UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE QUARTERLY PERIOD ENDED SEPTEMBER30, | |
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE TRANSITION PERIOD FROM TO |
Commission file number: 001-36054
Sophiris Bio Inc.
(Exact name of registrant as specified in its charter)
British Columbia | 98-1008712 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
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1258 Prospect Street, La Jolla, California | 92037 | |
(Address of Principal Executive Offices) | (Zip Code) |
858-777-1760
(Registrant’sRegistrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Shares, no par value | SPHS | The Nasdaq Capital Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions 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 |
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Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
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| Emerging growth company |
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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. ☒
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Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of November 6, 2017,1, 2019, the registrant had 30,111,15334,472,140 common shares (no par value) outstanding.
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| Item 1. |
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| Condensed Consolidated Statements of Operations and Comprehensive Loss | 3 |
Condensed Consolidated Statement of Shareholders’ (Deficit) Equity | 4 | ||
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| 6 | |
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| Item 3. |
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| Item 4. |
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| Item 1A. |
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| Item 6. |
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Sophiris Bio Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)
September 30, 2017 | December 31, 2016 | September 30, 2019 | December 31, 2018 | |||||||||||||
Assets: | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 16,486 | $ | 12,800 | $ | 4,251 | $ | 10,998 | ||||||||
Securities available-for-sale | 12,027 | 16,201 | 2,050 | 1,541 | ||||||||||||
Other receivables | 62 | 128 | ||||||||||||||
Prepaid expenses | 1,118 | 846 | ||||||||||||||
Prepaid expenses and other current assets | 710 | 656 | ||||||||||||||
Total current assets | 29,693 | 29,975 | 7,011 | 13,195 | ||||||||||||
Property and equipment, net | 3 | 4 | 3 | 4 | ||||||||||||
Other long-term assets | — | 19 | ||||||||||||||
Operating lease right-of-use asset | 85 | — | ||||||||||||||
Total assets | $ | 29,696 | $ | 29,998 | $ | 7,099 | $ | 13,199 | ||||||||
Liabilities and shareholders’ equity: | ||||||||||||||||
Liabilities and shareholders’ (deficit) equity: | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 737 | $ | 459 | $ | 431 | $ | 1,862 | ||||||||
Accrued expenses | 1,484 | 1,762 | 745 | 1,192 | ||||||||||||
Current portion of promissory note | 2,665 | 1,920 | ||||||||||||||
Current portion of operating lease liability | 85 | — | ||||||||||||||
Total current liabilities | 2,221 | 2,221 | 3,926 | 4,974 | ||||||||||||
Long-term promissory note | 6,756 | — | 3,086 | 5,091 | ||||||||||||
Warrant liability | 9,491 | 13,396 | 2,848 | 1,399 | ||||||||||||
Stock-based compensation liability | — | 57 | ||||||||||||||
Total liabilities | 18,468 | 15,674 | 9,860 | 11,464 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Shareholders’ equity: | ||||||||||||||||
Common shares, unlimited authorized shares, no par value; 30,111,153 and 30,107,644 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 131,246 | 131,245 | ||||||||||||||
Shareholders’ (deficit) equity: | ||||||||||||||||
Common shares, unlimited authorized shares, no par value; 33,572,140 and 30,205,915 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 131,489 | 131,247 | ||||||||||||||
Contributed surplus | 25,470 | 23,900 | 27,459 | 26,714 | ||||||||||||
Accumulated other comprehensive gain | 96 | 99 | 100 | 100 | ||||||||||||
Accumulated deficit | (145,584 | ) | (140,920 | ) | (161,809 | ) | (156,326 | ) | ||||||||
Total shareholders’ equity | 11,228 | 14,324 | ||||||||||||||
Total liabilities and shareholders’ equity | $ | 29,696 | $ | 29,998 | ||||||||||||
Total shareholders’ (deficit) equity | (2,761 | ) | 1,735 | |||||||||||||
Total liabilities and shareholders’ (deficit) equity | $ | 7,099 | $ | 13,199 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Research and development | $ | 1,649 | $ | 624 | $ | 4,244 | $ | 2,531 | $ | 738 | $ | 1,798 | $ | 3,382 | $ | 8,718 | ||||||||||||||||
General and administrative | 1,685 | 3,043 | 4,422 | 5,564 | 1,388 | 1,155 | 3,858 | 3,494 | ||||||||||||||||||||||||
Total operating expenses | 3,334 | 3,667 | 8,666 | 8,095 | 2,126 | 2,953 | 7,240 | 12,212 | ||||||||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||||||||
Interest expense | (35 | ) | (86 | ) | (35 | ) | (373 | ) | (145 | ) | (173 | ) | (470 | ) | (514 | ) | ||||||||||||||||
Interest income | 56 | 3 | 159 | 11 | 29 | 80 | 133 | 258 | ||||||||||||||||||||||||
Gain (loss) on revaluation of warrant liability | 670 | (350 | ) | 3,905 | (1,969 | ) | ||||||||||||||||||||||||||
Loss on early extinguishment of debt | — | (180 | ) | — | (180 | ) | ||||||||||||||||||||||||||
Other expense, net | (11 | ) | (4 | ) | (27 | ) | (11 | ) | ||||||||||||||||||||||||
Total other income (expense), net | 680 | (617 | ) | 4,002 | (2,522 | ) | ||||||||||||||||||||||||||
Gain on revaluation of warrant liability | 1,281 | 153 | 2,105 | 143 | ||||||||||||||||||||||||||||
Other income (expense), net | 2 | 21 | (11 | ) | 27 | |||||||||||||||||||||||||||
Total other income (expense) | 1,167 | 81 | 1,757 | (86 | ) | |||||||||||||||||||||||||||
Net loss | $ | (2,654 | ) | $ | (4,284 | ) | $ | (4,664 | ) | $ | (10,617 | ) | $ | (959 | ) | $ | (2,872 | ) | $ | (5,483 | ) | $ | (12,298 | ) | ||||||||
Basic and diluted loss per share | $ | (0.09 | ) | $ | (0.17 | ) | $ | (0.15 | ) | $ | (0.51 | ) | $ | (0.03 | ) | $ | (0.10 | ) | $ | (0.18 | ) | $ | (0.41 | ) | ||||||||
Weighted average number of outstanding shares – basic and diluted | 30,111 | 25,215 | 30,111 | 20,617 | 32,072 | 30,111 | 30,841 | 30,111 | ||||||||||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||||||||||
Unrealized gain (loss) on securities available-for-sale | 11 | — | (3 | ) | — | |||||||||||||||||||||||||||
Other comprehensive loss: | ||||||||||||||||||||||||||||||||
Unrealized income on securities available-for-sale | 1 | 2 | — | 2 | ||||||||||||||||||||||||||||
Total other comprehensive loss | $ | (2,643 | ) | $ | (4,284 | ) | $ | (4,667 | ) | $ | (10,617 | ) | $ | (958 | ) | $ | (2,870 | ) | $ | (5,483 | ) | $ | (12,296 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Shareholders’ (Deficit) Equity
(In thousands, except share amounts)
Common | Contributed |
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Shares | Amount | Surplus | Deficit | Income | (Deficit) Equity | |||||||||||||||||||
Balance at July 1, 2019 | 30,217,140 | $ | 131,247 | $ | 27,128 | $ | (160,850 | ) | $ | 99 | $ | (2,376 | ) | |||||||||||
Issuance of common shares and pre-funded warrants, net of issuance costs of $43,000 | 3,355,000 | 3,796 | 141 | — | — | 3,937 | ||||||||||||||||||
Initial valuation of warrant liability upon issuance of common share purchase warrants | — | (3,554 | ) | — | — | — | (3,554 | ) | ||||||||||||||||
Stock-based compensation expense | — | — | 190 | — | — | 190 | ||||||||||||||||||
Net loss | — | — | — | (959 | ) | — | (959 | ) | ||||||||||||||||
Other comprehensive income | — | — | — | — | 1 | 1 | ||||||||||||||||||
Balance at September 30, 2019 | 33,572,140 | $ | 131,489 | $ | 27,459 | $ | (161,809 | ) | $ | 100 | $ | (2,761 | ) | |||||||||||
Balance at July 1, 2018 | 30,111,153 | $ | 131,247 | $ | 26,274 | $ | (158,974 | ) | $ | 97 | $ | (1,356 | ) | |||||||||||
Stock-based compensation expense | — | — | 257 | — | — | 257 | ||||||||||||||||||
Net loss | — | — | — | (2,872 | ) | — | (2,872 | ) | ||||||||||||||||
Other comprehensive income | — | — | — | — | 2 | 2 | ||||||||||||||||||
Balance at September 30, 2018 | 30,111,153 | $ | 131,247 | $ | 26,531 | $ | (161,846 | ) | $ | 99 | $ | (3,969 | ) | |||||||||||
Balance at January 1, 2019 | 30,205,915 | $ | 131,247 | $ | 26,714 | $ | (156,326 | ) | $ | 100 | $ | 1,735 | ||||||||||||
Issuance of common shares and pre-funded warrants, net of issuance costs of $43,000 | 3,366,225 | 3,796 | 141 | — | — | 3,937 | ||||||||||||||||||
Initial valuation of warrant liability upon issuance of common share purchase warrants | — | (3,554 | ) | — | — | (3,554 | ) | |||||||||||||||||
Stock-based compensation expense | — | — | 604 | — | — | 604 | ||||||||||||||||||
Net loss | — | — | — | (5,483 | ) | — | (5,483 | ) | ||||||||||||||||
Balance at September 30, 2019 | 33,572,140 | $ | 131,489 | $ | 27,459 | $ | (161,809 | ) | $ | 100 | $ | (2,761 | ) | |||||||||||
Balance at January 1, 2018 | 30,111,153 | $ | 131,247 | $ | 25,854 | $ | (149,548 | ) | $ | 97 | $ | 7,650 | ||||||||||||
Stock-based compensation expense | — | — | 677 | — | — | 677 | ||||||||||||||||||
Net loss | — | — | — | (12,298 | ) | — | (12,298 | ) | ||||||||||||||||
Other comprehensive loss | — | — | — | — | 2 | 2 | ||||||||||||||||||
Balance at September 30, 2018 | 30,111,153 | $ | 131,247 | $ | 26,531 | $ | (161,846 | ) | $ | 99 | $ | (3,969 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Cash flows used in operating activities | ||||||||
Net loss for the period | $ | (4,664 | ) | $ | (10,617 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Stock-based compensation | 1,328 | 266 | ||||||
Amortization of debt discount | 7 | 81 | ||||||
Amortization of promissory note issuance costs | 3 | — | ||||||
Depreciation of property and equipment | 4 | 12 | ||||||
Amortization of discount on securities available-for-sale | 119 | — | ||||||
Change in fair value warrant liability | (3,905 | ) | 1,969 | |||||
Non-cash portion of loss on early extinguishment of debt | — | (159 | ) | |||||
Payment of original issue discount | — | (124 | ) | |||||
Foreign exchange transaction gain (loss) | 1 | (1 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Other receivables | 66 | (4 | ) | |||||
Prepaid expenses and other long-term assets | (253 | ) | (4 | ) | ||||
Accounts payable | 254 | (651 | ) | |||||
Accrued expenses | (278 | ) | 1,007 | |||||
Net cash used in operating activities | (7,318 | ) | (8,225 | ) | ||||
Cash flows provided by investing activities | ||||||||
Purchase of property and equipment | (3 | ) | — | |||||
Maturities of securities available-for-sale | 12,736 | 2,750 | ||||||
Purchases of securities available-for-sale | (8,683 | ) | (453 | ) | ||||
Net cash provided by investing activities | 4,050 | 2,297 | ||||||
Cash flows provided by financing activities | ||||||||
Proceeds from the issuance of common shares and warrants, net of paid offering costs | — | 33,665 | ||||||
Proceeds from exercise of stock options | 2 | 92 | ||||||
Proceeds from the exercise of warrants | — | 2,486 | ||||||
Proceeds from the issuance of the Silicon Valley Bank promissory note, net of issuance cost | 6,953 | — | ||||||
Principal payments on the Oxford promissory notes | — | (5,141 | ) | |||||
Net cash provided by financing activities | 6,955 | 31,102 | ||||||
Effect of exchange rate changes on cash and cash equivalents | (1 | ) | — | |||||
Net increase cash and cash equivalents | 3,686 | 25,174 | ||||||
Cash and cash equivalents at beginning of period | 12,800 | 5,881 | ||||||
Cash and cash equivalents at end of period | $ | 16,486 | $ | 31,055 | ||||
Supplemental disclosures of non-cash investing and financing activities: | ||||||||
Change in the fair value of stock-based compensation liability recorded to contributed surplus | $ | (57 | ) | $ | 27 | |||
Valuation of warrants issued in connection with the Silicon Valley Bank promissory note | $ | 185 | $ | — | ||||
Valuation of warrant liability upon issuance of warrants in connection with equity financings | $ | — | $ | 18,747 | ||||
Valuation of exercised warrants reclassified from warrant liability to contributed surplus | $ | — | $ | 5,681 | ||||
Issuance costs included in accounts payable and accrued expenses but not paid | $ | 23 | $ | 132 |
Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
Cash flows used in operating activities | ||||||||
Net loss | $ | (5,483 | ) | $ | (12,298 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Stock-based compensation | 604 | 677 | ||||||
Accretion of debt discount | 101 | 113 | ||||||
Amortization of promissory note issuance costs | 39 | 43 | ||||||
Depreciation and amortization | 93 | 2 | ||||||
Amortization of premium/discount on securities available-for-sale | (27 | ) | (44 | ) | ||||
Financing issuance cost allocated to warrant liability | 359 | — | ||||||
Change in fair value warrant liability | (2,105 | ) | (143 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Prepaid expenses and other current assets | (53 | ) | 143 | |||||
Accounts payable | (1,459 | ) | (433 | ) | ||||
Accrued expenses | (404 | ) | 599 | |||||
Operating lease liability | (92 | ) | — | |||||
Net cash used in operating activities | (8,427 | ) | (11,341 | ) | ||||
Cash flows (used in) provided by investing activities | ||||||||
Purchases of property and equipment | — | (4 | ) | |||||
Maturities of securities available-for-sale | 2,600 | 9,387 | ||||||
Purchases of securities available-for-sale | (3,082 | ) | (2,081 | ) | ||||
Net cash (used in) provided by investing activities | (482 | ) | 7,302 | |||||
Cash flows provided by financing activities | ||||||||
Proceeds from the issuance of common shares, pre-funded warrants and common share purchase warrants, net of paid issuance costs | 3,664 | — | ||||||
Payment of offering costs related to the establishment of the Controlled Equity Sales Agreement | (102 | ) | — | |||||
Principal payments on note payable | (1,400 | ) | — | |||||
Net cash provided by financing activities | 2,162 | — | ||||||
Net decrease in cash and cash equivalents | (6,747 | ) | (4,039 | ) | ||||
Cash and cash equivalents at beginning of period | 10,998 | 16,087 | ||||||
Cash and cash equivalents at end of period | $ | 4,251 | $ | 12,048 |
Supplemental disclosures of non-cash investing and financing activities: | ||||||||
Valuation of warrant liability upon issuance of purchase warrants | $ | 3,554 | $ | — | ||||
Unpaid issuance costs included in accounts payable | $ | 86 | $ | — |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. | Nature of the business |
Company
Sophiris Bio Inc., or the Company, or Sophiris, is a clinical-stage biopharmaceutical company currently developing topsalysinfocused on innovative products for the treatment of clinically significant localized prostate cancer and as a treatment for the lower urinary tract symptoms of benign prostatic hyperplasia, or BPH, commonly referred to as an enlarged prostate.urological diseases. The Company is governed by the British Columbia Business Corporations Act. The Company’s operations were initially located in Vancouver, British Columbia until April 2011, when its core activities and headquarters relocated from Vancouver, British Columbia to San Diego, California.
Liquidity
The condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has incurred net losses from operations since inception, including $5.5 million in the nine months ended September 30, 2019 and has an accumulated deficit of $161.8 million as of September 30, 2019. On August 29, 2019, the Company completed a registered direct financing with a private institutional investor whereby it received $3.6 million, net of underwriters’ discounts and offering costs. At September 30, 2019, the Company had cash, cash equivalents and securities available-for-sale of $6.3 million. As of September 30, 2019, the future principal and final fee payments under the Loan and Security Agreement with Silicon Valley Bank, or SVB, total $6.0 million. The maturity date of the loan is September 1, 2021. The Company is currently paying monthly installments of principal and interest under the Loan and Security Agreement. However, if the Company fails to make principal and interest payments when due or another event of default occurs under the loan, SVB may accelerate the loan and foreclose on the Company’s pledged assets if the Company is unable to repay the loan in full. Events of default include the accountsoccurrence of Sophiris and its wholly-owned subsidiaries, Sophiris Bio Corp. and Sophiris Bio Holding Corp., both of which are incorporateda material adverse change as defined in the StateLoan and Security Agreement. As of Delaware.the date of filing of this Form 10-Q, the Company is not in default under any of the provisions of the Loan and Security Agreement. The Company expects that its cash, cash equivalents and securities available-for-sale will be sufficient to fund its operations and debt service through March 2020 (assuming no acceleration of the loan) and, as a result, there is substantial doubt about its ability to continue as a going concern for one year from the date of the issuance of its condensed consolidated financial statements for the nine months ended September 30, 2019.
The Company announced that it has received formal scientific advice from the European Medicines Agency, or EMA, and reached an agreement with the U.S. Food and Drug Administration, or FDA, regarding a design for a single Phase 3 clinical trial to evaluate the potential of topsalysin as a targeted focal therapy to treat patients with intermediate risk localized prostate cancer. Based upon feedback from the EMA and the FDA, the Company believes that data from a single Phase 3 trial, if successful, should be sufficient to support market approval in both the U.S. and Europe. The scope of any additional trial in localized prostate cancer, including whether it will be a Phase 3 trial or an additional Phase 2 trial, will be dependent upon securing funding to finance such clinical trial. At this point in time, the Company does not plan on pursuing new clinical trials, including an additional trial in localized prostate cancer or a second Phase 3 trial in benign prostatic hyperplasia, or BPH, unless the Company secures a development partner to fund such new clinical trials or it obtains the necessary financing. The Company is currently evaluating options to further advance the clinical development of topsalysin. The Company will require significant additional funding to advance topsalysin in clinical development. The Company could use dilutive funding options such as an equity financing and/or non-dilutive funding options such as a partnering arrangement or other strategic arrangements to fund future clinical development of topsalysin. Any significant future public financing will most likely require the use of a Form S-1 registration statement. The process of getting a Form S-1 registration statement filed and declared effective can take an extended period of time which could delay the timing of any future significant financing. There can be no assurance that such funding will be secured in a timely manner or on favorable terms, if at all or that a development partner will be available on acceptable terms or if at all.
If the Company is unable to raise sufficient capital to fund its operations, the Company could be required to significantly reduce expenses, sell assets (potentially at a loss), cease operations altogether, file for bankruptcy or seek other protection from creditors, or liquidate all of its assets. The Company is also exploring partnership arrangements and other strategic alternatives which could include a merger or acquisition.
On March 7, 2019, the Company received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market LLC, or Nasdaq, notifying the Company that for the last 30 consecutive business days prior to the date of the letter, the market value of the Company’s listed securities was less than $35 million and therefore the Company did not meet the requirement for continued listing on The Nasdaq Capital Market as required by Nasdaq Listing Rule 5550(b)(2), or the Market Value Rule, or the alternative requirements under Nasdaq Listing Rules 5550(b)(1) and 5550(b)(3). In accordance with Nasdaq Listing Rule 5810(c)(3)(C), the Company had 180 calendar days, or until September 3, 2019, to regain compliance with the Market Value Rule. As of the date of this filing the Company has not regained compliance with the Market Value Rule.
On June 4, 2019, the Company received a letter from the Listing Qualifications Staff of Nasdaq notifying the Company that the closing bid price of the Company’s common shares had been below $1.00 per share for 30 consecutive business days and that the Company was therefore not in compliance with the minimum bid price requirement for continued listing on The Nasdaq Capital Market, as required by Nasdaq Listing Rule 5550(a)(2). Nasdaq stated in its June 4th letter that, in accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has a grace period of 180 calendar days, or until December 2, 2019, to regain compliance with the minimum closing bid price requirement for continued listing. The Company will regain compliance if the closing bid price of the Company’s common shares is at or above $1.00 for at least 10 consecutive business days anytime during the 180-day grace period.
On September 6, 2019, the Company received a letter from the Nasdaq notifying the Company that it had not regained compliance with Market Value Rule by September 3, 2019 and as a result the Company’s securities will be delisted from the Nasdaq unless the Company requests an appeal of this determination. The Company formally requested an appeal of this determination on September 12, 2019. On October 17, 2019, the Company met with the Nasdaq Hearings Panel regarding the Company’s potential delisting from The Nasdaq Stock Market as a result of its failure to maintain a market value of the Company’s listed securities of at least $35 million or in the alternative to have more than $2.5 million in stockholders’ equity. On October 21, 2019, the Company received the Nasdaq Hearings Panel decision which granted the Company until January 24, 2020 to regain compliance with the listing standards of the Nasdaq Capital Market, by either having the market value of the Company’s listed securities be at least $35 million during the preceding ten consecutive trading days before January 24, 2020 or having more than $2.5 million in stockholders’ equity by January 24, 2020. The Company will also be required to have a closing bid price of at least $1.00 per share during the preceding ten consecutive trading days before January 24, 2020. If the Company is unable to regain compliance with the listing standards of the Nasdaq Capital Market by January 24, 2020, the Company’s securities may be delisted from The Nasdaq Stock Market. As of the date of this filing the Company has not regained compliance with any of these listing rules.
2. | Summary of significant accounting policies |
Significant accounting policies followed by the Company in the preparation of its condensed consolidated financial statements are as follows:
Basis of consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Sophiris Bio Corp. and Sophiris Bio Holding Corp.Corp, both of which are incorporated in the State of Delaware. All intercompany balances and transactions have been eliminated for purposes of consolidation.
Basis of presentation and use of estimates
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States, or GAAP, for the interim financial information and the rules and regulations of the Securities and Exchange Commission, or SEC, related to quarterly reports on Form 10-Q. Accordingly, they do not include all of the information and disclosures required by GAAP for annual audited financial statements and should be read in conjunction with the Company’sCompany's audited consolidated financial statements and notes thereto included in the Company’sCompany's Annual Report on Form 10-K, or Annual Report, filed with the SEC on March 27, 2017.13, 2019. The accompanying year-end condensed balance sheet data was derived from the audited consolidated financial statements but does not include all disclosures required by GAAP. In the opinion of management, these condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented. The results of operations for the interim periods shown in this report are not necessarily indicative of the results that may be expected for any future period, including the full year.
GAAP requiresDuring the Company’s managementnine months ended September 30, 2019, there have been no changes to make estimates and judgments that may affectour significant accounting policies as described in our Annual Report on Form 10-K for the reported amounts of assets, liabilities, revenue, expenses and related disclosures. The Company bases estimates and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances. The significant estimates in these interim condensed consolidated financial statements include stock-based compensation expense, fair value of the warrant liability and accrued research and development expenses, including accruals related to the Company’s ongoing clinical trial. The Company’s actual results may differ from these estimates. The Company evaluates its estimates on an ongoing basis. Changes in estimates are reflected in reported results in the period in which they become known by the Company’s management. fiscal year ended December 31, 2018, except as described below.
Foreign currency
Historically gains and losses resulting from foreign currency translation were recorded in accumulated other comprehensive gain (loss), which is a separate component of stockholders’ equity. Foreign currency transaction gains and losses are recognized as a component of other expense.
Cash and cash equivalents
Cash equivalents are short-term, highly liquid investments with an original maturity of three months or less at the date of purchase.
Securities Available-for-Sale
Investments with an original maturity of more than three months when purchased have been classified by management as securities available-for-sale. Such investments are carried at fair value, with unrealized gains and losses included as a component of accumulated other comprehensive gain (loss) in shareholders’ equity. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in interest income. No other-than-temporary impairments were identified for the investment securities held by the Company as of September 30, 2017 and December 31, 2016. The cost of investment securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest income. The cost of securities sold is based on the specific-identification method. The Company has classified all of its investment securities as available-for-sale, including those with maturities beyond one year, as current assets on the consolidated balance sheets based on the highly liquid nature of the investment securities and because these investment securities are considered available for use in current operations.
Promissory notes
Promissory notes are recognized initially at fair value. Promissory notes are subsequently carried at amortized cost; any difference between the initial fair market value and the redemption value is recognized in the statement of operations and comprehensive loss over the period of the notes payable using the effective interest method.
The fair value of the promissory notes when issued with equity is recognized initially at the fair value of similar promissory notes issued on a standalone basis. The equity that is issued with borrowings is valued at fair value using the Black-Scholes valuation model.
Revenue recognitionLeases
The Company may entercurrently leases its corporate headquarters. When the Company enters into product development agreements with collaborative partners fora lease, it determines whether the researchagreement is a lease or contains a lease and development of products for the treatment of urological diseases. The terms of the agreements may include nonrefundable signing and licensing fees, milestone payments and royalties on any product sales derived from collaborations. These multiple element arrangements are analyzedat commencement it evaluates each lease agreement to determine whether the deliverables canlease is an operating or financing lease. The Company will evaluate the lease to determine if the lease contains renewal options, tenant improvement allowances, rent holidays and rent escalation clauses. The Company adopted the Financial Accounting Standards Board Accounting Standards Update, or ASU, "Leases," or ASU 2016-02, using the modified retrospective approach with an effective date as of January 1, 2019 for leases that existed on that date. Prior period results continue to be separated or whether they mustpresented under ASC 840 based on the accounting standard originally in effect for such periods.
Pursuant to ASU 2016-02, the Company’s office facility lease continued to be accountedclassified as operating leases. With the adoption of ASU 2016-02, the Company recorded an operating lease right-of-use asset and an operating lease liability on its balance sheet. Right-of-use lease assets represents its right to use the underlying asset for as a single unit of accounting. License feesthe lease term and the lease obligation represents its commitment to make the lease payments arising from the lease. Right-of-use lease assets and obligations are recognized as revenueat the commencement date based on the present value of remaining lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company used an estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The right-of-use lease asset includes any lease payments made prior to commencement and excludes any lease incentives. The lease term may include options to extend or terminate the lease when persuasive evidence of an arrangement exists, the fee is fixed or determinable, delivery or performance has substantially completed and collectionit is reasonably assured.
The Company recognizes up front license payments as revenue upon delivery of the license only if the license has stand-alone value to the customer and if the agreement includes a general right of return, the delivery or performance of undelivered items is considered probable and within the control of the Company. The payment is generally allocated to the separate units of accounting based on their relative selling prices. The selling price of each deliverable is determined using vendor specific objective evidence of selling prices, if it exists; otherwise, third-party evidence of selling prices. If neither vendor specific objective evidence nor third-party evidence exists, the Company uses its’ best estimate of the selling price for each deliverable. The payment allocated is limited to the amountcertain that is not contingent on the delivery of additional items or fulfillment of other performance conditions.
Whenever the Company determineswe will exercise that an arrangement should be accounted for as a single unit of accounting, it must determine the period over which the performance obligations will be performed and revenue recognized. If the Company cannot reasonably estimate the timing and the level of effort to complete its performance obligations under the arrangement, then revenue under the arrangementoption. Operating lease expense is recognized on a straight-line basis over the periodlease term, subject to any changes in the lease or expectations regarding the terms. The Company is expected to complete its performance obligations.combines lease and non-lease components. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
The Company evaluates milestone payments on an individual basis and recognizes revenue from non-refundable milestone payments when the earnings process is complete and the payment is reasonably assured. Non-refundable milestone payments related to arrangements under which the Company has continuing performance obligations are recognized as revenue upon achievement of the associated milestone, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement and (ii) the amount of the milestone payment is reasonable in relation to the effort expended or the risk associated with the milestone event. Any amounts received under agreements in advance of performance, if deemed substantive, are recorded as deferred revenue and recognized as revenue as the Company completes its performance obligations. A milestone event is considered substantive if (i) the milestone is commensurate with either (a) the Company’s performance to achieve the milestone or (b) the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the Company’s performance to achieve the milestone; (ii) it relates solely to past performance and (iii) it is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement. If any portion of the milestone payment does not relatePrior to the Company’s performance, does not relate solelyadoption of ASU 2016-02, when the lease agreement contained renewal options and rent escalation clauses, the Company recorded a deferred rent asset or liability equal to past performance or is refundable or adjustable based onthe difference between the rent expense and the future performance, the milestone is not considered to be substantive. Milestoneminimum lease payments are not bifurcated into substantive and non-substantive components. Paymentsdue. The lease expense related to operating leases was recognized on a straight-line basis in the achievementstatements of non-substantive milestones is deferred and recognizedoperations over the Company’s remaining performance period.term of each lease.
Royalty revenue will be recognized upon the sale of the related products provided the Company has no remaining performance obligations under the arrangement.
Research and development expenses
Research and development costs are charged to expense as incurred. Research and development expenses comprise costs incurred in performing research and development activities, including personnel-related costs, stock-based compensation, facilities, research-related overhead, clinical trial costs, contracted services, manufacturing, license fees and other external costs. The Company accounts for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been consumed rather than when the payment is made.
Accrued research and development expenses
Clinical trial costs are recorded as a component of research and development expenses. The Company accrues and expenses clinical trial activities performed by third parties based upon estimates of the percentage of work completed of the total work over the life of the individual study in accordance with agreements established with clinical research organizations and clinical trial sites. The Company determines the estimates through discussions with internal clinical personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services based on facts and circumstances known to the Company as of each balance sheet date. However, actual costs and timing of clinical trials are highly uncertain, subject to risks and may change depending upon a number of factors, including the Company’s clinical development plan.
If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Adjustments to prior period estimates have not been material.
Examples of estimated accrued research and development expenses include:
fees to clinical research organizations in connection with clinical studies;
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Nonrefundable advance payments for goods and services that will be used or rendered in future research and development activities, are recorded as a prepaid expense and recognized as expense in the period that the related goods are consumed or services are performed.
Stock-based compensation
The Company expenses the fair value of employee stock options over the vesting period. Compensation expense is measured using the fair value of the award at the grant date, net of estimated forfeitures, and is adjusted annually to reflect actual forfeitures. The fair value of each stock-based award is estimated using the Black-Scholes pricing model and is expensed using graded amortization over the vesting period.
Prior to the Company’s initial public offering, or IPO, the Company had issued its stock options with a Canadian dollar denominated exercise price. Subsequent to the Company’s IPO, the Company issues its stock options with a U.S. dollar denominated exercise price.
Effective November 13, 2013, the Company voluntarily delisted from the Toronto Stock Exchange, or TSX. As a result of the delisting from the TSX and the change in the Company’s functional currency to the U.S. dollar, the stock options granted with exercise prices denominated in Canadian dollars are considered dual indexed as defined in Accounting Standards Codification, or ASC, Topic 718, “Compensation, Stock Compensation”. As a result, the Company is required to account for these stock options as a liability. Historically these options had been accounted for as equity. The estimated fair value is determined using the Black-Scholes pricing model based on the estimated value of the underlying common shares at the valuation measurement date, the remaining service period of the stock options, risk-free interest rates, expected dividends and expected volatility of the price of the underlying common shares. The fair value of the stock-based compensation liability was zero at September 30, 2017. As the calculated fair value of the stock options at September 30, 2017 was less than the original grant date fair value, no additional compensation expense was recorded in the consolidated statement of operations and comprehensive loss. The change in the fair value of the stock-based compensation liability was recorded as an adjustment to Contributed Surplus of zero and ($57,000) for the three and nine months ended September 30, 2017, respectively, and $93,000 and $27,000 for the three and nine months ended September 30, 2016, respectively.
Warrant Liability
In connection with the offerings the Company completed in 2016, the Company issued warrants to purchase common shares. These warrants may require the Company to pay the warrant holder cash under certain provisions of the warrant and therefore the Company is accounting for these warrants as a liability in accordance with ASC 480 “Distinguishing Liabilities from Equity”. As a result of these warrants being classified as liabilities, the Company is required to calculate the fair value of these warrants at each reporting date. The fair value of these warrants are calculated utilizing a Black-Scholes pricing model. The Company calculated the initial fair value of these warrants at the date the warrants were issued. At each reporting date the Company is required to remeasure the fair value of the warrant liability and any corresponding increase or decrease to the warrant liability is recorded as a component of other income or expense in its consolidated statement of operations and comprehensive loss. In addition, if a warrant holder exercises warrants the Company is required to revalue the fair value of the underlying warrants on the date of exercise and reclassify the change in the fair value from the warrant liability to contributed surplus.
Certain inputs utilized in the Company’s Black-Scholes fair value calculation may fluctuate in future periods based upon factors which are outside of the Company’s control. A significant change in one or more of these inputs used in the calculation of the fair value may cause a significant change to the fair value of the Company’s warrant liability which could also result in material non-cash gain or loss being reported in the Company’s consolidated statement of operations and comprehensive loss.
Fair value of financial instruments
The Company measures certain financial assets and liabilities at fair value based on the exchange price that would be received for an asset or paid for to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The carrying amounts of the Company’s financial instruments, including cash and cash equivalents and accounts payable and accrued expenses, approximate fair value due to their short maturities.
The Company follows ASC 820-10, “Fair Value Measurements and Disclosures,” which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:
Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2 – Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3 – Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued new guidance related to revenue recognition (Accounting Standards Update, or ASU, No. 2014-09 Revenue from Contracts with Customers (Topic 606)). Subsequently the FASB has issued additional guidance (ASU Nos. 2015-14; 2016-08; 2016-10; 2016-12; 2016-20 Revenue from Contracts with Customers (Topic 606)). The guidance establishes principles for reporting information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Two methods of adoption are permitted: (a) full retrospective adoption, meaning the standard is applied to all periods presented or (b) modified retrospective adoption, meaning the cumulative effect of applying the new guidance is recognized as an adjustment to the opening retained earnings balance. The standard will be effective beginning the first quarter of 2018 and the Company is in the process of determining the adoption method. The Company did not recognize any revenue from contracts with customers in the years ended December 31, 2016, 2015 and 2014. Although the Company is still evaluating the impact of the new standard, the Company anticipates that the impact will not be material to the consolidated financial statements as the Company does not currently generate revenues from contracts with customers.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. This guidance requires lessees to recognize a lease liability and a right-of-use asset with the exception of short-term leases. In addition, lessees are required to classify leases as either operating or finance based on current criteria of whether or not the lease is effectively a financed purchase by the lessee. The new standard is effective for the annual reporting period beginning after December 15, 2018 and early adoption is permitted. Although the Company is in the process of evaluating the impact of this guidance on its consolidated financial statements and related disclosures, the Company expects that its operating lease will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”, addressing eight specific cash flow issues in an effort to reduce diversity in practice. The amended guidance is effective for fiscal years beginning after December 31, 2017, and for interim periods within those years. Early adoption is permitted. The Company is in the process of evaluating the impact of this guidance on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting". The new standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The new standard will be effective for the Company on January 1, 2018; however, early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's financial position or results of operations.
3. | Net loss per common share |
Basic net loss per share is calculated by dividing the net loss attributable to common shareholders by the weighted-average number of common shares outstanding during the period, without consideration for common shares equivalents. Diluted net loss per share is computed by dividing the net loss attributable to common shareholders by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method.
The following diluted securities have been excluded from the computation of diluted weighted-average shares outstanding as of September 30, 20172019 and 20162018 as the Company recorded a net loss in allboth periods and therefore, they would be anti-dilutive (in thousands):
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||
Options to purchase common shares | 2,888 | 1,978 | 2,963 | 2,940 | ||||||||||||
Common share purchase warrants | 5,825 | 6,206 | 11,131 | 5,798 |
Reconciliation of shares utilized in the weighted average outstanding number of shares for basic and diluted earnings per share for the three and nine months ended September 30, 2019 and 2018:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Weighted average number of common shares outstanding during the period | 31,384 | 30,111 | 30,609 | 30,111 | ||||||||||||
Weighted average number of pre-funded warrants outstanding during the period | 688 | — | 232 | — | ||||||||||||
32,072 | 30,111 | 30,841 | 30,111 |
Even through the impact of the inclusion of the pre-funded warrants in the earnings per shares calculation is anti-dilutive, the Company has included the pre-funded warrants issued in its August 2019 offering in the calculation of weighted average outstanding number of shares for both basic and diluted EPS for the three and nine months ended September 30, 2019 as these warrants were issued with an exercise price of $0.01 which the Company believes is nonsubstantive in relation to the fair value of the common shares to be issued upon exercise of the warrants. On October 25, 2019, 900,000 of these outstanding pre-funded warrants were exercised.
4. | Securities Available-for-Sale |
Securities available-for-sale consisted of the following as of September 30, 20172019 (in thousands):
September 30, 2017 | ||||||||||||||||
Amortized | Unrealized | Estimated | ||||||||||||||
Cost | Gain | Loss | Fair Value | |||||||||||||
Commercial paper | $ | 3,292 | $ | — | $ | — | $ | 3,292 | ||||||||
U.S. government sponsored enterprise securities | 8,738 | — | (3 | ) | 8,735 | |||||||||||
$ | 12,030 | $ | — | $ | (3 | ) | $ | 12,027 |
September 30, 2019 | ||||||||||||||||
Amortized | Unrealized | Estimated | ||||||||||||||
Cost | Gain | Loss | Fair Value | |||||||||||||
Commercial paper | $ | 1,547 | $ | — | $ | — | $ | 1,547 | ||||||||
U.S. government sponsored enterprise securities | 503 | — | — | 503 | ||||||||||||
$ | 2,050 | $ | — | $ | — | $ | 2,050 |
As of September 30, 2017,2019, all of the Company’sCompany’s securities available for saleavailable-for-sale have a contractual maturity date of less than one year.
Securities available-for-sale consisted of the following as of December 31, 20162018 (in thousands):
December 31, 2016 | December 31, 2018 | |||||||||||||||||||||||||||||||
Amortized | Unrealized | Estimated | Amortized | Unrealized | Estimated | |||||||||||||||||||||||||||
Cost | Gain | Loss | Fair Value | Cost | Gain | Loss | Fair Value | |||||||||||||||||||||||||
Commercial paper | $ | 3,890 | $ | — | $ | — | $ | 3,890 | $ | 892 | $ | — | $ | — | $ | 892 | ||||||||||||||||
U.S. government sponsored enterprise securities | 12,311 | — | — | 12,311 | 649 | — | — | 649 | ||||||||||||||||||||||||
$ | 16,201 | $ | — | $ | — | $ | 16,201 | $ | 1,541 | $ | — | $ | — | $ | 1,541 |
As of December 31, 2018, all of the Company’s securities available-for-sale have a maturity date of less than one year.
As of December 31, 2016, all of the Company’s securities available for sale have a contractual maturity of less than one year.
5. | Fair value measurement and financial instruments |
As of September 30, 20172019, the Company had $27.6$5.5 million of securities consisting of money market funds, commercial paper securities and U.S. government sponsored enterprise securities with maturities that range from twofour days to fourfive months with an overall average time to maturity of approximately one and one quarter months.month. The Company has the ability to liquidate these investments without restriction. The Company determines the fair value for securities with Level 1 inputs through quoted market prices. The Company determines the fair value for securities with Level 2 inputs through broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. The Company’s Level 2 securities have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, typically utilizing third party pricing services or other observable market data. The pricing services utilize industry standard valuation models, including both income and market based approaches and observable market inputs to determine value. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, and other industry and economic events. The Company’s Level 3 inputs are unobservable inputs based on the Company’s assessment that market participants would use in pricing the instruments.
The following tables presents the Company’s assets and liabilities that are measured at fair value on a recurring basis for the periods presented (in thousands):
September 30, 2017 | Level 1 | Level 2 | Level 3 | September 30, 2019 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Money market funds | $ | 82 | $ | 82 | $ | — | $ | — | $ | 410 | $ | 410 | $ | — | $ | — | ||||||||||||||||
Commercial paper | 18,782 | — | 18,782 | — | 2,796 | — | 2,796 | — | ||||||||||||||||||||||||
U.S. government sponsored enterprise securities | 8,735 | — | 8,735 | — | 2,250 | — | 2,250 | — | ||||||||||||||||||||||||
Total assets | $ | 27,599 | $ | 82 | $ | 27,517 | $ | — | $ | 5,456 | $ | 410 | $ | 5,046 | $ | — | ||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Warrant liability | $ | 9,491 | $ | — | $ | — | $ | 9,491 | $ | 2,848 | $ | — | $ | — | $ | 2,848 | ||||||||||||||||
Total liabilities | $ | 9,491 | $ | — | $ | — | $ | 9,491 | $ | 2,848 | $ | — | $ | — | $ | 2,848 |
December 31, 2016 | Level 1 | Level 2 | Level 3 | December 31, 2018 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Money market funds | $ | 57 | $ | 57 | $ | — | $ | — | $ | 20 | $ | 20 | $ | — | $ | — | ||||||||||||||||
Commercial paper | 16,085 | — | 16,085 | — | 9,729 | — | 9,729 | — | ||||||||||||||||||||||||
U.S. government sponsored enterprise securities | 12,311 | — | 12,311 | — | 2,198 | — | 2,198 | — | ||||||||||||||||||||||||
Total assets | $ | 28,453 | $ | 57 | $ | 28,396 | $ | — | $ | 11,947 | $ | 20 | $ | 11,927 | $ | — | ||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Warrant liability | $ | 13,396 | $ | — | $ | — | $ | 13,396 | $ | 1,399 | $ | — | $ | — | $ | 1,399 | ||||||||||||||||
Stock-based compensation liability | 57 | — | — | 57 | ||||||||||||||||||||||||||||
Total liabilities | $ | 13,453 | $ | — | $ | — | $ | 13,453 | $ | 1,399 | $ | — | $ | — | $ | 1,399 |
Warrant liability
In connection with the offering completed inon May 11, 2016, the Company issued 1,785,714 warrants to purchase its common shares. These warrants may require the Company to pay the warrant holder cash under certain provisions of the warrant and therefore the Company is accounting for these warrants as a liability. As a result of these warrants being classified as a liability, the Company is required to calculate their fair value at each reporting date. The fair value of these warrants is calculated utilizing a Black-Scholes pricing model. The Company calculated the initial fair value of these warrants on May 11, 2016, the date the warrants were issued. As of September 30, 2017,2019, only 10,000 of these warrants remain outstanding from the May 2016 offering for which the fair value was remeasured as of September 30, 2017.2019. The following inputs were utilized in the Black-Scholes pricing model:
September 30, 2017 | December 31, 2016 | |||||||
Stock price | $ | 2.15 | $ | 2.80 | ||||
Exercise price | $ | 1.40 | $ | 1.40 | ||||
Risk-free interest rate | 1.70 | % | 1.78 | % | ||||
Volatility | 145.62 | % | 144.25 | % | ||||
Dividend yield | 0.00 | % | 0.00 | % | ||||
Expected life in years | 3.61 | 4.36 | ||||||
Calculated fair value per warrant | $ | 1.87 | $ | 2.55 |
September 30, 2019 | December 31, 2018 | |||||||
Stock price | $ | 0.59 | $ | 0.83 | ||||
Exercise price | $ | 1.40 | $ | 1.40 | ||||
Risk-free interest rate | 1.67 | % | 2.46 | % | ||||
Volatility | 90.83 | % | 82.47 | % | ||||
Dividend yield | 0.00 | % | 0.00 | % | ||||
Expected life in years | 1.61 | 2.36 | ||||||
Calculated fair value per warrant | $ | 0.13 | $ | 0.29 |
In connection with the offering completed on August 26, 2016, the Company issued 5,606,250 warrants to purchase its common shares. These warrants may require the Company to pay the warrant holder cash under certain provisions of the warrant and therefore the Company is accounting for these warrants as a liability. As a result of these warrants being classified as a liability, the Company is required to calculate the fair value of these warrants at each reporting date. The fair value of these warrants is calculated utilizing a Black-Scholes pricing model. The Company calculated the initial fair value of these warrants on August 26, 2016, the date the warrants were issued. As of September 30, 2019, all of these warrants remain outstanding for which the fair value was remeasured. The following inputs were utilized in the Black-Scholes pricing model:
September 30, 2017 | December 31, 2016 | September 30, 2019 | December 31, 2018 | |||||||||||||
Stock price | $ | 2.15 | $ | 2.80 | $ | 0.59 | $ | 0.83 | ||||||||
Exercise price | $ | 4.00 | $ | 4.00 | $ | 4.00 | $ | 4.00 | ||||||||
Risk-free interest rate | 1.75 | % | 1.85 | % | 1.64 | % | 2.45 | % | ||||||||
Volatility | 141.15 | % | 140.47 | % | 86.81 | % | 104.52 | % | ||||||||
Dividend yield | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||
Expected life in years | 3.90 | 4.65 | 1.90 | 2.65 | ||||||||||||
Calculated fair value per warrant | $ | 1.69 | $ | 2.38 | $ | 0.04 | $ | 0.25 |
In connection with the offering completed on August 29, 2019, the Company issued 5,333,334 warrants to purchase its common shares. These warrants may require the Company to pay the warrant holder cash under certain provisions of the warrant and therefore the Company is accounting for these warrants as a liability. As a result of these warrants being classified as a liability, the Company is required to calculate the fair value of these warrants at each reporting date. The fair value of these warrants is calculated utilizing a Black-Scholes pricing model. The Company calculated the initial fair value of these warrants on August 29, 2019, the date the warrants were issued. As of September 30, 2019, all of these warrants remain outstanding for which the fair value was remeasured. The following inputs were utilized in the Black-Scholes pricing model:
Initial Fair Value Assessment August 29, 2019 | September 30, 2019 | |||||||
Stock price | $ | 0.78 | $ | 0.59 | ||||
Exercise price | $ | 0.95 | $ | 0.95 | ||||
Risk-free interest rate | 1.41 | % | 1.56 | % | ||||
Volatility | 126.36 | % | 130.31 | % | ||||
Dividend yield | 0.00 | % | 0.00 | % | ||||
Expected life in years | 5.51 | 5.42 | ||||||
Calculated fair value per warrant | $ | 0.67 | $ | 0.49 |
The following table presents a reconciliation of the warrant liability measured at fair value using unobservable inputs (Level 3) (in thousands):
Warrant Liability | ||||
Balance at January 1, 2017 | $ | 13,396 | ||
Change in fair value of warrant liability | (3,905 | ) | ||
Balance at September 30, 2017 | $ | 9,491 |
Stock-based compensation liability
The Company calculates the fair value of the stock-based compensation liability for those stock options with exercise prices denominated in Canadian Dollars (level 3) at each reporting period utilizing a Black-Scholes pricing model. The following inputs were utilized in the Black-Scholes pricing model:
September 30, 2017 | December 31, 2016 | |||||||
Stock price at the end of each reporting period | $ | 2.15 | $ | 2.80 | ||||
Weighted average exercise price | $ | 11.58 | $ | 11.06 | ||||
Risk-free interest rate | 1.31 | % | 0.85 | % | ||||
Volatility | 31.51 | % | 120.81 | % | ||||
Dividend yield | 0.00 | % | 0.00 | % | ||||
Expected life in years | 0.13 | 0.85 | ||||||
Calculated fair value per stock option | $ | 0.00 | $ | 0.33 |
The following table presents a reconciliation of the stock-based compensation liability measured at fair value using unobservable inputs (Level 3) (in thousands):
Stock-based Compensation Liability | ||||
Balance at January 1, 2017 | $ | 57 | ||
Change in fair value of stock-based compensation liability recorded as an adjustment to contributed surplus | (57 | ) | ||
Balance at September 30, 2017 | $ | — |
Warrant Liability | ||||
Liabilities: | ||||
Balance at January 1, 2019 | $ | 1,399 | ||
Issuance of warrants on August 29, 2019 | 3,554 | |||
Change in the fair value of warrant liability | (2,105 | ) | ||
Balance at September 30, 2019 | $ | 2,848 |
The Company recognizes transfers into and out of levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstances that caused the transfer occurs. There were no transfers of assets or liabilities between the fair value measurement classifications.
6. | Prepaid expenses and other current assets |
Prepaid expenses and other current assets as of September 30, 20172019 and December 31, 20162018 consisted of the following (in thousands):
September 30, 2017 | December 31, 2016 | September 30, 2019 | December 31, 2018 | |||||||||||||
Prepaid insurance | $ | 326 | $ | 273 | $ | 507 | $ | 245 | ||||||||
Prepaid research and development expenses | 720 | 546 | 116 | 256 | ||||||||||||
Other prepaid expenses | 72 | 27 | ||||||||||||||
Prepaid expenses | $ | 1,118 | $ | 846 | ||||||||||||
Other prepaid expenses and other current assets | 87 | 155 | ||||||||||||||
Prepaid expenses and other current assets | $ | 710 | $ | 656 |
As of September 30, 20172019 and December 31, 2016,2018, prepaid research and development expenses included $0.7 millionincludes $34,000 and $0.5$0.2 million, respectively, for upfront fees paid to our research andthe Company’s third-party manufacturing vendors for the development organizations assisting with our on-going clinical trial and drug formulation and manufacturing.of topsalysin. The upfront fees will be relieved in future periods based upon work completed.
7. | Accrued expenses |
Accrued expenses as of September 30, 20172019 and December 31, 20162018 consisted of the following (in thousands):
September 30, 2017 | December 31, 2016 | September 30, 2019 | December 31, 2018 | |||||||||||||
Accrued personnel related costs | $ | 751 | $ | 1,491 | $ | 221 | $ | 209 | ||||||||
Accrued interest | 25 | — | 31 | 41 | ||||||||||||
Accrued research and development expenses | 370 | 87 | 211 | 586 | ||||||||||||
Accrued audit and tax services | 162 | 129 | 238 | 168 | ||||||||||||
Other accrued expenses | 176 | 55 | 44 | 188 | ||||||||||||
Accrued expenses | $ | 1,484 | $ | 1,762 | $ | 745 | $ | 1,192 |
8. | Promissory notes |
On September 2, 2016, the Company repaid the outstanding principal balance on its Loan and Security Agreement with Oxford Finance LLC, or Oxford.
On September 8, 2017, the Company entered into a new Loan and Security Agreement with Silicon Valley Bank.Bank, or SVB. Under the terms of the agreement, the Company has the ability to request term loan advances in two tranches. The first tranche of 7.0borrowed $7.0 million was effective on the date of the agreement and the second tranche is available to the Company in a single advance not to exceed $3.0 million if the Company has either (a) received net proceeds of $20.0 million from the sale of common shares prior to December 31, 2018 or (b) obtained positive Phase 2b data in a clinical trial of Topsalysin for treatment of localized cancer prior to December 31, 2018.
The principal borrowed under the first tranche of $7.0 millionwhich bears fixed interest of 6.75% per annum. The Company has the option to prepay the outstanding balance of the loan in full, subject to a prepayment fee of 1% to 3% depending upon when the prepayment occurs. Upon the final repayment of the loan on the maturity date of September 1, 2021, by prepayment, or upon acceleration, the Company shallwill pay Silicon Valley BankSVB an additional fee of 5% of the principal amount of $7.0 million. This additional fee iswas recorded as a debt discount and is being recognized as interest expense over the life of the loan utilizing the effective interest method.
Under the terms of the agreement, the Company had the option to request an additional $3.0 million of principal. The repayment terms are interest only payments through September 2018 followed by 36 equal monthly paymentsCompany decided to not exercise the option to drawdown the additional $3.0 million of principal and interest.this option expired at December 31, 2018.
In September 2018, the Company announced that it had met the requirements within its existing Loan and Security Agreement with SVB to extend the interest only periods to March 31, 2019. The Company began making interest and principal payments on April 1, 2019, with the final payment due on September 1, 2021.
Pursuant to the first tranche of the loan, the Company issued warrants to Silicon Valley BankSVB to purchase an aggregate of up to 99,526 of the Company’s common shares at an exercise price of $2.11 per share. The warrants will expire seven years from the date of the grant.on September 8, 2024. The fair value of $0.2 million for this equity component was derived using the Black-Scholes pricing model utilizing the following inputs: risk-free interest rate – 1.9%, volatility – 113.9%, dividend yield – 0% and expected life in years – 7. The $7.0 million proceeds were allocated to equity and the debt based on their relative fair values. As of September 30, 2017, the aggregate fair value of the debt, based on level 3 inputs, was approximately $7.0 million. The equity component was recognized as a debt discount and will be amortized to interest expense over the life of the debt. Interest on the loan, consisting of the stated interest rate, final payment fee and amortization of the discount, is being recognized under the effective interest method.
The third party issuance costs incurred related to the loan of $0.1 million are being amortized under the effective interest method over the life of the loan and have been recorded as a reduction to the loan balance.
In connection with the loan, the Company granted to Silicon Valley BankSVB a security interest in all of the Company’s personal property now owned or hereafter acquired, excluding intellectual property and certain other assets.
The Company is not subject to any financial covenants under the loan. As of September 30, 2017,2019, the Company was not in compliance with all covenantsdefault under any of the provisions under the loan. The loan agreement contains customary affirmative and negative covenants, indemnification provisions and events of default. The affirmative covenants include, among others, covenants requiring us to maintain our legal existence and governmental approvals, deliver certain financial reports and maintain certain intellectual property rights. The negative covenants include, among others, restrictions on transferring or licensing our assets, changing our business, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, and creating other liens on our assets, in each case subject to customary exceptions. If we defaultthe Company defaults under the loan, Silicon Valley BankSVB may accelerate all of our repayment obligationsthe loan and take control of ourforeclose on the Company's pledged assets. Silicon Valley Bankassets if the Company is unable to repay the loan in full. SVB could declare a default under the loan upon the occurrence of any event that Silicon Valley BankSVB interprets as a material adverse change as defined under the loan agreement, thereby requiring us to repay the loan immediately.
As of September 30, 2017,2019, the future contractual principal and final fee payments on our debt obligations are as follows (in thousands):
2017 | $ | — | |||
2018 | 584 | ||||
2019 | 2,333 | ||||
2020 | 2,333 | ||||
2021 | 2,100 | ||||
Total | $ | 7,350 |
Remainder of 2019 | $ | 700 | ||
2020 | 2,800 | |||
2021 | 2,450 | |||
Total | $ | 5,950 |
The following table shows actual interest expense,, amortization of the debt discount and amortization of the issuance costs that was charged to interest expense (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Simple interest | $ | 25 | $ | 67 | $ | 25 | $ | 292 | $ | 101 | $ | 121 | $ | 330 | $ | 358 | ||||||||||||||||
Accretion of debt discount | 7 | 19 | 7 | 81 | 32 | 38 | 101 | 113 | ||||||||||||||||||||||||
Amortization of promissory note issuance costs | 3 | — | 3 | — | 12 | 14 | 39 | 43 | ||||||||||||||||||||||||
Total | $ | 35 | $ | 86 | $ | 35 | $ | 373 | $ | 145 | $ | 173 | $ | 470 | $ | 514 |
The Company calculated the fair value of the secured promissory notes as $5.5 million (Level 3) as of September 30, 2019. The fair value of long-term debt is based on the net present value of calculated interest and principal payments, using an interest rate of 6.75%, which takes into consideration the financial position of the Company and the recent interest rate environment for new debt issuances for comparable companies. The fair value of this equity component was derived using the Black-Scholes valuation model. The Company calculated the promissory notes’ fair value by allocating to equity and the debt based on their respective fair values.
9. | Operating Lease |
In February 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2016-02, "Leases." ASU 2016-02 is intended to improve financial reporting of leasing transactions by requiring organizations that lease assets to recognize assets and liabilities for the rights and obligations created by leases on the balance sheet. The Company elected to adopt ASU 2016-02 retrospectively at January 1, 2019 using a simplified transition option that allows companies to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We have also elected to adopt the package of practical expedients permitted in Accounting Standards Codification Topic 842, or ASC 842. Accordingly, the Company is continuing to account for our existing operating lease as operating leases under the new guidance, without reassessing whether the contracts contain a lease under ASC 842 or whether classification of the operating lease would be different under ASC Topic 842. The Company’s lease at the adoption date was an operating lease for our corporate headquarters.
As a result of the adoption of ASU 2016-02, on January 1, 2019, the Company recognized (a) a lease liability of approximately $53,000, which represents the present value of our remaining lease payments using an estimated incremental borrowing rate of 6.75% and (b) a right-of-use asset of approximately $53,000. Due to the adoption of the standard using the retrospective cumulative-effect adjustment method, there are no changes to our previously reported results prior to January 1, 2019.
Effectively January 31, 2019, the Company elected to extend its existing facility lease for an additional 12 months which resulted in the extension of the Company’s lease term from May 31, 2019 to May 31, 2020. As a result of this lease term extension the Company recognized a lease modification resulting in an increase to (a) a lease liability of approximately $124,000, which represents the present value of our remaining lease payments using an estimated incremental borrowing rate of 6.75% and (b) a right-of-use asset of approximately $124,000. As of September 30, 2019, the Company's lease liability and right-of-use assets was $85,000.
Total operating lease cost for the three and nine ended September 30, 2019 was $33,000 and $98,000, respectively. For the three and nine months ended September 30, 2019, $11,000 and $32,000 was included as a component of research and development expense and $22,000 and $66,000 was included as a component of general and administrative expense, respectively.
Maturity of the Company's lease liability is as follows (in thousands):
September 30, 2019 | ||||
Remainder of 2019 | $ | 33 | ||
2020 | 54 | |||
Total | 87 | |||
Less interest | (2 | ) | ||
Present value of lease liability | $ | 85 |
The remaining life of the Company’s operating lease as of September 30, 2019 is eight months.
The discount rate of the Company's operating lease as of September 30, 2019 is 6.75%.
Future minimum lease payments under non-cancelable operating lease at December 31, 2018 was as follows (in thousands):
December 31, 2018 | ||||
2019 | $ | 130 | ||
2020 | 54 | |||
Total | $ | 184 |
10. | Shareholders’ equity |
On August 29, 2019, the Company completed a registered direct financing with a private institutional investor whereby it issued 3,355,000 common shares at a price of $0.75 per share and 1,978,334 pre-funded warrants to purchase common shares at an total price of $0.75 per share ($0.74 paid to the Company upon the closing of the offering and $0.01 to be paid upon exercise of the pre-funded warrants). In addition, the Company has also agreed to sell and issue warrants to purchase up to 5,333,334 common shares at an exercise price of $0.95 per share. The purchase warrants will be exercisable beginning on the six month anniversary of the date of issuance (the “Initial Exercise Date”) and will expire on the fifth anniversary of the Initial Exercise Date. The Company received $3.6 million, net of underwriters’ discounts and offering cost.
As multiple securities were issued in this transaction the proceeds from the transaction were allocated to each security based upon the calculated fair value of each security. The proceeds were first allocated to the calculated fair value of the common share purchase warrants. The remaining proceeds were then allocated to the common shares and pre-funded warrants based upon the relative fair value of each security. The pre-funded warrants are recorded as equity warrants and are included in contributed surplus. The common share purchase warrants are recorded as a liability and then marked to market each period through earnings in other income (expense) each period as the purchase warrants included in this transaction contain a “fundamental transaction” provision, which may in certain circumstances allow the common share purchase warrants to be redeemed for cash at an amount equal to the Black-Scholes Value, as defined by the warrant agreements. In addition, the warrants include a “failure to timely deliver shares” provision, which may require the Company to pay cash to the warrant holder in certain circumstances as defined by the warrant agreements. See a discussion on the calculation of the fair value associated with these warrants at Note 5.
In connection with this offering the Company incurred offering costs of approximately $0.4 million. The Company allocated these offering costs between the fair value of the common shares, the fair value of the pre-funded warrants and the fair value of the purchase warrants on the date of the closing. The Company allocated approximately $27,000 to the common shares and approximately $16,000 to the pre-funded warrants which was recorded as a reduction to shareholders equity. The remaining $0.4 million was allocated to the purchase warrants and expensed as a component of general and administrative expenses for the three and nine months ended September 30, 2019 as the purchase warrants are classified as liabilities.
On December 7, 2018, the Company entered into a Controlled Equity OfferingSM Sales Agreement, or Sales Agreement, with Cantor Fitzgerald & Co., or Cantor Fitzgerald, as sales agent pursuant to which the Company may offer and sell from time to time, through Cantor Fitzgerald, common shares of the Company. On December 7, 2018, pursuant to the ATM Offering, the Company filed a prospectus supplement pursuant to which the Company may offer and sell, from time to time, Common Shares having an aggregate offering price of up to $20.0 million through Cantor, or the “ATM Prospectus Supplement”. The Company will pay Cantor Fitzgerald an amount equal to 3.0% of the aggregate gross proceeds from each sale of common shares. No shares were issued under the Sales Agreement during the three months ended September 30, 2019. The Company terminated the ATM Prospectus Supplement on August 26, 2019, but the Sales Agreement remains in full force and effect.
11. | Stock-based compensation plan |
The Company’sCompany’s Amended and Restated 2011 Stock Option plan, or the Plan, provides for the granting of options for the purchase of common shares of the Company at the fair value of the Company’s common shares on the date of the option grant. Options are granted to employees, directors and non-employees. The board of directors or a committee appointed by the board of directors administers the Plan and has discretion as to the number, vesting period and expiry date of each option award. Prior to the Company’s initial public offering, or IPO,Historically the Company granted options to residents of the United States with an exercise price denominated in Canadian dollars subsequentprior to the Company’s U.S. IPO. Following the Company’s U.S. IPO the Company issues its stockhas granted options with an exercise price denominated in U.S. dollar denominated exercise prices.dollars.
As of September 30, 2017,2019, the Company has 122,665approximately 394,000 common shares which were available for issuance under the Plan.
The Company recognized stock-based compensation expense as follows for the three and nine months ended September 30, 2017 and 2016 (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Research and development | $ | 121 | $ | 25 | $ | 376 | $ | 93 | ||||||||
General and administrative | 340 | 56 | 952 | 173 | ||||||||||||
Total | $ | 461 | $ | 81 | $ | 1,328 | $ | 266 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Research and development | $ | 55 | $ | 38 | $ | 182 | $ | 142 | ||||||||
General and administrative | 135 | 219 | 422 | 535 | ||||||||||||
Total | $ | 190 | $ | 257 | $ | 604 | $ | 677 |
As of September 30, 20172019, there was $1.0$0.4 million of total unrecognized compensation expense related to non-vested stock awards, which is expected to be recognized over a weighted average period of 1.1 years.
The following table summarizes stock option activity, including options issued to employees directors and non-employeesdirectors (in thousands, except per share):
Options | Weighted Average | |||||||
Outstanding at January 1, 2017 | 2,868 | $ | 3.63 | |||||
Options granted | 85 | 2.45 | ||||||
Options exercised | (3 | ) | 0.4589 | |||||
Options expired | (7 | ) | 24.40 | |||||
Options forfeited | (55 | ) | 2.23 | |||||
Outstanding at September 30, 2017 | 2,888 | $ | 3.58 |
The total amount of options outstanding at September 30, 2017 include options with exercise prices denominated in Canadian dollars and U.S. dollars. The Canadian dollar amounts have been converted to U.S. dollars for purposes of the weighted average exercise price calculation using the grant date exchange rate for each Canadian dollar denominated option.
Options | Weighted Average | |||||||
Outstanding at January 1, 2019 | 2,950 | $ | 1.60 | |||||
Options granted | 80 | 0.78 | ||||||
Options expired | (67 | ) | 2.65 | |||||
Outstanding at September 30, 2019 | 2,963 | $ | 1.56 |
The fair values of options granted during the nine months ended September 30, 20172019 and 20162018 were estimated at the date of grant using the following weighted-average assumptions:
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||
Expected life of the option term (years) | 4.1 | 3.8 | 5.1 | 4.7 | ||||||||||||
Risk-free interest rate | 1.61 | % | 1.19 | % | 1.76 | % | 2.67 | % | ||||||||
Dividend rate | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Volatility | 144.8 | % | 147.8 | % | 133.9 | % | 126.2 | % |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and notes included belowelsewhere in this Quarterly Report on Form 10-Q, (thisor Quarterly Report)Report, and the audited consolidated financial statements and notes as of and for the year ended December 31, 20162018 included with our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on March 27, 2017.13, 2019. Operating results are not necessarily indicative of results that may occur in future periods.
This discussion and analysis contains forward-looking statements that involve a number of risks, uncertainties and assumptions. Actual events or results may differ materially from our expectations. Important factors that could cause actual results to differ materially from those stated or implied by our forward-looking statements include, but are not limited to, those set forth in “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us as of the time we file this Quarterly Report on Form 10-Q and, except as required by law, we undertake no obligation to update publicly or revise any forward-looking statements.
All dollar amounts are expressed in U.S. dollars unless otherwise noted. All amounts that are expressed on an as-converted from Canadian dollar to U.S. dollar basis are calculated using the conversion rate as of September 30, 2017 unless otherwise noted.
Overview
Background
We are a clinical-stage biopharmaceutical company focused on developing innovative products for the treatment of urological diseases. We are headquartered in San Diego, California and our common shares currently trade on The NASDAQNasdaq Capital Market. We are currently developing topsalysin (PRX302) as a treatment for clinically significant localized prostate cancer and as a treatment for the lower urinary tract symptoms of benign prostatic hyperplasia, or BPH, commonly referred to as an enlarged prostate. Topsalysin, a first-in-class, pore-forming protein, is a highly ablative agent that is selective and targeted in that it is only activated by enzymatically active prostate specific antigen, or PSA, which is found in high concentrations around prostate tumor cells and in the transition zone of the prostate. In 2004, we licensed exclusive rights to topsalysin from UVIC Industry Partnerships Inc., or UVIC, and The Johns Hopkins University, or Johns Hopkins, for the treatment of prostate cancer and in 2009, we licensed exclusive rights to topsalysin from UVIC and Johns Hopkins for the treatment of the symptoms of BPH. In April 2010, we entered into an exclusive license agreement with Kissei Pharmaceuticals Co., Ltd., or Kissei, pursuant to which we granted Kissei the right to develop and commercialize topsalysin in Japan for the treatment of the symptoms of BPH, prostate cancer, prostatitis or other diseases of the prostate.
Topsalysin, a genetically modified recombinant protein, is delivered via ultrasound-guided injection directly into the prostate. This membrane-disrupting protein is selectively activated by enzymatically active prostate specific antigen, or PSA, which is only presentfound in high concentrations around prostate tumor cells and in the transition zone of the prostate, leading to localized cell death and tissue disruption without damage to neighboring tissue and nerves. This targeted method of administration limits the circulation of the drug in the body, and we believe that this limitedpotential for systemic exposure to the drug,of topsalysin, together with how the drugspecific mechanism of action, (topsalysin, is only activated inby enzymatically active PSA which is found within the prostate, greatly diminishesPSA in circulation is no longer enzymatically active) is thought to contribute the risk of side effects. We believe that the highly targeted mechanism by which topsalysin selectively destroys prostate tissue in BPH makes topsalysin a potential targeted focal treatment for localized prostate cancer.tolerability and safety profile observed to date.
We have completed a single-center,multicenter, open-label Phase 2a proof of concept clinical trial of topsalysin for the treatment of localized low to intermediate risk prostate cancer. The primary objective of the trial was to assess the safety and tolerability of topsalysin when used to selectively target and focally ablate a clinically significant tumor. The potential efficacy was evidenced by histological changes, indicating tumor ablation at six months following treatment.
A total of 18 patients with localized low to intermediate risk prostate cancer were enrolled in the Phase 2a proof of concept clinical trial. The one-time administration of topsalysin was well tolerated with no serious adverse events and no new safety signals being reported. Topsalysin demonstrated an ability to ablate tumor cells in more than 60 percent of patients (11/18 patients) six months after treatment in a patient population with pre-identified, clinically significant prostate cancer.
All 18 patients enrolled completed the study. Biopsy data at six months following treatment showed that:
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We have initiated a second Phase 22b clinical trial to confirm the dose and optimize the delivery of topsalysin for the treatment of clinically significant localized prostate cancer. This study utilizes stateA total of the art commercially available software which allows us to use previously obtained MRI images of each patient’s prostate and map the prostate image to38 patients with a real time 3D ultrasound to target the delivery of topsalysin directly into and around the pre-identified clinically significant tumor.lesion, received a single administration of topsalysin at eight clinical trial sites located in the United Kingdom and United States. A clinically significant tumor isreview of the safety data from 38 patients, indicates that a single administration of topsalysin continues to appear safe and well-tolerated by patients. Adverse events considered related to topsalysin were typically mild and typically occurred and were resolved on the day of the administration. In addition, urine function was preserved, no sexual dysfunction, no hypersensitivity reactions or other serious systemic reactions to topsalysin were observed after a single administration.
A secondary objective of the trial was to evaluate the efficacy of a single administration of topsalysin to selectively target and focally ablate a pre-identified lesion. Six months after the administration of topsalysin, 37 out of 38 patients underwent a targeted biopsy of the treated lesion with one patient having been lost to follow-up following re-location. The six-month biopsy results demonstrated that, 27% of patients (10/37) achieved a clinical response, defined in our studythis trial as eitherno detectable tumor on targeted biopsy of the treated lesion or a sufficient reduction to deem the lesion clinically-insignificant (cancer lesion of Gleason scoreScore 6 (pattern 3+3) and greater than or equal to 6 mm Maximum Cancer Core Length,a maximum cancer core length, or MCCL, or a Gleason score 7 (pattern 3+4 or 4+3) and lesserof less than or equal to 10 mm MCCL, which is thought to have the potential to progress and would therefore warrant treatment. (A Gleason score is a grading system utilized to describe how aggressive a prostate tumor is and how likely it is to spread. Generally, there are five recognized Gleason histological scores and a higher Gleason score indicates a more aggressive tumor.) The primary objective of the study is safety and tolerability of an injection of topsalysin and the key efficacy variable is focal ablation of a clinically significant lesion on biopsy at 24 weeks. This study is enrolling approximately 40 patients at clinical sites in the UK and US. Eight active clinical trial sites contine to schedule and dose the remaining handful of patients required to complete enrollment. We expect biopsy data from all patients dosed with the first administration of topsalysin to be available in the first half of 2018.6 millimeters).
The Phase 2b study includes an option to re-treat patients with a second dose of topsalysin, with a targeted biopsy to occur 24 weeks following the second dose. We expect to have complete data on all patients who received a second dose in the fourth quarter of 2018 assuming enrollment is completed as expected.
We have also completed the first of two Phase 3 clinical trialsOn June 19, 2019, we announced that we believe would be required to obtain marketing approval for topsalysin forhad received formal scientific advice from the treatmentEuropean Medicines Agency, or EMA regarding a proposed design of the symptoms of BPH. In October 2013 we initiated our firsta Phase 3 clinical trial which we refer to asevaluate the “PLUS-1” trial,potential of topsalysin for the treatment of the lower urinary tract symptoms of BPH.as a targeted focal therapy to treat patients with intermediate risk localized prostate cancer. The Phase 3 “PLUS-1” trial was an international, multicenter,design agree upon by the EMA would enroll patients with a confirmed diagnosis of intermediate risk disease. Approximately 700 men who meet the eligibility criteria will be equally randomized double-blind, and vehicle-controlled trial to assess the efficacy and safety ofreceive a single intraprostatic administration of topsalysin (0.6 µg/g prostate) for the treatment of the lower urinary symptoms of BPH. Patients were randomized on a 1:1 ratio to either topsalysin or vehicle-only injection, and then monitoredplacebo. The primary endpoint for one year. A totalthe trial is the proportion of 479 patients with moderate to severe BPH were enrolled and randomized by September 2014. On November 10, 2015, we announced final results from this trial. Topsalysin demonstrated a statistically significant improvement in International Prostate Symptom Score, IPSS, total score from baseline overat 12 months comparedwho have failed treatment, defined as histological progression of disease, resulting in the need for alternative intervention, per an independent central adjudication panel. Based upon the feedback from the EMA, we believe that data from a single Phase 3 trial, if successful, should be sufficient to the vehicle-only control group (7.60 vs. 6.58 point overall improvement; p = 0.043), the primary endpoint of the trial. (IPSS is a patient recorded, composite assessment that takes into account factors such as ability to empty the bladder, frequency of urination, intermittency of urination, urgency of urination, weak strength of urine stream, straining while urinating, and having to urinate at night after going to bed.) Topsalysin continues to demonstrate a favorable safety profile, with no evidence of any treatment related sexual or cardiovascular side effects.support market approval in Europe.
We are currentlyOn October 21, 2019, we announced that following an End of Phase 2/ Pre-Phase 3 meeting with the United States Food and Drug Administration, or FDA, there is agreement regarding the design of a single Phase 3 clinical trial to evaluate the potential of topsalysin as a targeted focal therapy to treat patients with intermediate risk localized prostate cancer. The Phase 3 study design agreed upon with the FDA is consistent with the design previously agreed upon with the EMA. In addition, the FDA has indicated that in order to receive approval, we will need to evaluate all patients that progress to alternative treatments for an additional 12 months, for a total of 24 months of data, post the administration of the study drug.
Our goal is to conduct a single Phase 3 trial, which if successful, will provide the clinical data for approval in both the United States and Europe.
The scope of any additional trial in localized prostate cancer, including whether it will be a Phase 3 trial or an additional Phase 2 trial, will be dependent upon securing funding to finance such clinical trial. At this point in time, we do not planningplan on pursuing new clinical trials, including an additional trial in localized prostate cancer or a second Phase 3 trial in benign prostatic hyperplasia, or BPH, unless we secure a development partner to fund such new clinical trialtrials or we obtain the necessary financing. We are currently evaluating options to further advance the clinical development of topsalysin. We will require significant additional funding to advance topsalysin in clinical development. We could use dilutive funding options such as an equity financing and/or non-dilutive funding options such as a partnering arrangement or other strategic arrangements to fund future clinical development of topsalysin. Any significant future public financing will most likely require the use of a Form S-1 registration statement. The process of getting a Form S-1 registration statement filed and declared effective can take an extended period of time which could delay the timing of any future significant financing. There can be no assurance that such funding will be secured in a timely manner or on favorable terms, if at all or that a development partner will be available on acceptable terms or if at all. For that reason,
If we are unable to raise sufficient capital to fund our operations, we could be required to significantly reduce expenses, sell assets (potentially at a loss), cease operations altogether, file for bankruptcy or seek other protection from creditors, or liquidate all of our assets. We are also exploring partnership arrangements and other strategic alternatives which could include a merger or acquisition. See the Liquidity and Capital Resource section below for further details.
Further, we cannot currently estimate when the clinical development required to seek the regulatory approvals needed to commercialize topsalysin for the treatment of clinically significant localized prostate cancer or the treatment of the symptoms of BPH will be completed.
On August 29, 2019, we completed a registered direct financing whereby we issued 3,355,000 common shares at a price of $0.75 per share and 1,978,334 pre-funded warrants to purchase common shares at an total price of $0.75 per share ($0.74 paid to us upon the closing of the offering and $0.01 to be paid upon exercise of the pre-funded warrants). In addition, we have also agreed to sell and issue warrants to purchase up to 5,333,334 common shares at an exercise price of $0.95 per share. The purchase warrants will be exercisable beginning on the six-month anniversary of the date of issuance, or the “Initial Exercise Date” and will expire on the fifth anniversary of the Initial Exercise Date. We received $3.6 million, net of underwriters’ discounts and offering cost.
On March 7, 2019, we received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market LLC, or Nasdaq, notifying us that for the last 30 consecutive business days prior to the date of the letter, the market value of our listed securities was less than $35 million and therefore we did not meet the requirement for continued listing on The Nasdaq Capital Market as required by Nasdaq Listing Rule 5550(b)(2), or the Market Value Rule, or the alternative requirements under Nasdaq Listing Rules 5550(b)(1) and 5550(b)(3). In accordance with Nasdaq Listing Rule 5810(c)(3)(C), we had 180 calendar days, or until September 3, 2019, to regain compliance with the Market Value Rule.
On June 4, 2019, we received a letter from the Listing Qualifications Staff of Nasdaq notifying us that the closing bid price of our common shares had been below $1.00 per share for 30 consecutive business days and that we were therefore not in compliance with the minimum bid price requirement for continued listing on The Nasdaq Capital Market, as required by Nasdaq Listing Rule 5550(a)(2). Nasdaq stated in its June 4th letter that, in accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have a grace period of 180 calendar days, or until December 2, 2019, to regain compliance with the minimum closing bid price requirement for continued listing. We will regain compliance if the closing bid price of our common shares is at or above $1.00 for at least 10 consecutive business days anytime during the 180-day grace period.
On September 8, 2017, 6, 2019, we entered intoreceived a new Loanletter from the Nasdaq notifying us that we had not regained compliance with Market Value Rule by September 3, 2019 and Security Agreementas a result our securities will be delisted from the Nasdaq unless we requested an appeal of this determination. We formally requested an appeal of this determination on September 12, 2019. On October 17, 2019, we met with Silicon Valley Bank. Under the termsNasdaq Hearings Panel regarding our potential delisting from The Nasdaq Stock Market as a result of our failure to maintain a market value of our listed securities of at least $35 million or in the alternative to have more than $2.5 million in stockholders’ equity. On October 21, 2019, we received the Nasdaq Hearings Panel decision which granted us until January 24, 2020 to regain compliance with the listing standards of the agreement,Nasdaq Capital Market either by having the market value of our listed securities be at least $35 million during the preceding ten consecutive trading days before January 24, 2020, or having more than $2.5 million in stockholders’ equity by January 24, 2020. We will also be required to have a closing bid price of at least $1.00 per share during the preceding ten consecutive trading days before January 24, 2020. If we haveare unable to regain compliance with the ability to request term loan advances in two tranches.listing standards of the Nasdaq Capital Market by January 24, 2020, our securities may be delisted from The first tranche, effectiveNasdaq Stock Market. As of the date of the agreement for $7.0 million and the second tranche available to us in a single advance not to exceed $3.0 million ifthis filing we have either (a) received net proceedsnot regained compliance with any of $20.0 million from the salethese listing rules.
Financial Operations Overview
Revenues
Our cumulative revenues to date consist of a $3.0 million up-front payment received from Kissei in 2010 and a $5.0 million non-refundable milestone payment from Kissei for our achievement of certain development activities in 2013. We have no products approved for sale, and we have not generated any revenues from product sales.
Other than potential development milestones from Kissei, we do not expect to receive any revenues from topsalysin until we obtain regulatory approval and commercialize such product or until we potentially enter into additional collaborative agreements with third parties for the development and commercialization of topsalysin,. which additional agreements will not likely occur until we complete the development of topsalysin. If our development efforts for topsalysin, or the efforts orof Kissei or any future collaborator, result in clinical success and regulatory approval or collaboration agreements with other third parties, we may generate revenues from topsalysin. However, we may never generate revenues from topsalysin as we or any collaborator may never succeed in obtaining regulatory approval or commercializing this product.
Research and Development Expenses
Research and development expenses can be driven by a number of factors including: (a) the scope of clinical development and research programs pursued; (b) the type and size of clinical trials undertaken; (c) the number of clinical trials that are active during a particular period of time; (d) the rate of patient enrollment; (e) regulatory activities to support the clinical programs; and (f) Chemistry, Manufacturing and Controls, or CMC, activities associated with process development, scale-up and manufacture of drugs used in clinical trials; and such expenses are ultimately a function of decisions made to continue the development and testing of a product candidate based on supporting safety and efficacy results from clinical trial.
The majority of our operating expenses to date have been incurred in research and development activities related to topsalysin. Research and development expenses include:
external research and development expenses incurred under agreements with clinical research organizations, or CROs, and investigative sites and clinical trial costs, as well as payments to consultants;
employee related expenses, including salaries, benefits, travel and stock-based compensation expense;
● | external research and development expenses incurred under agreements with clinical research organizations, or CROs, and investigative sites and clinical trial costs, as well as payments to consultants; |
| third-party manufacturing expenses; |
● | employee related expenses, including salaries, benefits, travel and stock-based compensation expense; and |
facilities, depreciation and other allocated expenses.
● | facilities, depreciation and other allocated expenses. |
We expense research and development costs as incurred. We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been consumed.
At this time, due to the risks inherent in the clinical trial process and given the stage of our product development program, we are unable to estimate with any certainty the costs we will incur in the continued development of topsalysin for potential approval and commercialization in two indications. Clinical development timelines, the probability of success and development costs can differ materially from expectations. However, we do expect our research and development expenses to continue for the foreseeable future as we advance topsalysin through clinical development assuming we are able to obtain additional financing or secure a development partner to fund such clinical development. The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. Any failure by us or delay in completing clinical trials, or in obtaining regulatory approvals, could lead to increased research and development expenseexpenses and, in turn, have a material adverse effect on our results of operations.
Essentially all of our research and development expenses were related to topsalysin during the three months and nine months ended September 30, 20172019 and 2016.2018. We recognized research and development expenses as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Clinical research and development | $ | 1,182 | $ | 510 | $ | 2,889 | $ | 2,243 | $ | 383 | $ | 710 | $ | 1,223 | $ | 3,133 | ||||||||||||||||
Manufacturing | 346 | 89 | 979 | 195 | 300 | 1,050 | 1,977 | 5,443 | ||||||||||||||||||||||||
Stock-based compensation expense | 121 | 25 | 376 | 93 | 55 | 38 | 182 | 142 | ||||||||||||||||||||||||
$ | 1,649 | $ | 624 | $ | 4,244 | $ | 2,531 | $ | 738 | $ | 1,798 | $ | 3,382 | $ | 8,718 |
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation. Other general and administrative expenses include allocated facility-related costs not otherwise included in research and development expenses, travel expenses, market research expenses and professional fees for auditing, tax, investor relations and legal services. We expect general and administrative expenses to remain fairly consistent over the next year butyear. However, if we were to move our drug candidate towards commercialization in future periods we dowould expect that general and administrative expenses would increase.
Interest Expense
Interest expense represents interest payable,, amortization of our debt discount and our issuance costs on our outstanding promissory notes.
Interest Income
We earn interest income from interest-bearing cash and investment accounts.
Gain (Loss) on Revaluation of Warrant Liability
In connection with the offerings completed in 2016 and our recently completed registered direct financing on August 29, 2019, we issued warrants to purchase our common shares. These warrants may require us to pay the warrant holder cash under certain provisions of the warrant and therefore we account for these warrants as a liability. As a result of these warrants being classified as a liability, we are required to calculate the fair value of these warrants at each reporting date. The fair value of these warrants is calculated utilizing a Black-Scholes pricing model. We calculated the initial fair value of these warrants at the date the warrants were issued. At each reporting date, we are required to remeasure the fair value of the warrant liability and any corresponding increase or decrease to the warrant liability is recorded as a gain (loss) on revaluation of warrant liability. In addition, if a warrant holder exercises warrants, we are required to revalue the fair value of the underlying warrants on the date of exercise and reclassify the change in the fair value from the warrant liability to contributed surplus.
Certain inputs utilized in our Black-Scholes fair value calculationpricing model may fluctuate in future periods based upon factors which are outside of our control. A significant change in one or more of these inputs used in the calculation of the fair value may cause a significant change to the fair value of our warrant liability which could also result in material non-cash gain or loss being reported in our condensed consolidated statement of operations and comprehensive loss.
Loss on the Early Extinguishment of Debt
On September 2, 2016, we repaid the outstanding balance of the Oxford Loan and Security Agreement in full. The debt repayment was accounted for as an extinguishment per ASC 470-50, “Debt: Modification and Extinguishments”, and a loss on early extinguishment of the debt totaling $0.2 million was recorded for the three and nine months ended September 30, 2016, consisting of the final payment and the prepayment fee which was offset by the unamortized debt premium.
Other Income (Expense), Net
Other income (expense), net consists primarily of foreign exchange gains and losses and on occasion income or expense of an unusual nature. Foreign exchange gains and losses result from the settlement of foreign currency transactions and from the remeasurement of monetary assets and liabilities denominated in currencies other than our functional currency.
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the revenues and expenses incurred during the reported periods. We believe that the estimates, assumptions and judgments involved in the accounting policies described in Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 20162018 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. There were no material changes to our critical accounting policies and estimates during the nine months ended September 30, 2017.
Results Of Operations
Comparison of the three months ended September 30, 20172019 and 20162018
The following table summarizes the results of our operations for the three months ended September 30, 20172019 and 2016,2018, together with the changes in those items in dollars (in thousands):
Three Months Ended September 30, | Change | Three Months Ended September 30, | Change | |||||||||||||||||||||
2017 | 2016 | 2017 vs. 2016 | 2019 | 2018 | 2019 vs. 2018 | |||||||||||||||||||
Research and development expenses | 1,649 | 624 | 1,025 | 738 | 1,798 | (1,060 | ) | |||||||||||||||||
General and administrative expenses | 1,685 | 3,043 | (1,358 | ) | 1,388 | 1,155 | 233 | |||||||||||||||||
Interest expense | (35 | ) | (86 | ) | 51 | (145 | ) | (173 | ) | 28 | ||||||||||||||
Interest income | 56 | 3 | 53 | 29 | 80 | (51 | ) | |||||||||||||||||
Gain (loss) on revaluation of warrant liability | 670 | (350 | ) | 1,020 | ||||||||||||||||||||
Loss on early extinguishment of debt | — | (180 | ) | 180 | ||||||||||||||||||||
Other expense | (11 | ) | (4 | ) | (7 | ) | ||||||||||||||||||
Gain on revaluation of warrant liability | 1,281 | 153 | 1,128 | |||||||||||||||||||||
Other income (expense) | 2 | 21 | (19 | ) |
Research and development expenses. Research and development expenses were $1.6$0.7 million forin the three months ended September 30, 20172019 compared to $0.6$1.8 million forin the three months ended September 30, 2016.2018. The increasedecrease in research and development costs is attributable to the following:
● | a |
● | a $0.3 million decrease in clinical costs associated with our Phase 2b clinical trial of topsalysin for |
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These increases are partially offset by a decreaseResearch and development expenses included non-cash stock-based compensation expenses of $0.1 million$55,000 for personnel related costs.the three months ended September 30, 2019 as compared to $38,000 for the three months ended September 30, 2018.
General and administrative expenses. General and administrative expenses were $1.7$1.4 million in the three months ended September 30, 2019 as compared to $1.2 million for the three months ended September 30, 20172018. Included as compared to $3.0 milliona component of general and administrative expense for the three months ended September 30, 2016. The decrease from the three months ended September 30, 2016 as compared to the three months ended September 30, 2017 is primarily due to the inclusion2019 was $0.4 million of $1.4 million in offering costs which were allocated to the common share purchase warrants issued in our publicAugust 2019 financing. These offering completed in August 2016costs were allocated to general and due to decreases of $0.3 million of professional servicesadministrative expense as the common share purchase warrants were classified as liabilities. General and $0.3 million of personnel related costs. These decreases are partially offset by increases inadministrative expenses included non-cash stock-based compensation expense of $0.3 million and market research activities of $0.3 million.
Interest expense. Interest expense was $35,000 for the three months ended September 30, 2017 as compared to $0.1 million for the three months ended September 30, 2016. Interest expense2019 as compared to $0.2 million for the three months ended September 30, 2017 is related2018.
Interest expense. Interest expense was $0.1 million in the three months ended September 30, 2019 as compared to the Silicon Valley Bank Loan and Security Agreement entered into in September 2017. Interest expense$0.2 million for the three months ended September 30, 2016 was2018. The interest expense is related to our promissory notes with Oxford. We repaid the outstanding principal balance of the OxfordSilicon Valley Bank Loan and Security Agreement in full in September 2016.Agreement.
Interest income. Interest income was $56,000 was$29,000 for the three months ended September 30, 20172019 as compared to $3,000$80,000 for the three months ended September 30, 2016.2018. The increasedecrease is due to the increasedecrease in the average balances of our interest-bearing cash and investment accounts from period to period.
Gain (loss) on revaluation of warrant liability. Gain on revaluation of the warrant liability was $0.7$1.3 million for the three months ended September 30, 20172019 as compared to a loss of $0.4$0.2 million for the three months ended September 30, 2016. This2018. The non-cash gain is associated with the change in the fair value of our warrant liability which is calculated using a Black-Scholes pricing model.
Loss on early extinguishment of debt. Loss on early extinguishment of debt was $0.2 million for the three months ended September 30, 2016. This consists of the final payment and prepayment fee offset by the unamortized debt premium resulting from the payoff of the loan with Oxford.
Comparison of the nine months ended September 30, 20172019 and 20162018
The following table summarizes the results of our operations for the nine months ended September 30, 20172019 and 2016,2018, together with the changes in those items in dollars (in thousands):
Nine Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||
2017 | 2016 | 2017 vs. 2016 | 2019 | 2018 | 2019 vs. 2018 | |||||||||||||||||||
Research and development expenses | 4,244 | 2,531 | 1,713 | 3,382 | 8,718 | (5,336 | ) | |||||||||||||||||
General and administrative expenses | 4,422 | 5,564 | (1,142 | ) | 3,858 | 3,494 | 364 | |||||||||||||||||
Interest expense | (35 | ) | (373 | ) | 338 | (470 | ) | (514 | ) | 44 | ||||||||||||||
Interest income | 159 | 11 | 148 | 133 | 258 | (125 | ) | |||||||||||||||||
Gain (loss) on revaluation of warrant liability | 3,905 | (1,969 | ) | 5,874 | ||||||||||||||||||||
Loss on early extinguishment of debt | — | (180 | ) | 180 | ||||||||||||||||||||
Other expense | (27 | ) | (11 | ) | (16 | ) | ||||||||||||||||||
Gain on revaluation of warrant liability | 2,105 | 143 | 1,962 | |||||||||||||||||||||
Other income (expense) | (11 | ) | 27 | (38 | ) |
Research and development expenses. Research and development expenses were $4.2$3.4 million for the nine months ended September 30, 20172019 compared to $2.5$8.7 million for the nine months ended September 30, 2016.2018. The increasedecrease in research and development costs is attributable to the following:
● | a |
● | a $1.8 million decrease in clinical costs associated with our Phase 2b clinical trial of topsalysin for the |
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These increases are partially offset by decreases of $0.4 million for costs associated with our completed Phase 2a proof of concept clinical trial for low to intermediate risk prostate cancerResearch and $0.6 million for personnel related costs, primarily related to our completed reduction in work force in May 2016.
General and administrative expenses. General and administrativedevelopment expenses were $4.4 million for the nine months ended September 30, 2017 compared to $5.6 million for the nine months ended September 30, 2016. The decrease of $1.1 million from the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2017 is primarily due to the inclusion of $1.6 million in offering costs which were allocated to the warrants issued in our private and public offerings completed in 2016, $0.4 million of professional services and $0.4 million of personnel related costs. These decreases are partially offset by increases inincluded non-cash stock-based compensation expenseexpenses of $0.8 million, market research activities of $0.3 million and consulting of $0.1 million. The increase in the non-cash stock-based compensation expense is primarily associated with stock options granted to employees in December 2016 and directors in May 2017.
Interest expense. Interest expense was $35,000 for the three months ended September 30, 2017 as compared to $0.4 million for the three months ended September 30, 2016. Interest for the nine months ended September 30, 2017 is related to the Silicon Valley Bank Loan and Security Agreement entered into in September 2017. Interest expense for the nine months ended September 30, 2016 was related to our promissory notes with Oxford. We repaid the outstanding principal balance of the Oxford Loan and Security Agreement in full in September 2016.
Interest income. Interest income was $0.2 million for the nine months ended September 30, 20172019 as compared to $11,000$0.1 million for the nine months ended September 30, 2016.2018.
General and administrative expenses. General and administrative expenses were $3.9 million for the nine months ended September 30, 2019 compared to $3.5 million for the nine months ended September 30, 2018. Included as a component of general and administrative expense for the nine months ended September 30, 2019 was $0.4 million of offering costs which were allocated to the common share purchase warrants issued in our August 2019 financing. These offering costs were allocated to general and administrative expense as the common share purchase warrants were classified as liabilities. General and administrative expenses included non-cash stock-based compensation expense of $0.4 million for the nine months ended September 30, 2019 as compared to $0.5 million for the nine months ended September 30, 2018.
Interest expense. Interest expense was $0.5 million for the nine months ended September 30, 2019 and 2018. Interest expense is related to our Silicon Valley Bank Loan and Security Agreement.
Interest income. Interest income was $0.1 million for the nine months ended September 30, 2019 compared to $0.3 million for the nine months ended September 30, 2018. The increasedecrease is due to the increasedecrease in the average balances of the interest-bearing cash and investment accounts from period to period.
Gain (loss) on revaluation of warrant liability. Gain on revaluation of the warrant liability was $3.9$2.1 million for the nine months ended September 30, 20172019 as compared to a loss of $2.0$0.1 million for the nine months ended September 30, 2016. This2018. The non-cash gain is associated with the change in the fair value of our warrant liability which is calculated using a Black-Scholes pricing model.
Loss on early extinguishment of debt. Loss on early extinguishment of debt was $0.2 million for the nine months ended September 30, 2016. This consists of the final payment and prepayment fee offset by the unamortized debt premium resulting from the payoff of the loan with Oxford.
Liquidity and Capital Resources
Overview
Since our inception, our operations have been primarily financed through public and private equity sales, debt financings and payments from Kissei. Since inception, we have devoted our resources to funding and conducting research and development programs, including discovery research, preclinical studies and clinical trial activities.
At On August 29, 2019, we completed a registered direct financing whereby we issued 3,355,000 common shares at a price of $0.75 per share and 1,978,334 pre-funded warrants to purchase common shares at an total price of $0.75 per share ($0.74 paid to us upon the closing of the offering and $0.01 to be paid upon exercise of the pre-funded warrants). In addition, we have also agreed to sell and issue warrants to purchase up to 5,333,334 common shares at a price of $0.95 per share. The purchase warrants will be exercisable beginning on the six-month anniversary of the date of issuance, or the “Initial Exercise Date” and will expire on the fifth anniversary of the Initial Exercise Date. We received $3.6 million, net of underwriters’ discounts and offering cost.
The condensed consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. We have incurred net losses from operations since inception, including $5.5 million in the nine months ended September 30, 20172019 and has an accumulated deficit of $161.8 million as of September 30, 2019. At September 30, 2019, we had cash, cash equivalents and securities available-for-sale of $28.5 million$6.3 million. As of September 30, 2019, the future principal and working capitalfinal fee payments under the Loan and Security Agreement with SVB total $6.0 million. The maturity date of $27.5 million.the loan is September 1, 2021. We are currently paying monthly installments of principal and interest under the Loan and Security Agreement. However, if we fail to make principal and interest payments when due or another event of default occurs under the loan, SVB may accelerate the loan and foreclose on our pledged assets if we are unable to repay the loan in full. Events of default include the occurrence of a material adverse change as defined in the Loan and Security Agreement. As of the date of filing of this Form 10-Q, we are not in default under any of the provisions of the Loan and Security Agreement. We expect that our cash, cash equivalents and securities available-for-sale will be sufficient to fund our operations and debt service through March 2020 (assuming no acceleration of the loan) and, as a result, there is substantial doubt about our ability to continue as a going concern for one year from the middledate of the issuance of our condensed consolidated financial statements for the nine months ended September 30, 2019.
We announced that we have received formal scientific advice from the EMA and reached an agreement with the FDA regarding a design for a single Phase 3 clinical trial to evaluate the potential of topsalysin as a targeted focal therapy to treat patients with intermediate risk localized prostate cancer. Based upon feedback from the EMA and the FDA, we believe that data from a single Phase 3 trial, if successful, should be sufficient to support market approval in both the U.S. and Europe. The scope of any additional trial in localized prostate cancer, including whether it will be a Phase 3 trial or an additional Phase 2 trial, will be dependent upon securing funding to finance such clinical trial. At this point in time, we do not plan on pursuing new clinical trials, including an additional trial in localized prostate cancer or a second Phase 3 trial in benign prostatic hyperplasia, or BPH, unless we obtainsecure a development partner to fund such new clinical trials or it obtains the necessary financing. We are currently evaluating options to further advance the clinical development of topsalysin. We will require significant additional financing.funding to advance topsalysin in clinical development. We could use dilutive funding options to fund a second Phase 3 trial in BPH such as an equity financing andand/or non-dilutive funding options such as a partnering arrangement or royalty agreement.other strategic arrangements to fund future clinical development of topsalysin. Any significant future public financing will most likely require the use of a Form S-1 registration statement. The process of getting a Form S-1 registration statement filed and declared effective can take an extended period of time which could delay the timing of any future significant financing. There can be no assurance that such funding will be secured in a timely manner or on favorable terms, if at all or that a development partner will be available on acceptable terms. terms or if at all.
Promissory NoteIf we are unable to raise sufficient capital to fund our operations, we could be required to significantly reduce expenses, sell assets (potentially at a loss), cease operations altogether, file for bankruptcy or seek other protection from creditors, or liquidate all of our assets. We are also exploring partnership arrangements and other strategic alternatives which could include a merger or acquisition.
On March 7, 2019, we received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market LLC, or Nasdaq, notifying us that for the last 30 consecutive business days prior to the date of the letter, the market value of our listed securities was less than $35 million and therefore we did not meet the requirement for continued listing on The Nasdaq Capital Market as required by Nasdaq Listing Rule 5550(b)(2), or the Market Value Rule, or the alternative requirements under Nasdaq Listing Rules 5550(b)(1) and 5550(b)(3). In accordance with Nasdaq Listing Rule 5810(c)(3)(C), we had 180 calendar days, or until September 3, 2019, to regain compliance with the Market Value Rule. We will regain compliance with the Market Value Rule if the market value of our listed securities closes at or above $35 million for a minimum of 10 consecutive business days anytime during the 180 day compliance period. As of the date of this prospectus supplement we have not regained compliance with the Market Value Rule.
On June 4, 2019, we received a letter from the Listing Qualifications Staff of Nasdaq notifying us that the closing bid price of our common shares had been below $1.00 per share for 30 consecutive business days and that we were therefore not in compliance with the minimum bid price requirement for continued listing on The Nasdaq Capital Market, as required by Nasdaq Listing Rule 5550(a)(2). Nasdaq stated in its June 4th letter that, in accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have a grace period of 180 calendar days, or until December 2, 2019, to regain compliance with the minimum closing bid price requirement for continued listing. We will regain compliance if the closing bid price of our common shares is at or above $1.00 for at least 10 consecutive business days anytime during the 180-day grace period. As of the date of this filing we have not regained compliance with this rule.
On September 2, 2016,6, 2019, we repaidreceived a letter from the outstanding principal balanceNasdaq notifying us that we had not regained compliance with Market Value Rule by September 3, 2019 and as a result our securities will be delisted from the Nasdaq unless we requested an appeal of this determination. We formally requested an appeal of this determination on its Loan and Security AgreementSeptember 12, 2019. On October 17, 2019, we met with Oxford Finance LLC,the Nasdaq Hearings Panel regarding our potential delisting from The Nasdaq Stock Market as a result of our failure to maintain a market value of our listed securities of at least $35 million or Oxford.
in the alternative to have more than $2.5 million in stockholders’ equity. On September 8, 2017,October 21, 2019, we entered into a new Loan and Security Agreementreceived the Nasdaq Hearings Panel decision which granted us until January 24, 2020 to regain compliance with Silicon Valley Bank. Under the termslisting standards of the agreement,Nasdaq Capital Market either by having the market value of our listing securities of at least $35 million during the preceding ten consecutive trading days or having more than $2.5 million in stockholders’ equity. We will also be required to have a closing bid price of at least $1.00 per share during the preceding ten consecutive trading days before January 24, 2020. If we haveare unable to regain compliance with the ability to request term loan advances in two tranches.listing standards of the Nasdaq Capital Market by January 24, 2020, our securities may be delisted from The first trancheNasdaq Stock Market. As of $7.0 million was effective the date of the agreement and the second tranche is available to us in a single advance not to exceed $3.0 million ifthis filing we have either (a) received net proceedsnot regained compliance with any of $20.0 million from the sale of common shares prior to December 31, 2018 or (b) obtained positive Phase 2b data in Topsalysin trial for treatment of localized cancer prior to December 31, 2018.
The principal borrowed under the first tranche of $7.0 million bears fixed interest of 6.75% per annum. We have the option to prepay the outstanding balance of the loan in full, subject to a prepayment fee of 1% to 3% depending upon when the prepayment occurs. Upon the final repayment of the loan on the maturity date of September 1, 2021, by prepayment, or upon acceleration, we will pay Silicon Valley Bank an additional fee of 5% of the principal amount of $7.0 million. This additional fee is recorded as a debt discount and is being recognized as interest expense over the life of the loan utilizing the effective interest method. The repayment terms are interest only payments through September 2018 followed by 36 equal monthly payments of principal and interest.
Pursuant to the first tranche of the loan, we issued to Silicon Valley Bank warrants to purchase an aggregate of up to 99,526 of our common shares at an exercise price of $2.11 per share. The warrants will expire seven years from the date of the grant.these listing rules.
Future Operations
We have devoted substantial resources to developing topsalysin, protecting and enhancing our intellectual property and providing general and administrative support for these activities. We have not generated any revenue from product sales and, to date, have funded our operations primarily through public and private equity security sales, debt financings and payments from Kissei.
We will require significant additional capital to fund our operations and complete development of topsalysin and there is no assurance that we will obtain additional capital.
Our future capital requirements will depend on, and could increase significantly as a result of many factors, including:
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● | the costs and timing of regulatory approvals; |
our ability to maintain our strategic license with Kissei and its ability to achieve applicable milestones and establish and maintain additional strategic collaborations, including licensing and other arrangements;
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● | our ability to maintain our strategic license with Kissei and its ability to achieve applicable milestones and establish and maintain additional strategic collaborations, including licensing and other arrangements; | |
● | the costs involved in filing, prosecuting, enforcing and defending patent claims and other intellectual property rights; |
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● | the costs of obtaining and securing manufacturing supply for clinical or commercial production of product candidates; and | |
● | the costs of establishing, or contracting for, sales and marketing capabilities if we obtain regulatory approvals to market topsalysin. |
the costs of establishing, or contracting for, sales and marketing capabilities if we obtain regulatory approvals to market topsalysin.
Until we can generate significant continuing revenues, we expect to satisfy our future cash needs through private and public sales of our securities, debt financings, by establishing additional strategic collaborations for topsalysin or from exercise of outstanding common share purchase warrants and stock options.
Cash Flows
The following table shows a summary of our cash flows for the nine months ended September 30, 20172019 and 20162018 (in thousands):
Nine Months Ended September 30, | Nine Months Ended September 30 | |||||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||
Net cash provided by (used in): | ||||||||||||||||
Operating activities | $ | (7,318 | ) | $ | (8,225 | ) | $ | (8,427 | ) | $ | (11,341 | ) | ||||
Investing activities | 4,050 | 2,297 | (482 | ) | 7,302 | |||||||||||
Financing activities | 6,955 | 31,102 | 2,162 | — | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (1 | ) | — | |||||||||||||
Net increase in cash and cash equivalents | $ | 3,686 | $ | 25,174 | ||||||||||||
Net (decrease) increase in cash and cash equivalents | $ | (6,747 | ) | $ | (4,039 | ) |
Operating Activities
Net cash used in operating activities decreased to $7.3$8.4 million for the nine months ended September 30, 2017 from $8.22019 compared to $11.3 million for the nine months ended September 30, 2016.2018. The decrease in net cash used in operating activities of $0.9$2.9 million was primarily due to the decrease in our net loss from period to period partiallywhich was offset by a decreasean increase in funds used for the payment of accounts payable and accrued expenses in the nine monthmonths period ended September 30, 2016.2019. The decrease in ourthe net loss fromis due to a reduction in costs associated with our manufacturing activities for topsalysin, a reduction in our clinical trial costs associated with our completed Phase 2b localized prostate cancer clinical trial and the nine months ended September 30, 2016 to the nine months ended September 30, 2017 is primarily a result ofincrease in the non-cash gain recorded for the revaluation of our warrants, increase in our research and development expenses associated with our Phase 2b clinical trial for the focal treatment of localized prostate cancer and costs associated with manufacturing activities of topsalysin. These increases are partially offset by decreases in costs associated with our completed Phase 2a proof of concept clinical trial for lowwarrant liability from period to intermediate risk prostate cancer. period.
Investing Activities
Net cash provided byused in investing activities was $4.1$0.5 million for the nine months ended September 30, 2017,2019, compared to $2.3 million net cash provided by investing activities of $7.3 million for the nine months ended September 30, 2016.2018. The net cash used in investing activities during the nine months ended September 30, 2017 represents the usage of cash to purchase securities classified as available-for-sale. The net cash(used in) and provided by investing activities during the nine months ended September 30, 20162019 and 2018 represents the use of securities classified as available-for-sale or proceeds from the maturity of securities classified as available-for-sale to fund our operations, and to a lesser extent, to purchase securities with maturities less than 90 days which are classified as cash and cash equivalents. available-for-sale.
Financing Activities
Net cash provided by financing activities was $7.0$2.2 million for the nine months ended September 30, 2017, compared to $31.1 million2019. The net cash provided by financing activities for the nine months ended September 30, 2016. The cash providedis primarily related to our registered direct financing with a private institutional investor. We received $3.7 million of proceeds, net of paid issuance costs. This increase is offset by financing activities for the nine months ended September 30, 2017 are $7.0 million proceeds from theprincipal payments on our Silicon Valley Bank Loan and Security Agreement with Silicon Valley Bank and $2,000 in proceeds from the exercise of stock options. The cash provided by financing activities in the nine months ended September 30, 2016 are the net proceeds of $33.7 million from our completed common share offerings and proceeds of $2.6 million from the exercise of warrants and stock options, offset by $5.1 million of principal payments for offering costs associated with the establishment of our loanControlled Equity and Sales AgreementSM with Oxford.Cantor Fitzgerald & Co.
Off-balance Sheet Arrangements
We do not have any off-balance sheet arrangements (as defined by applicable SEC regulations) that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued new guidance related to revenue recognition (ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606)). Subsequently the FASB has issued additional guidance (ASU Nos. 2015-14; 2016-08; 2016-10; 2016-12; 2016-20 Revenue from Contracts with Customers (Topic 606)). The guidance establishes principles for reporting information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Two methods of adoption are permitted: (a) full retrospective adoption, meaning the standard is applied to all periods presented or (b) modified retrospective adoption, meaning the cumulative effect of applying the new guidance is recognized as an adjustment to the opening retained earnings balance. We did not recognize any revenue from contracts with customers in the years ended December 31, 2016, 2015 and 2014. Although we are still evaluating the impact of the new standard, we anticipate that the impact will not be material to the consolidated financial statements as we do not currently generate revenues from contracts with customers.
In February 2016, the FASB issued ASU, No. 2016-02, “Leases (Topic 842)”. This guidance requires lessees to recognize a lease liability and a right-of-use asset with the exception of short-term leases. In addition, lessees are required to classify leases as either operating or finance based on current criteria of whether or not the lease is effectively a financed purchase by the lessee. The new standard is effective for the annual reporting period beginning after December 15, 2018 and early adoption is permitted. Although we are in the process of evaluating the impact of this guidance on its consolidated financial statements and related disclosures, we expect that our operating lease will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”, addressing eight specific cash flow issues in an effort to reduce diversity in practice. The amended guidance is effective for fiscal years beginning after December 31, 2017, and for interim periods within those years. Early adoption is permitted. We are in the process of evaluating the impact of this guidance on our consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting". The new standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The new standard will be effective for us on January 1, 2018; however, early adoption is permitted. The adoption of this standard is not expected to have a material impact on our financial position or results of operations.
Item 3. | Qualitative and Quantitative Disclosures About Market Risk |
Under SEC rules and regulations, as a smaller reporting company, we are not required to provide the information required by this item.
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’sSEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
As of September 30, 2017,2019, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2017. 2019.
Changes in Internal Control Over Financial Reporting
An evaluation was also performed under the supervision and with the participation of our management, including our chief executive officer and our principal financial officer, of any change in our internal control over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any change in our internal control over financial reporting that occurred during our latest fiscalthe quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Risk Factors |
You should consider carefully the following risk factors, together with all of the other information included or incorporated in this Quarterly Report, before making your decision whether to purchase or sell shares of our common stock. Each of these risk factors, either alone or taken together, could adversely affect our business, operating results, growth prospects and financial condition, as well as adversely affect the value of an investment in our common shares. If that were to happen, the trading price of our common stock could decline. There may be additional risks that we do not presently know of or that we currently believe are immaterial which could also impair our business and financial position. We have marked with an asterisk (*) those risk factors that reflect changes from the risk factors included in our Annual Report on Form 10-K filed with the SEC on March 27, 2017.13, 2019.
Risks Related to Our Business and Industry
*We will require significant funding to completefund our operations, and there is substantial doubt about our ability to continue as a going concern.
Our Annual Report on Form 10-K for the developmentyear ended December 31, 2018 includes disclosures regarding management’s assessment of our ability to continue as a going concern and commercializationa report from our independent registered public accounting firm that includes an explanatory paragraph regarding going concern, as there is substantial doubt about our ability to continue as a going concern due to our current liquidity position and recurring losses from operations since inception and negative cash flows from operating activities.
The condensed consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of topsalysinassets and the settlement of liabilities in the normal course of business. We have incurred net losses from operations since inception, including $5.5 million in the nine months ended September 30, 2019, and have an accumulated deficit of $161.8 million as of September 30, 2019. On August 29, 2019, we completed a registered direct financing with a private institutional investor whereby we received $3.6 million, net of underwriters’ discounts and offering costs. At September 30, 2019, we had cash, cash equivalents and securities available-for-sale of $6.3 million. As of September 30, 2019, the future principal and final fee payments under the Loan and Security Agreement with Silicon Valley Bank, or SVB, totaled $6.0 million. The maturity date of the loan is September 1, 2021. We are currently paying monthly installments of principal and interest under the Loan and Security Agreement. However, if we fail to make principal and interest payments when due or another event of default occurs under the loan, SVB may beaccelerate the loan and foreclose on our pledged assets if we are unable to raise capital when needed, which would force usrepay the loan in full. Events of default include the occurrence of a material adverse change as defined in the Loan and Security Agreement. As of the date of filing of this Form 10-Q, we are not in default under any of the provisions of the Loan and Security Agreement. We expect that our cash, cash equivalents and securities available-for-sale will be sufficient to delay, reduce or eliminatefund our development program or commercialization efforts or cease operations.operations and debt service through March 2020 (assuming no acceleration of the loan) and, as a result, there is substantial doubt about our ability to continue as a going concern for one year from the date of the issuance of our condensed consolidated financial statements for the nine months ended September 30, 2019.
Our operations have consumed substantial amounts of cash since inception. Since inception, we have raised approximately $146$149 million from the sale of equity securities in private placements and public offerings, $28$28 million from the issuance of debt securities and $11 million from the exercise of common share purchase warrants. We will need to continue to spend substantial amounts to continue clinical development of topsalysin. We have initiatedannounced that we had received formal scientific advice from the European Medicines Agency, or EMA, and reached an agreement with the U.S. Food and Drug Administration, or FDA, regarding a design for a single Phase 2b3 clinical trial to confirmevaluate the dose and optimize the deliverypotential of topsalysin for the treatment ofas a targeted focal therapy to treat patients with intermediate risk localized prostate cancer. Based upon feedback from the EMA and the FDA, we believe that data from a single Phase 3 trial, if successful, should be sufficient to support market approval in both the U.S. and Europe. The scope of any additional trial in localized prostate cancer, including whether it will be a Phase 3 trial or an additional Phase 2 trial, will be dependent upon securing funding to finance such clinical trial. At this point in time, we do not plan on pursuing new clinical trials, including an additional trial in localized prostate cancer or a second Phase 3 trial in benign prostatic hyperplasia, or BPH, unless we secure a development partner to fund such new clinical trials or we obtain the necessary financing. We are currently evaluating options to further advance the clinical development of topsalysin. We will require significant additional funding to advance topsalysin in clinical development outside of this Phase 2b clinical trial and to repay our Silicon Valley Bank, or SVB loan.development. We could use dilutive funding options such as an equity financing andand/or non-dilutive funding options such as a partnering arrangement or royalty agreementother strategic arrangements to fund future clinical development of topsalysin. At this point inAny significant future public financing will most likely require the use of a Form S-1 registration statement. The process of getting a Form S-1 registration statement filed and declared effective can take an extended period of time we do not plan on pursuing additional clinical trials, including a second Phase 3 trial in BPH, unless we obtain additional financing or secure a development partner to fund such new clinical trials.which could delay the timing of any future significant financing. There can be no assurance that such funding will be secured in a timely manner or on favorable terms, if at all or that a development partner will be available on acceptable terms or if at all.
We expect that our existing cash, cash equivalents and securities available-for-sale, together with interest thereon, will only be sufficient to fund our operations to the middle of 2019. However, changing circumstances may cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. Any clinical development efforts, including our second Phase 2 clinical trial and our ongoing operations will require significant funding.
We expect to finance future cash needs through public or private equity offerings, debt financings or strategic partnerships and alliances and licensing arrangements. In addition, as part of our offering of common shares in August 2016, we agreed not to sell any equity securities for 90 days from the closing. We cannot be certain that additional funding will be available on acceptable terms, or at all. Subject to limited exceptions, our SVB loan also prohibits us from incurring indebtedness without the prior written consent of SVB. If we are unable to raise additionalsufficient capital in sufficient amounts or on terms acceptable to usfund our operations, we may need to significantly delay, scale back or discontinue the development or commercialization of topsalysin. We also could be required to:to significantly reduce expenses, sell assets (potentially at a loss), cease operations altogether, file for bankruptcy or seek other protection from creditors, or liquidate all of our assets. We are also exploring partnership arrangements and other strategic alternatives which could include a merger or acquisition. Furthermore, if there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all.
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Any of the above events could significantly harm our business, prospects, financial condition and results of operations and cause the price of our common shares to decline.
*We are an earlya development stage company with no approved products and no revenue from commercialization of our product candidate.any products.
We have not completed the development of any product candidates and, accordingly, have not begun to commercialize, or generate any product revenues from any product candidate. We are at an early stage of development of our product candidate, topsalysin, for the treatment of the lower urinary tract symptoms of benign prostatic hyperplasia, or BPH and for the treatment of clinically significant localized prostate cancer. Topsalysin requires significant additional clinical testing and investment prior to seeking marketing approval for either the treatment of localized prostate cancer or as a treatment for the lower urinary tract symptoms of BPH or the treatment of prostate cancer.BPH. On November 10, 2015, we announced final results from our Phase 3 "PLUS-1" study of topsalysin as a treatment for lower urinary tract symptoms of BPH. However, in order to seek regulatory approval for the treatment of the symptoms of BPH, we would be required to conduct a second Phase 3 clinical trial.trial in this indication. At this point in time we do not plan on pursuinghave no immediate plans to conduct a second Phase 3 trial in BPH unless we obtain additional financing or secure a development partner to fund such new clinical trial. There can be no assurance that such fundingtrials or aobtain financing in excess of the financing required for our prostate cancer development partner will be available on acceptable terms or at all. In May 2015, we initiatedprogram, which is our development priority.
We are planning a Phase 2a proof of concept clinical trial of topsalysin for the treatment of patients with clinically significant localized lowprostate cancer. Our goal is to intermediate riskconduct a single Phase 3 trial, which if successful, will provide the clinical data for approval in both the US and Europe. In addition, the scope of any additional trial in localized prostate cancer, and on June 9, 2016, we announced the biopsy data of all 18 patients. We have initiatedincluding whether it will be a secondPhase 3 clinical trial or an additional Phase 2 trial will be dependent upon securing sufficient funding to finance such clinical trial to confirmtrial. Any delay in the dosefinalization of the design and optimizefunding of the deliverynext clinical study would delay our development of topsalysin for the treatment of localized prostate cancer, which will be conducted across clinical sites in the UK and US. While we believe that we may be able to seek regulatory approval for topsalysin for the treatment of localized prostate cancer with one Phase 3 clinical trial, we have not discussed late-stage clinical development in this indication with the Food and Drug Administration, or FDA, or foreign regulatory authorities and these authorities may disagree with our assessment and require additional clinical trials or other studies before we can submit for regulatory approval. We will continue to refine our development plans for topsalysin for the treatment of localized prostate cancer based on the results of our second Phase 2 clinical trial and discussions with regulatory agencies and may change our assessment of required clinical trials and our development plan. cancer.
A commitment of substantial resources by us and potential partners will be required to conduct additional clinical trials for topsalysin to meet applicable regulatory standards, obtain required regulatory approvals, and to successfully commercialize this product candidate for the treatment in either indication. Topsalysin is not expected to be commercially available for either indication for several years, if at all, and any projected timelines for commercialization are subject to a number of factors that are outside our control. There is no assurance that we will be able to commercialize topsalysin within the time periods we expect or that our clinical trials will support the regulatory approvals needed to commercialize topsalysin at all.
We are highly dependent on the success of our sole product candidate, topsalysin, and we may not be able to successfully obtain regulatory or marketing approval for, or successfully commercialize, this product candidate.
To date, we have expended significant time, resources and effort on the development of topsalysin for the lower urinary tract symptoms of BPH and for the treatment of clinically significant localized prostate cancer and for the treatment of lower urinary tract symptoms of BPH, including conducting preclinical and clinical trials. We have no product candidates in our clinical development pipeline other than topsalysin, which we are developing for those two potential indications. Our ability to generate product revenues and to achieve commercial success in the near term will initially depend almost entirely on our ability to successfully raise capital to fund our development programstopsalysin program and to develop, obtain regulatory approval for and then successfully commercialize topsalysin for either of these indications in the United States and the European Economic Area, or EEA. Before we can market and sell topsalysin in the United States or foreign jurisdictions for any indication, we will need to commence and complete additional clinical trials, manage clinical, preclinical, and manufacturing activities, obtain necessary regulatory approvals from the Food and Drug Administration, or FDA in the United States and from similar foreign regulatory agencies in other jurisdictions, obtain manufacturing supply, build a commercial organization or enter into a marketing collaboration with a third party, and in some jurisdictions, obtain reimbursement authorization, among other things. We cannot assure you that we will be able to successfully complete the necessary preclinical studies and clinical trials and/or obtain regulatory approvals and sufficient commercial manufacturing supply for topsalysin in either indication. If we do not receive regulatory approvals, our business, prospects, financial condition and results of operations will be adversely affected. Even if we obtain the regulatory approvals to market and sell topsalysin, we may never generate significant revenues from any commercial sales of topsalysin for several reasons, including because the market for topsalysin may be smaller than we anticipate, topsalysin may not be adopted by physicians and payors or because topsalysin may not be as efficacious or safe as other treatment options. If we fail to successfully commercialize topsalysin, we may be unable to generate sufficient revenues to sustain and grow our business and our business, prospects, financial condition and results of operations will be adversely affected.
Topsalysin may cause undesirable side effects or have other properties that may delay or prevent its regulatory approval or commercialization or limit its commercial potential.
Undesirable side effects caused by topsalysin could cause us or regulatory authorities to interrupt, delay, suspend or terminate clinical trials and could result in a more restrictive label or the delay or denial of marketing approval by the FDA or other regulatory authorities. This, in turn, could limit or prevent us from commercializing topsalysin and generating revenues from its sale. The most common adverse events observed in patients who received topsalysin in our initial Phase 3 clinical trial for the treatment of lower urinary tract symptoms of BPH that were potentially attributable to topsalysin included painful urination, the presence of red blood cells in urine, frequent urination and urinary urgency, fever, and perineal pain. Each of the foregoing adverse events occurred in greater than 5% of the topsalysin population. Further, the incidence of serious AEs, or SAEs, was similar in patients treated with topsalysin and vehicle. There were two SAEs assessed by the investigator as at least possibly related to treatment for topsalysin and one such SAE for vehicle. The topsalysin-related SAEs were moderate events of “acute non-infectious prostatitis” and “fever following prostate procedure” not unexpected manifestations of the intraprostatic cellular destruction and resultant inflammation integral to the topsalysin mechanism of action. The vehicle-related SAE was a mild event of “urinary tract infection.” Although the SAEs were moderate and not unexpected, they may not be fully indicative of the adverse events that would be encountered in commercial use or in larger trials. In our completed Phase 2b localized prostate cancer trial a single administration of topsalysin continues to appear safe and well tolerated by patients. No hypersensitivity reactions or other serious systemic reactions to topsalysin were observed after a single administration. Adverse events considered related to topsalysin and occurring in more than one patient were: dysuria (3 patients), urinary retention (3 patients), proctalgia (2 patients), perineal pain (2 patients), nocturia (2 patients), micturition urgency (2 patients) and strangury (2 patients). All adverse events were considered mild and typically resolved within the same day. One event of micturition urgency was considered severe and resolved the same day, two events were considered moderate in severity, one event of perineal pain which resolved within a day and one event of urinary retention was considered moderate and the event was considered resolved after the patient underwent a transurethral resection of the prostate. One of the topsalysin related mild events of strangury was reported as a serious adverse event (SAE) because the patient was hospitalized overnight for monitoring as was the practice at the site in the United Kingdom where the patient had been treated. The event of strangury resolved the next day and the patient was released from the hospital.
In August 2018, we announced that we had completed an investigation into the death of a patient in the Phase 2b trial for the treatment of localized prostate cancer. It was concluded that the patient death was unlikely to be related to either topsalysin or the injection procedure. On December 17, 2018, we announced the interim safety and tolerability results from the 10 patients who received a second administration of topsalysin from our completed Phase 2b localized prostate cancer trial. A second administration of topsalysin appears to be both safe and well-tolerated by patients. There were no adverse events considered related to topsalysin that were experienced by more than one patient following the second administration. The adverse events that were considered related to topsalysin were typically mild and resolved within two days. Importantly, no hypersensitivity reaction or other serious systemic reactions to topsalysin were observed. Urine function was preserved and there were no reports of sexual dysfunction related to topsalysin.
Results from our future clinical trials could reveal a high and unacceptable severity and prevalence of these or other side effects. In such an event, our trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny approval of topsalysin for its targeted indication. Further, such side effects could affect patient recruitment or the ability of enrolled patients to complete a trial or result in potential product liability claims. Any of these occurrences may have a material and adverse impact on our business, prospects, financial condition and results of operations.
In addition, if topsalysin receives marketing approval for the treatment of the symptoms of BPH or localized prostate cancer, or both, and we or others later identify undesirable side effects caused by topsalysin, a number of significant negative consequences could result, including:
● | regulatory authorities may withdraw their approval of topsalysin; | |
● | regulatory authorities may require that we demonstrate a larger clinical benefit by conducting additional clinical trials for approval to offset the risk; | |
● | regulatory authorities may require the addition of labeling statements or warnings that could diminish the usage of the product or otherwise limit the commercial success of topsalysin; | |
● | we may be required to change the way topsalysin is administered; | |
● | we may choose to recall, withdraw or discontinue sale of topsalysin; |
● | we could be sued and held liable for harm caused to patients; |
● | we may not be able to enter into collaboration agreements on acceptable terms and execute on our business model; and | |
● | our reputation may suffer. |
Any one or a combination of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing topsalysin, which in turn could delay or prevent us from generating any revenues from the sale of the product, which could significantly harm our business, prospects, financial condition and results of operations.
*The clinical trial protocol and design for our completed and any additional future Phase 3 clinical trials of topsalysin may not be sufficient to allow us to submit a BLA to the FDA in the indication of either lower urinary tract symptoms of BPH or clinically significant localized prostate cancer or demonstrate safety or efficacy at the level required by the FDA for product approval.approval in either indication.
Our initial Phase 3 clinical trial infor the treatment of lower urinary tract symptoms of BPH and any additional Phase 3 clinical trial of topsalysin in this indication use the International Prostate Symptom Score, or IPSS, outcome measure evaluated at total change from baseline over 52 weeks as the primary endpoint. Secondary endpoints include Qmax (maximum urine flow) change from baseline (maximum urine flow) over 52 weeks. The IPSS outcome measure, which is a validated primary efficacy endpoint used to assess the treatment benefit in BPH clinical trials, is a patient recorded, composite assessment that takes into account factors such as ability to empty the bladder, frequency of urination, intermittency of urination and the urgency of urination. The IPSS outcome measure is subjective in nature and requires patients in the trial to accurately and retroactively assess numerous symptoms. The subjective nature of the IPSS outcome measure may make efficacy more difficult to demonstrate than for clinical trials for therapies that can show objective measures of efficacy.
Wetopsalysin as a targeted focal therapy to treat patients with intermediate risk localized prostate cancer. Based upon feedback from the EMA and the FDA,we believe that data from a single Phase 3 trial, if successful, should be sufficient to support market approval in both the U.S. and Europe. However, this advice and agreement are not binding on the regulatory agencies, and we have not requested a special protocol assessment, or SPA, which drug development companies sometimes use to obtain an agreement with the FDA concerning the design and size of a clinical trial intended to form the primary basis of an effectiveness claim. Without the concurrence of the FDA on an SPA or otherwise, we cannot be certain that the design, conduct and data analysis approach for our initial Phase 3 clinicalBPH trial and any future Phase 3 clinical trials has or will generate data sufficient to establish the effectiveness of topsalysin for treatment of BPH symptomsfor either indication to the FDA’s satisfaction, and therefore allow us to submit or receive approval of a Biologics License Application, or BLA for topsalysin.topsalysin in either indication.
Specifically, with respect to our development of topsalysin for the treatment of BPH symptoms, the FDA has not agreed upon the amount of IPSS treatment effect that must be demonstrated in our Phase 3 clinical trials of topsalysin in order for it to grant marketing approval for the treatment of BPH symptoms. Historically, oral medications for the treatment of BPH have shown approximately a 2 point improvement in IPSS between active and control, which was not seen in our PLUS-1 clinical trial. If the FDA requires us, or we otherwise determine, to amend our protocols, change our clinical trial designs, increase enrollment targets or conduct additional clinical trials, our ability to obtain regulatory approval on the timeline we have projected wouldin this indication could be jeopardizeddelayed and we could be required to make significant additional expenditures related to clinical development.
Further, even if we achieve positive results on the endpoints for a clinical trial, the FDA may disagree with our interpretation of the data and deem the results insufficient to demonstrate efficacy at the level required by the FDA for product approval. It is possible that we may make modifications to the clinical trial protocols or designs of our future clinical trials that delay enrollment or completion of such clinical trials and could delay regulatory approval of topsalysin for the treatment of symptoms of BPH.
either or both indications.
*Our clinical trials may fail to adequately demonstrate safety and efficacy of topsalysin for either indication being pursued. Failure to meet the safety or efficacy standards for the trialpursued which would prevent or delay regulatory approval and commercialization.
Clinical development is expensive, takes many years to complete and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process and topsalysin is subject to the risks of failure inherent in drug development. Success in early clinical trials does not mean that later clinical trials will be successful because product candidates in later-stage clinical trials may fail to demonstrate sufficient safety or efficacy despite having progressed through initial clinical testing, even at statistically significant levels. We will be required to demonstrate through well-controlled clinical trials of topsalysin that our product candidate is safe and effective for use in its target indication before we can obtain regulatory approvals for its commercial sale. Companies frequently suffer significant setbacks in late-stage clinical trials, even after earlier clinical trials have shown promising results. Any future clinical trials of topsalysin may not be successful for a variety of reasons, including faults in the clinical trial designs, the failure to enroll a sufficient number of patients, undesirable side effects and other safety concerns and the inability to demonstrate sufficient efficacy. If topsalysin fails to demonstrate sufficient safety or efficacy, we would experience potentially significant delays in, or be required to abandon our development of, topsalysin, which would have a material and adverse impact on our business, prospects, financial condition and results of operations.
On November 10, 2015,*We rely on third parties to manufacture topsalysin and we announced the final results from our initial Phase 3 clinical trialintend to rely on third parties to manufacture commercial supplies of topsalysin, if and when it is approved. The development and commercialization of topsalysin could be stopped or delayed if any such third party fails to provide us with sufficient quantities of topsalysin or the diluent or fails to do so at acceptable quality levels or prices or fails to maintain or achieve satisfactory regulatory compliance.
We do not currently have, nor do we plan to acquire the infrastructure or capability internally to manufacture our clinical drug supplies for use in the conduct of our clinical trials, and we lack the resources and the capability to manufacture topsalysin on a commercial scale. Instead, we rely on our third-party manufacturing partners. Although we have entered into agreements for the treatmentmanufacture of lower urinary tract symptomsclinical supplies of BPHtopsalysin, our third party manufacturing partners may not perform as agreed, may be unable to comply with cGMP requirements and with FDA, state and foreign regulatory requirements or may terminate their agreements with us. We do not control the manufacturing processes of our third party manufacturers and we are currently consideringcompletely dependent on our third party manufacturers for the production of topsalysin in accordance with cGMPs, which include, among other things, quality control, quality assurance and the maintenance of records and documentation. Our purchase orders under our manufacturing contracts either cannot be cancelled or can only be cancelled with the payment of financial penalties.
We have entered into an additional Phase 3agreement with Boehringer Ingelheim RCV GmbH & Co KG, or BI, to manufacture topsalysin drug substance. We have completed scale-up up to the commercial scale for topsalysin drug substance. In addition, we recently completed a project to optimize the formulation of topsalysin drug product. We have incurred significant costs to ensure that the optimised drug product formulation is biochemically and biophysically comparable to our previous drug product formulation. There is no guarantee that the new drug product formulation will obtain the same clinical results as our old drug formulation.
We have entered into a long-term agreement with Vetter Pharma International GmbH, or Vetter, to work on the commercial fill finish process for the production of reformulated topsalysin drug product and to supply clinical trial drug product material. We have incurred significant costs in connection with the technology transfer and manufacturer of clinical drug supplies. During the first quarter of 2019, we completed a fill finish campaign at commercial scale which produced drug product for future clinical trials. Analysis for release of this recently filled drug product is underway. Any delay in the release of this clinical trial drug product would result in future delays in our ability to commence additional clinical trials.
BI historically procured an ingredient used in our former diluent formulation for use with topsalysin drug product from a multinational industrial biotech company which is a single source supplier, on a purchase order basis. Our new drug product formulation does not use this single source provider ingredient in the diluent formulation. If we are required to examine whetherrevert back to our old drug product formulation and if our single source provider is unable to or decides to no longer supply BI or us with an ingredient for the diluent, we could experience delays in obtaining product for clinical trials until we procured another source or until we reformulate the product and we may be required to contract with another source in order to assure adequate commercial supply.
If our third-party manufacturers cannot successfully manufacture material that conforms to our specifications and the applicable regulatory authorities’ strict regulatory requirements, or pass regulatory inspection, they will not be able to secure or maintain regulatory approval for the manufacturing facilities. In addition, we have no control over the ability of any third-party manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or any other applicable regulatory authorities do not approve these facilities for the manufacture of our products or if they withdraw any such approval in the future, or if our suppliers or third-party manufacturers decide they no longer want to supply our biologic or manufacture our products, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our products.
The facilities used by our third-party manufacturers to manufacture topsalysin will effectively relieve BPH symptoms as measured at 52 weeks following treatment, which second trialand any other potential product candidates that we may develop in the future must be approved by the applicable regulatory authorities, including the FDA, pursuant to inspections that will be requiredconducted after we submit our BLA to the FDA. Further, manufacturers are subject to ongoing periodic unannounced inspection by the FDA beforeand other governmental authorities to ensure strict compliance with government regulations. Currently, our contract manufacturers are located outside the United States and the FDA has recently increased the number of foreign drug manufacturers which it inspects. As a result, these third-party manufacturers may be subject to increased scrutiny.
Topsalysin is manufactured by starting with cells which are stored in a cell bank. We have one master cell bank and multiple working cell banks and believe we can seek marketing approvalwould have adequate backup should any cell bank be lost in a catastrophic event. However, it is possible that we could lose multiple cell banks and have our manufacturing severely impacted by the need to replace the cell banks. Also, if we were to experience an unexpected loss of topsalysin supply, we could experience delays in this indication. our future clinical trials as our third party manufacturers would need to manufacture additional topsalysin and would need sufficient lead time to schedule a manufacturing slot. This is due to the fact that, given its nature, topsalysin cannot be manufactured in a facility at the same time as other biologics.
The resultsmanufacture of biopharmaceutical products is complex and requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. We and our contract manufacturers must comply with cGMP regulations and guidelines. Manufacturers of biopharmaceutical products often encounter difficulties in production, particularly in scaling up and validating initial production and contamination. These problems include difficulties with production costs and yields, quality control, including stability of the initial Phase 3product, quality assurance testing, operator error, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Furthermore, if microbial, viral or other contaminants are discovered in our products or in the manufacturing facilities in which our products are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. We cannot assure you that any stability or other issues relating to the manufacture of any of our products will not occur in the future. Additionally, our manufacturer may experience manufacturing difficulties due to resource constraints or as a result of labor disputes or unstable political environments. If our manufacturer was to encounter any of these difficulties, or otherwise fail to comply with their contractual obligations, our ability to provide any product candidates to patients in clinical trials would be jeopardized. Any delay or interruption in the supply of clinical trial may not be predictivesupplies could delay the completion of clinical trials, increase the second required Phase 3costs associated with maintaining clinical trial programs and, depending upon the period of delay, require us to commence new clinical trials at additional expense or terminate clinical trials completely.
Any adverse developments affecting clinical or commercial manufacturing of our products may result in shipment delays, inventory shortages, lot failures, product withdrawals or recalls, the need to reformulate our product or other interruptions in the same indication. Further, even if we meet the primary and secondary endpoints in both trials, if topsalysin is slow to achieve effectiveness, this may limit its commercial potential relative to therapies that demonstrate more immediate effect on the symptoms of BPH. The FDA has not agreed upon the amount of IPSS treatment effect that must be demonstrated in the required Phase 3 clinical trials in order for marketing approval to be granted; however, historically the oral medications approved for the treatment of BPH have shown approximately a 2 point improvement in IPSS between active and control. There is no assurance that the FDA will not require that we demonstrate a 2 point improvement, which was not seen in the PLUS-1 clinical trial.
On June 9, 2016, we announced the biopsy data at six months on all 18 patients enrolled in our Phase 2a proof of concept clinical trial of topsalysin for the treatment of localized low to intermediate risk prostate cancer. The results of the Phase 2a proof of concept clinical trial may not be predictive of the resultssupply of our Phase 2b clinical trialproducts. We may also have to confirm dosingtake inventory write-offs and optimize delivery.
Ifincur other charges and expenses for products that fail to meet specifications, undertake costly remediation efforts or seek more costly manufacturing alternatives. Accordingly, failures or difficulties faced at any level of our supply chain could materially adversely affect our business and delay or impede the development and commercialization of any of the clinical trials of topsalysin fail to demonstrate sufficient safetyour products or product candidates and efficacy, we would experience potentially significant delays in, or be required to abandon our development program, which wouldcould have a material and adverse impacteffect on our business, prospects, financial condition and results of operations.
We may seek a partner for the continued development and commercialization of topsalysin for the treatment of the symptoms of BPH.topsalysin. If we seek a partner and are unable to find a partner or such partnership is unsuccessful, we may be unable to commercialize topsalysin for this indication.topsalysin.
We may seek a third-party partner for financial and scientific resources for the further clinical development and commercialization of topsalysin for the treatment of the symptoms of BPH, including the required second Phase 3 clinical trial.topsalysin. There is no assurance that we will be able to find such a partner and, if we do, we may have to relinquish a significant portion of the future economic value of topsalysin to such partner. Also, a partner will likely significantly limit our control over the course of clinical development and/or commercialization of topsalysin. Our ability to recognize revenue from a successful partnering arrangement of the sort we are contemplating may be impaired by several factors, including:
● | a partner may shift its priorities and resources away from topsalysin due to many reasons, including a change in business strategy, a merger, acquisition, sale or downsizing of its company or business unit; |
● | successfully identifying a new partner and negotiating an agreement could be more difficult or the terms less advantageous because we have already established a partnership for Japan; |
● | a partner may have the ability to unilaterally cease development of topsalysin; |
● | a partner may change the success criteria for topsalysin as a treatment for the symptoms of BPH or as a treatment for clinically significant localized prostate cancer thereby delaying or ceasing clinical development of topsalysin; |
● | a partner could develop a product that competes, either directly or indirectly, with topsalysin; |
● | a partner with commercialization obligations may not commit sufficient financial or human resources to the marketing, distribution or sale of topsalysin; |
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● | a dispute could arise between us and a partner concerning the research, development or commercialization of topsalysin which could delay or terminate development and, possibly, result in costly litigation or arbitration which may divert management attention and resources; and |
● | a partner may use our proprietary information or intellectual property in such a way as to invite litigation from a third party or fail to maintain or prosecute intellectual property rights such that our rights are jeopardized. |
In addition, any adverse developments that occur during any clinical trials conducted by or under the supervision of a partner may affect our ability to obtain regulatory approval or commercialize topsalysin for the treatment of prostate cancer.topsalysin.
Further, if a partnership terminates an agreement with us or is otherwise unsuccessful, we may need to seek out and establish an alternative partnership. This may not be possible, or we may not be able to do so on terms which are acceptable to us, in which case, it may be necessary for us to cease the development of topsalysin for the treatment of symptoms of BPH or conduct the remaining clinical development on our own and with our own funds.
Any of these events would have a material adverse effect on our results of operations and financial condition.
Topsalysin is subject to extensive regulation, and we may not obtain regulatory approvals for topsalysin.
The clinical development, manufacturing, labeling, packaging, storage, tracking, recordkeeping, advertising, promotion, export, import, marketing and distribution and other possible activities relating to our product candidate are, and for any other biologic or drug candidate that we may develop will be, subject to extensive regulation by the FDA in the United States and other regulatory agencies in foreign jurisdictions. Topsalysin is subject to regulation in the United States as a biologic. Biologics require the submission of a BLA, and we are not permitted to market topsalysin in the United States until we obtain approval from the FDA of a BLA. To market topsalysin in the EEA, which includes the 2728 member states of the European Union plus Norway, Liechtenstein and Iceland, we must submit a Marketing Authorization Application, or MAA, to the European Medicines Agency, or EMA, for approval under the EMA’sEMA’s centralized procedure, which if the marketing authorization is granted, will enable us to market the product throughout the entire territory of the EEA. A BLA or MAA must be supported by extensive clinical and preclinical data, as well as extensive information regarding chemistry, manufacturing and controls, or CMC, sufficient to demonstrate the safety and effectiveness of the applicable product candidate to the satisfaction of FDA and EMA, respectively.
Regulatory approval of a BLA or an MAA is not guaranteed, and the approval process is expensive and will take several years. The FDA and foreign regulatory entities also have substantial discretion in the approval process. The number and types of preclinical studies and clinical trials that will be required for BLA or MAA approval varies depending on the product candidate, the disease or the condition that the product candidate is designed to target and the regulations applicable to any particular product candidate. Despite the time and expense associated with preclinical studies and clinical trials, failure can occur at any stage, and we could encounter problems that cause us to repeat or perform additional preclinical studies or clinical trials or generate additional CMC data. The FDA, EMA and similar foreign authorities could delay, limit or deny approval of a product candidate for many reasons, including because they:
may not deem our product candidate to be adequately safe and effective;
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● | may not find the data from our preclinical studies and clinical trials or CMC data to be sufficient to support a claim of safety and efficacy; |
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● | may not approve the manufacturing processes or facilities associated with our product candidate; |
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● | may conclude that we have not sufficiently demonstrated long-term stability of the formulation of the drug product for which we are seeking marketing approval; |
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● | may change approval policies (including with respect to our product |
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● | may not accept a submission due to, among other reasons, the content or formatting of the submission. |
Obtaining approval of a BLA is a lengthy, expensive and uncertain process. As part of the U.S. Prescription Drug User Fee Act, the FDA has a goal to review and act on a percentage of all submissions in a given time frame. The general review goal for a BLA is 12 months from the submission date for a standard application and eight months from the submission date for a priority review application. The FDA’sFDA’s review goals are subject to change, and it is unknown whether the review of a BLA for topsalysin will be completed within the FDA’s target timelines or will be delayed. Moreover, the duration of the FDA’s review may depend on the number and types of other BLAs that are submitted to the FDA around the same time period or are pending. Generally, public concern regarding the safety of drug products could delay or limit our ability to obtain regulatory approval, result in the inclusion of unfavorable information in our labeling, or require us to undertake other activities that may entail additional costs.
We have not submitted an application for approval or obtained FDA approval for any product. This lack of experience may impede our ability to obtain FDA approval in a timely manner, if at all, for topsalysin. In addition, failure to comply with FDA and other applicable U.S. and foreign regulatory requirements, either before or after product approval, may subject us to administrative or judicially imposed sanctions, including:
including warning letters;
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injunctions;
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letters, civil and criminal penalties, injunctions, withdrawal of approved products, product seizure or detention;
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detention, product recalls, total or partial suspension of production;production, and refusal to approve pending BLAs or supplements to approved BLAs.
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Even if we believe that data collected from our preclinical studies and clinical trials of our product candidate areis promising, our data may not be sufficient to support marketing approval by the FDA or any foreign regulatory authority, or regulatory interpretation of these data and procedures may be unfavorable. In addition, the FDA’sFDA’s regulatory review of BLAs for product candidates intended for widespread use by a large proportion of the general population is becoming increasingly focused on safety, which may lead to increased scrutiny of the safety data we submit in any BLA for topsalysin. Even if approved, a product candidate may not be approved for all indications requested and such approval may be subject to limitations on the indicated uses for which the biologic may be marketed, restricted distribution methods or other limitations. Our business and reputation may be harmed by any failure or significant delay in obtaining regulatory approval for the sale of our product candidate. We cannot predict when or whether regulatory approval will be obtained for any product candidate we develop.
To market any biologics outside of the United States, we and current or future collaborators must comply with numerous and varying regulatory and compliance related requirements of other countries. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods, including obtaining reimbursement and pricing approval in select markets. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks associated with FDA approval as well as additional, presently unanticipated, risks. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others, including the risk that our product candidates may not be approved for all indications requested and that such approval may be subject to limitations on the indicated uses for which the drug may be marketed.
Topsalysin may cause undesirable side effects or have other properties that may delay or prevent its regulatory approval or commercialization or limit its commercial potential.
Undesirable side effects caused by topsalysin could cause us or regulatory authorities to interrupt, delay, suspend or terminate clinical trials and could result in a more restrictive label or the delay or denial of marketing approval by the FDA or other regulatory authorities. This, in turn, could limit or prevent us from commercializing topsalysin and generating revenues from its sale. The most common adverse events observed in patients who received topsalysin in our initial Phase 3 clinical trial for the treatment of lower urinary tract symptoms of BPH that were potentially attributable to topsalysin included painful urination, the presence of red blood cells in urine, frequent urination and urinary urgency, fever, and perineal pain. Each of the foregoing adverse events occurred in greater than 5% of the topsalysin population. Further, the incidence of serious AEs, or SAEs, was similar in patients treated with topsalysin and vehicle. There were two SAEs assessed by the investigator as at least possibly related to treatment for topsalysin and one such SAE for vehicle. The topsalysin-related SAEs were moderate events of “acute non-infectious prostatitis” and “fever following prostate procedure” not unexpected manifestations of the intraprostatic cellular destruction and resultant inflammation integral to the topsalysin mechanism of action. The vehicle-related SAE was a mild event of “urinary tract infection.” The adverse events which occurred in our Phase 2a localized prostate cancer trial were similar in nature to the adverse events noted in our BPH program and no SAEs were reported. Although the SAEs were moderate and not unexpected, they may not be fully indicative of the adverse events that would be encountered in commercial use or in larger trials. Results from our future clinical trials could reveal a high and unacceptable severity and prevalence of these or other side effects. In such an event, our trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny approval of topsalysin for its targeted indication. Further, such side effects could affect patient recruitment or the ability of enrolled patients to complete a trial or result in potential product liability claims. Any of these occurrences may have a material and adverse impact on our business, prospects, financial condition and results of operations.
In addition, if topsalysin receives marketing approval for the treatment of the symptoms of BPH or prostate cancer, or both, and we or others later identify undesirable side effects caused by topsalysin, a number of significant negative consequences could result, including:
regulatory authorities may withdraw their approval of topsalysin;
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Any one or a combination of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing topsalysin, which in turn could delay or prevent us from generating any revenues from the sale of the product, which could significantly harm our business, prospects, financial condition and results of operations.
*We may experience delays in the commencement or completion of our clinical trials, which could result in increased costs to us and delay our ability to pursue regulatory approval and generate product revenues.
Delays in the commencement or completion of clinical testing could significantly impact our product development costs and could resultwill delay our ability to pursue regulatory approval and, in the need for additional financing. turn, our ability to generate any product revenues.
Although we have completed the first of two required Phase 3 clinical trials of topsalysin for the treatment offor the lower urinary tract symptoms of BPH and completed a Phase 2a proof of concept2b open-label clinical trial for the treatment of localized low to intermediate risk prostate cancer, and have commenced a Phase 2b trial for the treatment of clinically significant localized prostate cancer, we do not know whether or when we will be able to fund any additional clinical trials for either the treatment of clinically significant localized prostate cancer or the treatment of the symptoms of BPH, or if any future trials will be completed on time, or at all.
Further, the commencement or completion of clinical trials can be delayed for a variety of reasons, including delays in or related to:
raising sufficient capital or securing a development partner to fund the clinical trial;
| raising sufficient capital or securing a development partner to fund future clinical trials, including a Phase 3 clinical trial of topsalysin for the treatment of clinically significant localized prostate cancer and a second Phase 3 clinical trial for the treatment of the symptoms of BPH; | |
● | obtaining regulatory approval, or feedback on trial design necessary, to commence a clinical trial; |
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● | identifying, recruiting and training suitable clinical investigators; |
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● | identifying, recruiting and enrolling suitable patients to participate in a clinical trial; |
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● | catastrophic loss of drug product due to shipping delays or delays in customs in connection with delivery of drug product to foreign countries for use in clinical trials; |
| reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and clinical trial sites; |
obtaining sufficient quantities of topsalysin and the diluent used with topsalysin for use in clinical trials and completing reformulation of topsalysin and obtaining sufficient quantities of the reformulated topsalysin for commercial fill and finish for use in any future Phase 3 clinical trials;
having patients complete a trial or return for post-treatment follow-up;
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