the time of sales without any fixed discount, and we will control the timing and amount of any sales of common stock to LPC. In addition, we may direct LPC to purchase additional amounts as accelerated purchases if on the date of a regular purchase the closing sale price of the common stock is not below $20.00 per share. As consideration for entering into the Purchase Agreement, we issued to LPC 12,351 shares of common stock; no cash proceeds were received from the issuance of these shares.

From September 14, 2017 through August 8, 2018, we offered and sold 183,378 shares of our common stock pursuant to our Purchase Agreement with LPC, including the 32,895 shares that were part of the initial purchase of Units. These sales resulted in gross proceeds

25


to us of approximately $3.6 million and offering expenses of $0.5 million. As of August 8, 2018 shares of our common stock having an aggregate value of approximately $7.4 million remained available for sale under this offering program.

 

June 2018 Public Offering

On June 19, 2018, we completed an underwritten registered public offering, pursuant to which we sold 710,500 Class A Units at a price per unit of $4.00 and 9,158 Class B Units at a price per unit of $1,000.

Each Class A Unit consisted of one share of our common stock and a warrant to purchase one share of common stock.

Each Class B Unit consisted of one share of Series A Convertible Preferred Stock convertible into 250 shares of common stock and warrants to purchase 250 shares of common stock.

Each Warrant was immediately exercisable, expires on the five year anniversary of the date of issuance and is exercisable at a price per share of common stock of $4.00. Additionally, subject to certain exceptions, if, after the June 19, 2018, (i) the volume weighted average price of our common stock for each of 30 consecutive trading days, or the Measurement Period, which Measurement Period commences on June 19, 2018, exceeds 300% of the exercise price (subject to adjustments for stock splits, recapitalizations, stock dividends and similar transactions), (ii) the average daily trading volume for such Measurement Period exceeds $500,000 per trading day and (iii) certain other equity conditions are met, and subject to a beneficial ownership limitation, then we may call for cancellation of all or any portion of the Warrants then outstanding

The Class A Units and Class B Units were not certificated and the shares of common stock, Series A Convertible preferred stock and warrants comprising such Units were immediately separable and were issued separately in the public offering. The Class A and B Units were offered by us pursuant to (i) the registration statement on Form S-1 (File No. 333-224840), and each amendment thereto, which was initially filed with the SEC, on May 10, 2018 and declared effective by the SEC on June 14, 2018, and the registration statement on Form S-1 (File No. 333- 225649) filed by the us with the SEC pursuant to Rule 462(b) of the Securities Act of 1933 on June 14, 2018.

In addition, pursuant to the Underwriting Agreement we entered into with Ladenburg Thalmann & Co. Inc., or the Underwriter, on June 15, 2018, we granted the Underwriter a 45 day option, or the Overallotment Option, to purchase up to 450,000 additional shares of common stock and/or warrants to purchase up to 450,000 shares of Common Stock solely to cover over-allotments. The Overallotment Option was exercised in full on June 18, 2018.

We received net proceeds of approximately $12.2 million, after deducting underwriting discounts and commissions and offering expenses.

From June 19, 2018 to August 8, 2018, 7,127 shares of the Series A Convertible Preferred Stock had been converted into 1,781,750 shares of common stock, and 2,031 shares of the Series A Convertible Preferred Stock remained outstanding.

 

From June 19, 2018 through August 8, 2018, 318,000 of the warrants issued in the June 2018 financing were exercised at a per unit price of $4.00, for proceeds of approximately $1.3 million. No warrants were exercised during the three and six months ended 2017.

Cash Flows

Cash Used by Operations

For the six months ended June 30, 2018, net cash used in operating activities was $4.1 million compared to $29,000 for the six months ended June 30, 2017. The increase in cash used in operations in 2018 as compared to 2017 was primarily attributable to increased personnel and facilities assumed in the Arrangement and increased research and development expenses for our cytisine program.

Cash Provided by Financing Activities

For the six months ended June 30, 2018, net cash provided by financing activities was $13.9 million compared to $20,000 for the six months ended June 30, 2017. Net cash provided by financing activities in the six months ended June 30, 2018 relates to proceeds received from our June 2018 financing and our purchase agreement with LPC. Net cash provided by financing activities in the six months ended June 30, 2017 relates to proceeds from promissory notes payable to a certain shareholder.

Cash Used by Investing Activities

Net cash used by investing activities for the six months ended June 30, 2018 was $26,000 compared to zero for the six months ended June 30, 2017. Net cash used by investing activities in the six months ended June 30, 2018 relates to the purchase of capital assets. There were no investing activities for the six months ended June 30, 2017.

26


Off-Balance Sheet Arrangements

We did not have any off-balance sheet financing arrangements at June 30, 2018.

Commitments and Contingencies

We previously disclosed certain contractual obligations and contingencies and commitments relevant to us within the financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on March 1, 2018. There have been no material changes to our “Contractual Obligations” table in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2017 Form 10-K. For more information regarding our current contingencies and commitments, see note 9 to the financial statements included above.

Material Changes in Financial Condition

 

 

 

June 30,

 

 

December 31,

 

(in thousands)

 

2018

 

 

2017

 

Total Assets

 

$

19,220

 

 

$

9,892

 

Total Liabilities

 

 

2,778

 

 

 

2,013

 

Total Equity

 

 

16,442

 

 

 

7,879

 

 

The increase in assets at June 30, 2018 compared to December 31, 2017 was due to proceeds received from our June 2018 financing. The increase in liabilities at June 30, 2018 compared to December 31, 2017 was primarily due to higher clinical related trade payables associated with increased cytisine development activity.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed those estimates that we believe are critical and require the use of complex judgment in their application in our audited financial statements for the year ended December 31, 2017 in our Annual Report on Form 10-K filed with the SEC, on March 1, 2018. Since December 31, 2017, there have been no material changes to our critical accounting policies or the methodologies or assumptions we apply under them.

New Accounting Standards

See Note 2, “Accounting Policies,” of the consolidated financial statements for information related to the adoption of new accounting standards in 2018 and the future adoption of recently issued accounting standards. We expect the adoption of ASU No. 2016-02, Leases, to have a significant impact on our accounting for our lease arrangements, particularly our current operating lease arrangements, as well as our disclosures.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act are accumulated and communicated to our management, including our principal executive officer and principal financial officer as appropriate, to allow timely decisions regarding required disclosure.

During the quarter ended June 30, 2018, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this report.

27


Changes in Internal Control Over Financial Reporting

We have not made any changes to our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

Limitations on Effectiveness of Controls

Our management does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

 

 

28


PART II. OTHER INFORMATION

Item 1A.

Risk Factors

Risks Related to Our Business

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information contained in this Quarterly Report on Form 10-Q and in the other periodic and current reports and other documents we file with the Securities and Exchange Commission, before deciding to invest in our common stock. If any of the following risks materialize, our business, financial condition, results of operation and future prospects will likely be materially and adversely affected. In that event, the market price of our common stock could decline and you could lose all or part of your investment. This list is not exhaustive and the order of presentation does not reflect management's determination of priority or likelihood.

Risks Related to Our Financial Condition, Integration and Capital Requirements

We have incurred losses since inception, have a limited operating history on which to assess our business and anticipate that we will continue to incur losses for the foreseeable future. We have never had any products available for commercial sale and we may never achieve or sustain profitability.

We are a clinical development-stage specialty pharmaceutical company with a limited operating history, are not profitable, have incurred losses in each year since our inception and do not expect to become profitable in the foreseeable future. We have never had any products available for commercial sale, and we have not generated any revenue from product sales, nor do we anticipate that we will generate revenue from product sales in the near future.

Pharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We have devoted substantially all of our financial resources to identify, acquire, and develop cytisine, including providing general and administrative support for our operations. To date, we have financed our operations primarily through the sale of equity securities and convertible promissory notes. The amount of our future net losses will depend, in part, on the rate of our future expenditures and our ability to obtain funding through equity or debt financings, strategic collaborations, or grants.

We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We further expect that our expenses will increase substantially if and as we:

 

 

continue the clinical development of cytisine;

 

 

advance cytisine development into larger, more expensive clinical trials;

 

 

initiate additional pre-clinical, clinical, or other trials or studies for cytisine;

 

 

seek to attract and retain skilled personnel;

 

 

undertake the manufacturing of cytisine or increase volumes manufactured by third parties;

 

 

seek regulatory and marketing approvals and reimbursement for cytisine;

 

 

make milestone, royalty or other payments under third-party license and/or supply agreements;

 

 

establish a sales, marketing, and distribution infrastructure to commercialize any product for which we may obtain marketing approval and market for ourselves;

 

 

continue efforts to discover new product candidates;