Company Quick10K Filing
Quick10K
Aptose Biosciences
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$2.18 42 $91
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
20-F 2016-12-31 Annual: 2016-12-31
20-F 2015-12-31 Annual: 2015-12-31
8-K 2019-06-14 Other Events, Exhibits
8-K 2019-06-04 Shareholder Vote, Exhibits
8-K 2019-06-03 Officers, Exhibits
8-K 2019-06-03 Officers, Other Events, Exhibits
8-K 2019-06-03 Other Events, Exhibits
8-K 2019-05-30 Enter Agreement, Other Events, Exhibits
8-K 2019-05-30 Other Events, Exhibits
8-K 2019-05-29 Other Events, Exhibits
8-K 2019-05-24 Other Events, Exhibits
8-K 2019-05-24 Enter Agreement, Leave Agreement, Other Events, Exhibits
8-K 2019-05-16 Other Events, Exhibits
8-K 2019-05-10 Regulation FD, Exhibits
8-K 2019-05-10 Other Events, Exhibits
8-K 2019-05-07 Earnings, Exhibits
8-K 2019-05-01 Exhibits
8-K 2019-03-25 Other Events, Exhibits
8-K 2019-03-12 Earnings, Exhibits
8-K 2019-02-25 Other Events, Exhibits
8-K 2019-01-02 Other Events, Exhibits
8-K 2018-09-30 Regulation FD, Exhibits
8-K 2018-06-30 Regulation FD, Exhibits
8-K 2018-03-31 Regulation FD, Exhibits
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INVA Innoviva 1,480
XBIO Xenetic Biosciences 13
SPL Sabine Pass Liquefaction 0
ATK Simply Good Foods 0
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MCCX McorpCX 0
APTO 2019-03-31
Part I&Mdash;Financial Information
Item 1 - Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii&Mdash;Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 5. Other Information
Item 6. - Exhibits
EX-10.1 exh_101.htm
EX-10.2 exh_102.htm
EX-31.1 exh_311.htm
EX-31.2 exh_312.htm
EX-32.1 exh_321.htm
EX-32.2 exh_322.htm

Aptose Biosciences Earnings 2019-03-31

APTO 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 f10q_050719p.htm FORM 10-Q

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended March 31, 2019

 

OR

 

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

 

For the Transition Period from        to        

 

Commission File Number: 1-35447

 

APTOSE BIOSCIENCES INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Canada 98-1136802
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)

 

251 Consumers Road, Suite 1105

Toronto, Ontario, Canada M2J 4R3

(Address of Principal Executive Offices)

 

647-479-9828

(Registrant’s Telephone Number, Including Area Code)

 

Not applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the 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 ☐ Non-accelerated filer ☒ Smaller reporting
company ☒
Emerging growth
company ☒
         

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

 

 

 

 

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

 

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 APTO Nasdaq Capital Market

 

 

As of May 7, 2019, the registrant had 43,764,509 shares of common stock outstanding.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

  Page
PART I—FINANCIAL INFORMATION 1
Item 1 – Financial Statements 1
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
Item 3. – Qualitative and Quantitative Disclosures about Market Risk 23
Item 4 – Controls and Procedures 23
PART II—OTHER INFORMATION 25
Item 1a. – Risk Factors 25
Item 5 - Other Information 44
Item 6. – Exhibits 45
Signatures 46

 

 

 

 

 

 

 

 

PART I—FINANCIAL INFORMATION

 

ITEM 1 – FINANCIAL STATEMENTS

 

 

 

 

 

 

 

Condensed Consolidated Interim Financial Statements

 

(Unaudited)

 

APTOSE BIOSCIENCES INC.

 

 

 

For the three months ended March 31, 2019 and 2018

 

 

 

 

 

 

 

 

 1 

 

 

APTOSE BIOSCIENCES INC.

Condensed Consolidated Interim Statements of Financial Position (Expressed in thousands of US dollars) (unaudited)    

 

    March 31, 2019    December 31, 2018 
           
Assets          
Current assets:          
Cash and cash equivalents  $16,581   $15,299 
Investments   449    440 
Prepaid expenses   539    646 
Other current assets   95    101 
Total current assets   17,664    16,486 
           
Non-current assets:          
Property and equipment   379    384 
Right-of-use assets, operating leases   1,680     
Total non-current assets   2,059    384 
           
Total assets  $19,723   $16,870 
Liabilities and Shareholders’ Equity          
Current liabilities:          
Accounts payable  $1,170   $1,315 
Accrued liabilities   1,322    1,474 
Current portion of lease liability, operating leases   485     
Total current liabilities    2,977    2,789 
           
Non-current liabilities:          
Lease liability, operating leases   1,322     
Total liabilities   4,299    2,789 
           
           
Shareholders’ equity:          
Share capital:          
Common shares, no par value, unlimited authorized shares, 41,499,112 and 38,161,808 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively   267,250    261,072 
Additional paid-in capital   33,625    32,963 
Accumulated other comprehensive loss   (4,307)   (4,316)
Deficit   (281,144)   (275,638)
Total shareholders’ equity   15,424    14,081 
           
Total liabilities and shareholders’ equity  $19,723   $16,870 
           

 

See accompanying notes to condensed consolidated interim financial statements (unaudited).

 

Subsequent events (note 12)

 

 2 

 

 

APTOSE BIOSCIENCES INC.

Condensed Consolidated Interim Statement of Loss and Comprehensive Loss

(Expressed in thousands of US dollars, except for per common share data)

(unaudited)

 

    Three months ended
March 31, 2019
    Three months ended
March 31, 2018  
 
           
           
Revenue  $   $ 
           
Expenses:          
Research and development   3,340    3,140 
General and administrative   2,260    3,702 
Operating Expenses   5,600    6,842 
           
Other income (expense):          
Interest income   92    44 
Foreign exchange gains/( losses)   2    (16)
Total other income   94    28 
           
Net loss   (5,506)   (6,814)
           
Other comprehensive loss:          
Unrealized gain/(losses) on securities available-for-sale   9    (2)
Total comprehensive loss  $(5,497)  $(6,816)
           
Basic and diluted loss per common share  $(0.14)  $(0.23)
           
Weighted average number of common shares outstanding used in the calculation of (in thousands) Basic and diluted loss per common share   39,846    29,042 
           

 

See accompanying notes to condensed consolidated interim financial statements (unaudited)

 

 

 3 

 

 

APTOSE BIOSCIENCES INC.

Condensed Consolidated Interim Statements of Changes in Shareholders’ Equity

(Expressed in thousands of US dollars)

(unaudited)

 

 

    Common Shares    Additional     Accumulated
other
           
    Shares
(thousands)
    Amount    paid-in
capital
    comprehensive
loss
    Deficit    Total 
                               
Balance, December 31, 2018   38,162   $261,072   $32,963   $(4,316)  $(275,638)  $14,081 
Common shares issued under the 2018 ATM   77    178                   178 
Common shares issued pursuant to 2018 share purchase agreement   3,260    6,000                6,000 
Stock-based compensation           662            662 
Other comprehensive loss               9        9 
Net loss                   (5,506)   (5,506)
Balance, March 31, 2019   41,499    267,250    33,625    (4,307)   (281,144)   15,424 
                               
Balance, December 31, 2017   27,502   $231,923   $29,365   $(4,316)  $(246,770)  $10,202 
Common shares issued pursuant to 2017 share purchase agreement   3,200    8,855                8,855 
Stock-based compensation           2,228            2,228 
Other comprehensive loss               (2)       (2)
Net loss                   (6,814)   (6,814)
Balance, March 31, 2018   30,702   $240,778   $31,593   $(4,318)  $(253,584)  $14,469 

 

 

 

 

See accompanying notes to condensed consolidated interim financial statements (unaudited)

 

 4 

 

 

 

APTOSE BIOSCIENCES INC.

Condensed Consolidated Interim Statements of Cash Flows

(Expressed in thousands of US dollars)

(unaudited)

 

    Three months ended
March 31, 2019
    Three months ended
March 31, 2018  
 
           
           
           
Cash flows from operating activities:          
Net loss for the period  $(5,506)  $(6,814)
Items not involving cash:          
Stock-based compensation   662    2,228 
Depreciation and amortization   29    16 
Amortization of right-of-use assets   124     
Interest on lease liabilities   24     
Operating lease payments amortized to lease liabilities   (99)    
Unrealized foreign exchange (gain)/loss   (2)   26 
Change in non-cash operating working capital:          
Prepaid expenses   107    73 
Other assets   6    (23)
Accounts payable   (145)   (227)
Accrued liabilities   (74)   667 
Cash used in operating activities   (4,874)   (4,054)
           
Cash flows from financing activities:          
Issuance of common shares under 2017 share purchase agreement       8,860 
Issuance of common shares under 2018 share purchase agreement   6,000     
Issuance of common shares under the ATM, net of broker commission   178     
Cost of offerings       (5)
Cash provided by financing activities   6,178    8,855 
           
Cash flows from (used in) investing activities:          
Purchase of property and equipment   (24)   (24)
Cash provided by (used in) investing activities   (24)   (24)
           
Effect of exchange rate fluctuations on cash and cash equivalents held   2     
           
Increase in cash and cash equivalents   1,282    4,777 
           
Cash and cash equivalents, beginning of period   15,299    10,631 
Cash and cash equivalents, end of period  $16,581   $15,408 

 

See accompanying notes to condensed consolidated interim financial statements (unaudited)

 

 

 5 

 

APTOSE BIOSCIENCES INC.
Notes to Condensed Consolidated Interim Financial Statements (unaudited)
Three months ended March 31, 2019 and 2018
(Tabular amounts in thousands of United States dollars, except per share amounts)

 

1.Reporting entity:

 

Aptose Biosciences Inc. (“Aptose” or the “Company”) is a clinical-stage biotechnology company committed to discovering and developing personalized therapies addressing unmet medical needs in oncology. The Company’s executive offices are located in San Diego, California and its head office is located in Toronto, Canada.

 

Aptose has two clinical-stage programs and a second program that is discovery-stage and partnered with another company. CG026806 (“CG-806”), Aptose’s pan-FMS-like tyrosine kinase 3 / pan-Bruton’s tyrosine kinase inhibitor, was recently approved by the U.S. Food and Drug Administration (FDA) for a phase 1 safety trial for the treatment of patients with relapsed / refractory Acute Myeloid Leukemia (R/R AML) and patients having certain B-cell malignancies. APTO-253, Aptose’s second program, is a small molecule MYC inhibitor and is currently enrolling patients in a Phase 1b clinical trial for the treatment of patients with R/R blood cancers, including AML and high-risk Myelodysplastic Syndrome.

 

 

2.Significant accounting policies

 

(a)Basis of consolidation:

 

These condensed consolidated interim financial statements include the accounts of its subsidiaries. All intercompany transactions, balances, revenue and expenses are eliminated on consolidation.

 

(b)Basis of presentation:

 

The accompanying unaudited condensed consolidated interim financial statements have been prepared in conformity with generally accepted accounting principles in the United States, or GAAP, for the interim financial information and the rules and regulations of the Securities and Exchange Commission, or SEC, related to quarterly reports on Form 10-Q. Accordingly, they do not include all of the information and disclosures required by GAAP for annual audited financial statements and should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K, or Annual Report, filed with the SEC on March 12, 2019. In the opinion of management, these condensed consolidated interim 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. 

 

(c)Significant accounting policies, estimates and judgments:

 

During the three months ended March 31, 2019, there have been no changes to our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, except as described below for Lease accounting.

 

The preparation of the condensed consolidated interim financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting period. Actual outcomes could differ from those estimates. The condensed consolidated interim financial statements include estimates, which, by their nature, are uncertain.

 

The impacts of such estimates are pervasive throughout the condensed consolidated interim financial statements and may require accounting adjustments based on future occurrences.

 

The estimates and underlying assumptions are reviewed on a regular basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected.

 

(d)Foreign currency:

 

The functional and presentation currency of the Company is the US dollar.

 

 6 

 

APTOSE BIOSCIENCES INC.
Notes to Condensed Consolidated Interim Financial Statements (unaudited)
Three months ended March 31, 2019 and 2018
(Tabular amounts in thousands of United States dollars, except per share amounts)

 

(e)Leases

 

Effective January 1, 2019, the Company adopted Financial Accounting Standards Board, or FASB, standard ASU No. 2016-02, “Leases (Topic 842)”. The Company’s operating leases of tangible property with terms greater than twelve months are recognized as right of use assets, which represents the lessee’s right to use, or control the use of, a specified asset for the lease term, and a corresponding lease liability, which represents the lessee’s obligation to make lease payments under a lease, measured on a discounted basis. The Company adopted the new standard using the alternative transition method, which permits a company to use its effective date as the date of initial application without restating comparative period financial statements. Landlord inducements in the form of free rent periods are netted against lease payments to the landlord in measuring right-of-use assets and lease liabilities.

 

Impact of adoption:

 

As a result of adopting Topic 842, we recorded as of January 1, 2019, a right of use asset of approximately $1.570 million, and a lease liability of approximately $1.647 million. Upon adoption, landlord inducements of approximately $78 thousand were de-recognized, and a corresponding adjustment was made to right-of-use assets.

 

(f)Concentration of risk:

 

The Company is subject to credit risk from the Company’s cash and cash equivalents and investments. The carrying amount of the financial assets represents the maximum credit exposure. The Company manages credit risk associated with its cash and cash equivalents and investments by maintaining minimum standards of R1-low or A-low investments and the Company invests only in highly rated Canadian corporations which are capable of prompt liquidation.

 

 

3.Cash and cash equivalents:

 

Cash and cash equivalents consists of cash of $1.233 million (December 31, 2018 - $621 thousand), deposits in high interest savings accounts and other term deposits with maturities less than 90 days totaling of $15.348 million (December 31, 2018 - $14.678 million).

 

 

4.Right-of-use assets:

 

    Three months ended
March 31, 2019
    Year  ended
December 31, 2018
 
           
Right-of-use assets, January 1, 2019   1,570     
Additions to right-of-use assets   234     
Right-of-use assets, March 31, 2019   1,804     
Accumulated amortization   (124)    
Right-of use assets, NBV   1,680     
           

 

 7 

 

APTOSE BIOSCIENCES INC.
Notes to Condensed Consolidated Interim Financial Statements (unaudited)
Three months ended March 31, 2019 and 2018
(Tabular amounts in thousands of United States dollars, except per share amounts)

 

5.Investments:

 

Investments consisted of the following as of March 31, 2019 and December 31, 2018:

 

   March 31, 2019
    
    Cost    Unrealized
gain
    Market
value
 
                
Guaranteed investment certificate  $440    9    449 
                

 

 

   December 31, 2018
    
    Cost    Unrealized
loss
    Market
value
 
                
Guaranteed investment certificate  $458    (18)   440 
                

 

 

6.Fair value measurements and financial instruments:

 

The fair value hierarchy establishes three levels to classify the inputs to valuation techniques used to measure fair value.

 

Level 1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;

 

Level 2 - inputs are quoted prices in markets that are not active, quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data or other means; and

 

Level 3 - inputs are unobservable (supported by little or no market activity).

 

The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs.

 

The following table presents the Company’s assets that are measured at fair value on a recurring basis for the periods presented:

 

    March 31,
2019
    Level 1    Level 2    Level 3 
Assets                    
                     
High interest savings account  $1,164   $   $1,164   $ 
United States treasury bills   4,486        4,486     
Government of Canada promissory notes   4,986        4,986     
Guaranteed investment certificates, Royal Bank of Canada   5,161        5,161     
                     
   $15,797   $   $15,797   $ 

 

 8 

 

APTOSE BIOSCIENCES INC.
Notes to Condensed Consolidated Interim Financial Statements (unaudited)
Three months ended March 31, 2019 and 2018
(Tabular amounts in thousands of United States dollars, except per share amounts)

 

    December 31,
2018
    Level 1    Level 2    Level 3 
Assets                    
                     
High interest savings account  $496   $   $496   $ 
United States treasury bills   3,989        3,989     
Canadian provincial promissory notes   5,991        5,991     
Guaranteed investment certificates, Royal Bank of Canada   4,642        4,642     
                     
   $15,118   $   $15,118   $ 

 

 

7.Accrued liabilities:

 

Accrued liabilities as of March 31, 2019 and December 31, 2018 consisted of the following:

 

    March 31,
2019
    December 31,
2018
 
           
Accrued personnel related costs  $907   $955 
Accrued research and development expenses   198    257 
Other accrued expenses   217    262 
   $1,322   $1,474 

 

 

8.Lease liability

 

Aptose leases office space and lab space in San Diego, California. The lease for the office space expires on March 31, 2023 and can be extended for an additional 5 year period. The lease for our lab space expired on February 29, 2019, and on February 18, 2019 was renewed until February 28, 2022. We lease office space in Toronto, Ontario, Canada. The lease for this location expires on June 30, 2023 with an option to renew for another 5-year period. The Company has not included any extension periods in calculating its right-to-use assets and lease liabilities. The Company also enters into leases for small office equipment.

 

Minimum payments, undiscounted, under our operating leases are as follows:

 

Years ending December 31,     
2019  $369 
2020   521 
2021   532 
2022   460 
2023   119 
Thereafter    
   $2,001 

 

 9 

 

APTOSE BIOSCIENCES INC.
Notes to Condensed Consolidated Interim Financial Statements (unaudited)
Three months ended March 31, 2019 and 2018
(Tabular amounts in thousands of United States dollars, except per share amounts)

 

To calculate the lease liability, the lease payments in the table above were discounted over the remaining term of the leases using the Company’s incremental borrowing rate as at January 1, 2019 for existing leases at the time of adopting the Topic 842, and for new leases after the date adoption, as at the date of the execution date of the new lease. The following table presents the weighted average remaining term of the leases and the weighted average discount rate:

 

    Three months ended
March 31, 2019
 
Weighted-average remaining term – operating leases (in years)   3.8 
Weighted-average discount rate  – operating leases   5.42%
      
Lease liability, current portion   485 
Lease liability, long term portion   1,322 
Lease liability, total   1,807 
      

 

Right-of-use assets obtained in exchange for new operating lease liabilities are as follows:

 

    Three months ended
March 31, 2019
 
      
Right-of-use assets recorded upon adoption of Topic 842, January 1, 2019  $1,570 
Right-of-use assets obtained in exchange for new operating lease liabilities in the period  $234 
      

 

Operating lease costs and operating cash flows from our operating leases are as follows:

 

    Three months ended
March 31, 2019
 
      
Operating lease cost  $148 
      
Operating cash flows from operating leases  $99 
      

 

Comparable figures are not presented as the Company adopted the new standard using the alternative transition method, which permits a company to use its effective date as the date of initial application without restating comparative period financial statements.

 

9.Share capital:

 

The Company has authorized share capital of an unlimited number of common voting shares.

 

(a)Equity issuances:

 

(i)2018 Share Purchase agreement

 

On May 30, 2018, the Company entered into the 2018 Aspire Purchase Agreement, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $20 million of Common Shares over approximately 30 months. Pursuant to the terms of this agreement, on June 8, 2018, the Company issued 170,261 Common Shares (“Commitment Shares”) to Aspire Capital in consideration for entering into the 2018 Aspire Purchase Agreement. The Company recorded $600 thousand in general and administrative expenses related to the issuance of the Commitment Shares. During the three months ended March 31, 2019, the Company issued 3,259,955 common shares under the 2018 Aspire Purchase Agreement at an average price of $1.84 per share for gross and net proceeds of $6 million. On a cumulative basis to March 31, 2019, the Company has raised a total of approximately $7.9 million gross and net proceeds under the Aspire Purchase Agreement.

 

 10 

 

APTOSE BIOSCIENCES INC.
Notes to Condensed Consolidated Interim Financial Statements (unaudited)
Three months ended March 31, 2019 and 2018
(Tabular amounts in thousands of United States dollars, except per share amounts)

 

(ii)2017 Share purchase agreement

 

On October 27, 2017, we entered into the 2017 Aspire Purchase Agreement, which provided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $15,500,000 of Common Shares over approximately 30 months. During the year ended December 31, 2017, and pursuant to the terms of the Aspire Purchase Agreement, Aspire Capital purchased 357,143 Common Shares for gross proceeds of $500 thousand ($324 thousand net of cash share issue costs) and we also issued 321,429 Common Shares to Aspire Capital in consideration for entering into the Aspire Purchase Agreement. On a cumulative basis to March 31, 2018, the Company has raised a total of $9.4 million gross proceeds under the Aspire Purchase Agreement, the total amount that was available under the Agreement. On a cumulative basis to December 31, 2018, the Company has raised a total of $15.5 million gross proceeds under the Aspire Purchase Agreement, the total amount that was available under the Agreement.

 

(iii)2018 At-The-Market (“ATM”) Facility

 

On March 28, 2018, the Company entered into an “At-The-Market” Facility (“ATM”) equity distribution agreement with Cantor Fitzgerald acting as sole agent. Under the terms of this facility, the Company may, from time to time, sell shares of our common stock having an aggregate offering value of up to $30 million through Cantor Fitzgerald on the Nasdaq Capital Market. During the three months ended March 31, 2019, the Company issued 77,349 shares under this ATM equity facility at an average price of $2.37 for gross proceeds of $183 thousand ($178 thousand net of share issue costs). Costs associated with the proceeds consisted of a 3% cash commission. On a cumulative basis to March 31, 2019, the Company has raised a total of $11.2 million gross proceeds ($10.9 million net of share issue costs) under the ATM Facility.

 

(b)Loss per share:

 

Loss per common share is calculated using the weighted average number of common shares outstanding and is presented in the table below:

 

    Three months ended
March 31, 2019
    Three months ended
March 31, 2018
 
           
Net loss  $(5,506)  $(6,814)
Weighted-average common shares – basic and diluted   39,846    29,042 
Net loss per share – basic and diluted  $(0.14)  $(0.23)

 

The effect of any potential exercise of the Company’s stock options outstanding during the three month periods ended March 31, 2019 and March 31, 2018 has been excluded from the calculation of diluted loss per common share as it would be anti-dilutive.

 

10.Stock-based compensation:

 

(a)Stock options

 

Under the Company’s stock option plan, options, rights and other entitlements may be granted to directors, officers, employees and consultants of the Company to purchase up to a maximum of 17.5% of the total number of outstanding common shares, estimated at 7.3 million options, rights and other entitlements as at March 31, 2019. Options are granted at the fair market value of the common shares on the closing trading price of the Company’s stock on the day prior to the grant if the grant is made during the trading day or the closing trading price on the day of grant if the grant is issued after markets have closed. Options vest at various rates (immediate to four years) and have a term of 10 years.

 

 11 

 

APTOSE BIOSCIENCES INC.
Notes to Condensed Consolidated Interim Financial Statements (unaudited)
Three months ended March 31, 2019 and 2018
(Tabular amounts in thousands of United States dollars, except per share amounts)

 

Stock option transactions for the three months ended March 31, 2019, are summarized as follows:

 

Option numbers are in (000’s)               
         Three months ended
March 31, 2019
     Weighted
average
 
    Options    

Weighted

average
exercise price

    remaining
contractual
life (years)
 
                
Outstanding, beginning of period   4,489   $3.11      
Granted   1,414    1.91      
Forfeited   (119)   2.67      
Outstanding, end of the period   5,784    2.86    8.1 
Exercisable, end of the period   3,237    3.33    7.2 
Vested and expected to vest, end of period   5,400    2.90    8.0 

 

As of March 31, 2019, there was $2.19 million of total unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over an estimated weighted-average period of 1.71 years.

 

The following table presents the weighted average assumptions that were used in the Black-Scholes option pricing model to determine the fair value of stock options granted during the period, and the resultant weighted average fair values:

 

    Three months ended
March 31, 2019
    Three months ended
March 31, 2018
 
           
Risk-free interest rate   2.41%   2.39%
Expected dividend yield        
Expected volatility   84.0%   93.9%
Expected life of options (in years)   5    5 
Grant date fair value   $1.29   $2.14 

 

The Company uses historical data to estimate the expected dividend yield and expected volatility of its common shares in determining the fair value of stock options. The expected life of the options represents the estimated length of time the options are expected to remain outstanding.

 

Stock options granted by the Company during the three months ended March 31, 2019, vest 50% after one year and 16.67% on each of the next three anniversaries, except for 335,000 options which vest 100% after one year.

 

Stock options granted by the Company during the three months ended March 31, 2018, vest 50% after one year and 16.67% on each of the next three anniversaries, except for 91,000 options which vest 50% after one year and 25% on each of the next two anniversaries and 850,000 options which vested immediately on the grant date.

 

The Company recorded share-based payment expense related to stock options as follows:

 

    Three months ended
March 31, 2019
    Three months ended
March 31, 2018
 
           
Research and development  $118   $367 
General and administrative   544    1,861 
Total  $662   $2,228 

 

 12 

 

APTOSE BIOSCIENCES INC.
Notes to Condensed Consolidated Interim Financial Statements (unaudited)
Three months ended March 31, 2019 and 2018
(Tabular amounts in thousands of United States dollars, except per share amounts)

 

11.Related party transactions:

 

The Company uses Moores Cancer Center at the University of California San Diego (UCSD) to provide pharmacology lab services to the Company. Dr. Stephen Howell is the Acting Chief Medical Officer of Aptose and is also a Professor of Medicine at UCSD and oversees the laboratory work. The work is completed under the terms of research services agreements executed in March 2015 and has been extended annually. In March 2019, the Board approved an extension of this agreement for twelve months for services up to $300,000. These transactions are in the normal course of business and are measured at the amount of consideration established and agreed to by the related parties.

 

During the three months ended March 31, 2019, the Company recorded $62 thousand (2018 – $61 thousand) in research and development expenses related to the agreement.

 

12.Subsequent events

 

Subsequent to the quarter end, the Company issued 2,242,478 shares under the 2018 Aspire Purchase Agreement at an average price of $1.7837 per share for gross and net proceeds of $4 million.

 

 

 

 

 

 

13

 

 

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This discussion contains forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that impact our business. In particular, we encourage you to review the risks and uncertainties described in “Risk Factors” in Part II, Item 1A in this Quarterly Report on Form 10-Q. These risks and uncertainties could cause actual results to differ materially from those projected or implied by our forward-looking statements contained in this report. These forward-looking statements are made as of the date of this management’s discussion and analysis, and we do not intend, and do not assume any obligation, to update these forward-looking statements, except as required by law.

 

The following discussion should be read in conjunction with our condensed consolidated interim financial statements and accompanying notes contained in this Quarterly Report on Form 10-Q and our audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

All amounts are expressed in United States dollars unless otherwise stated.

 

OVERVIEW

 

Aptose Biosciences is a science-driven biotechnology company advancing first-in-class targeted agents to treat life-threatening cancers, such as acute myeloid leukemia (“AML”), high-risk myelodysplastic syndromes (“MDS”), chronic lymphocytic leukemia (“CLL”) and other hematologic malignancies. Based on insights into the genetic and epigenetic profiles of certain cancers and patient populations, Aptose is building a pipeline of novel oncology therapies directed at dysregulated processes and signaling pathways. Aptose is developing targeted medicines for precision treatment of these diseases, based on the specific gene expression signature of a patient’s malignancy. In the treatment of cancer, this strategy is intended to optimize efficacy and quality of life by minimizing the cytotoxic side effects associated with conventional therapies. We currently have in development two molecules: CG026806 (“CG-806”) and APTO-253, both being evaluated for safety, tolerance, pharmacokinetics and signals of efficacy in Phase 1 clinical trials. Each molecule is described below:

 

CG-806 is an orally administered, highly potent first-in-class pan-FLT3/pan-BTK inhibitor. Development of CG-806 is intended for the treatment of patients having B-cell malignancies including CLL, small lymphocytic lymphoma (“SLL”) and certain non-Hodgkin’s lymphomas (“NHL”) that are resistant/refractory/intolerant to other therapies, as well as for patients with relapsed/refractory Acute Myeloid Leukemia (“R/R AML”), including the emerging populations resistant to FMS-like tyrosine kinase 3 (“FLT3”) inhibitors. CG-806 is a highly potent, reversible, non-covalent inhibitor of the wild type and mutant forms of the Bruton’s tyrosine kinase (“BTK”) enzyme. Overexpression of BTK drives certain B cell malignancies, and treatment of such B cell malignancies with covalent BTK inhibitors that target the cysteine residue in the active site of BTK have heralded dramatic responses in many patients, but also can lead to drug resistance via mutation of the cysteine amino acid residue to a serine residue (“BTK-C481S mutant”) thus rendering such covalent inhibitors less effective. CG-806 targets the ATP-binding pocket of BTK through a reversible, non-covalent mechanism, thereby allowing CG-806 to retain low nanomolar potency against the BTK-C481S mutant enzyme. Simultaneously, CG-806 inhibits aberrant intracellular BTK signaling and a handful of other oncogenic signaling pathways, thereby allowing CG-806 to exert potent and direct killing of the cancer cells without targeting pathways often associated with toxicities. Thus, CG-806 may serve as a novel therapeutic agent to treat B cell malignancy patients that are refractory, resistant or intolerant to covalent BTK inhibitors and other non-covalent BTK inhibitors currently in development. In addition to potent inhibition of wild type and mutant forms of the BTK enzyme, CG-806 exhibits high potency (picomolar to low nanomolar IC50 values) for inhibition of the FLT3 cell surface receptor with the Internal Tandem Duplication (“FLT3-ITD”) and significant potency against all other mutant forms of FLT3. Because of the potency of CG-806 against the FLT3 receptor, it may become an effective therapy for AML patients, including the subset of patients having the FLT3-ITD, which occurs in approximately 30% of patients with AML and is associated with poor prognosis. As noted above, CG-806 also suppresses the initiation and intracellular transmission of other oncogenic signaling pathways which are operative in AML, thereby potentially allowing the agent to become a broadly active and important therapeutic option for the difficult-to-treat AML patient population and hopefully slowing the pace of drug resistance in patients.

 

14

 

 

APTO-253 is our Phase 1-stage small molecule therapeutic agent that inhibits expression of the MYC oncogene without causing general myelosuppression of the bone marrow. The MYC oncogene is overexpressed in hematologic cancers, including AML and certain B cell malignancies. MYC is a transcription factor that regulates cell growth, proliferation, differentiation and apoptosis, and overexpression amplifies new sets of genes to promote survival of cancer cells. APTO-253 down regulates expression of the MYC oncogene in AML cells and depletes those cells of the MYC oncoprotein, leading to apoptotic cell death in AML cells. Indeed, the first AML patient administered the lowest dose level (20 mg/m2) of APTO-253 experienced a significant reduction in the expression of MYC in blood cells (“PBMCs”) during the 28-day cycle of therapy, and no drug-related adverse events were noted. Thus, APTO-253 may serve as a safe and effective MYC inhibitor for AML that combines well with other agents and does not significantly impact the normal bone marrow.

 

PROGRAM UPDATES

 

CG-806

 

On March 25, 2019, we announced that the U.S Food and Drug Administration (“FDA”) granted Aptose Investigational New Drug (“IND”) allowance to initiate its Phase 1 clinical trial for CG-806. The Phase 1 clinical trial is a multicenter, open label, dose-escalation study with expansions to assess the safety, tolerability, PK, and preliminary efficacy of CG-806 in patients with CLL, SLL or NHL. The initial goal of the trial is to evaluate safety, tolerability and pharmacokinetics of CG-806 in these patient populations and to observe for signals of efficacy. CG-806 in gelatin capsules will be dosed every 12 hours during a 28-day cycle, and the starting dose will be 150mg. Pending the collection of predictive pharmacokinetic data in humans, Aptose plans to seek allowance from the FDA to move CG-806 into the AML/MDS patient population in a separate Phase I trial.

 

In May 2018, we paid $2.0 million in cash and obtained the rights to CG-806, for all fields of use, in all territories outside of the Republic of Korea and China, by exercising an option we obtained through a June 2016 option-license agreement with South Korean company CrystalGenomics, Inc. (“CG”), granting us an exclusive option to research, develop and commercialize (collectively the “Rights”) CG-806.

 

In June 2018, we entered into a separate license agreement with CG for Aptose to gain a license for Rights to CG-806 in the People’s Republic of China, Hong Kong and Macau (the “China Rights”). Under the license agreement, Aptose made an upfront payment to CG of $3.0 million for the China Rights. CG is eligible for payments upon the achievement of developmental, regulatory and commercial-based milestones, as well as single-digit royalties on product sales in China. Aptose now owns worldwide Rights to CG-806, including an issued patent in China but excluding any Rights in Korea.

 

We created a scalable chemical synthetic route for the manufacture of CG-806 drug substance and have scaled the manufacture of API (active pharmaceutical ingredient, or drug substance) to kg levels. We manufactured and delivered a batch of API which was used for Dose Range Finding Studies that were performed and completed in early January 2018. We completed in March 2018 the manufacture of a multi-kg batch of Good Laboratory Practice (“GLP”) grade API and then formulated that API into a drug product for use in IND-enabling GLP toxicology studies. We also completed the manufacture of a multi-kg batch of API under Good Manufacturing Product (“GMP”) conditions as our API supply for our first-in-human clinical trials, and we manufactured under GMP conditions two dosage strengths of capsules to serve as our clinical supply in those human studies. Although we have been able to manufacture API and capsules to support clinical supplies under GMP conditions, research and development funds are being utilized to support further exploratory formulation studies in an ongoing effort to craft a superior formulation for CG-806. During the year ended December 31, 2018, we completed the in-life dosing phase of the IND-enabling GLP toxicology studies and received audited reports for such studies early in fiscal 2019.

 

15

 

 

We have continued to augment our patent protection on CG-806. On September 12, 2017, we announced that we received a notice from the United States Patent and Trademark Office (“USPTO”) stating that our U.S. Patent Application had been issued as a patent. The patent claims numerous compounds, including the CG-806 compound, pharmaceutical compositions comprising the CG-806 compound, and methods of treating various diseases caused by abnormal or uncontrolled activation of protein kinases. On July 9, 2018, we received a notice from the Japan Patent Office stating that our Japan Patent Application has been issued as a patent. The patent claims the CG-806 compound, pharmaceutical compositions comprising the CG-806 compound, and uses for treating various diseases caused by abnormal or uncontrolled activation of protein kinases. On September 27, 2018, we announced that the European Patent Office had issued a patent. The granted patent claims the CG-806 compound, pharmaceutical compositions comprising the CG-806 compound, and uses for treating diseases caused by abnormal or uncontrolled activation of protein kinases, such as cancer. This European patent will be nationalized in, and cover, approximately forty European countries including the United Kingdom, France, Germany, Italy, the Netherlands and Spain. The patent is expected to provide protection until the end of 2033. Finally, on March 4, 2019, we announced that the Australian Patent Office had issued a patent that claims various compounds, including the CG-806 compound, pharmaceutical compositions comprising the CG-806 compound, and uses for the treatment of various diseases, such as lymphoma or leukemia. The patent is expected to provide protection until December 2033.

 

We have completed several studies that demonstrate the highly differentiated profile of CG-806. Key studies that have been presented at scientific forums are as follows:

 

On April 15, 2018, at the 2018 Annual Meeting of the American Association for Cancer Research (AACR), we presented with the OHSU Knight Cancer Institute preclinical data demonstrating that CG-806, a pan-FLT3/pan-BTK inhibitor, demonstrates broader activity and superior potency to other FLT3 and BTK inhibitors against primary bone marrow samples from patients with hematologic malignancies. We also presented preclinical data demonstrating CG-806 targets multiple pathways to kill diverse subtypes of AML and B-cell malignancies in vitro.

 

On June 15, 2018, at the 23rd Congress of the European Hematology Association (EHA), we presented, during a poster presentation, preclinical data demonstrating CG-806 unique binding to wild type and C481S mutant BTK. Further, we presented that CG-806 suppresses the BCR, AKT/PI3K, ERK and NFkB signaling pathways and exerts broader and far greater potency of direct cancer cell killing that Ibrutinib against malignant bone marrow cells from patients with CLL, ALL and a host of other hematologic malignancies.

 

On December 3, 2018, we announced two separate poster presentations at the American Society of Hematology (ASH) Annual Meeting being held on December 1-4, 2018. The OHSU Knight Cancer Institute and Aptose presented data in one poster and the team at The University of Texas MD Anderson Cancer Center (“MDACC”) presented data in a separate poster. These presentations highlighted several key findings. First, in collaboration with the MDACC, orally administered CG-806 demonstrated efficacy in a patient derived xenograft (“PDX”) study in which the bone marrow cells from a patient with AML having dual ITD and D835 mutations in FLT3 were implanted into a mouse. The dual FLT3 mutant form of AML represents a very difficult to treat population that has shown resistance to other FLT3 inhibitors, and data from the PDX model suggest that CG-806 may be useful in treating such patients. Secondly, Aptose presented high level data from preclinical GLP toxicology studies that demonstrate orally administered CG806 is a well-tolerated targeted molecule. Finally, in collaboration with the OHSU Knight Cancer Center, studies of CG-806 on 124 samples of freshly isolated bone marrow from CLL patients demonstrated both broader and greater cell killing potency for CG-806 than Ibrutinib.

 

On April 1, 2019, at the 2019 Annual Meeting of the American Association for Cancer Research (AACR), Aptose, along with our collaborators at OHSU Knight Cancer Institute, presented data highlighting CG-806 was more potent than other FLT3 inhibitors including midostaurin, sorafenib, sunitinib, dovitinib, quizartinib, crenolanib and gilteritinib. CG-806 was equally potent against cells from patients in the adverse, intermediate and favorable risk groups (2017 ELN risk stratification), and cells from patients with relapsed or transformed AML (World Health Organization classification) were as sensitive as those from patients with de novo AML. The data demonstrated potency in primary AML patient samples across all AML subgroups including relapsed/refractory/transformed AML and those with genetic abnormalities related to poor prognosis. While patient samples with FLT3-ITD mutations were expected to have greater sensitivity to CG-806, the most surprising correlation was the sensitivity of patient samples with IDH1 R132 mutations. The enhanced sensitivity of IDH-1 mutant AML to CG-806 warrants investigation in the clinical setting. Moreover, in studies of CG-806 on AML patient bone marrow samples, we demonstrated that mutations in p53, ASXL1 and NPM1  do not hinder the potency of CG-806.

 

16

 

 

CG-806 is being developed with the intent to deliver the agent as an oral therapeutic and to develop it for relapsed and refractory (R/R) AML/ MDS and for appropriate B cell malignancies (including CLL, SLL and NHL). In collaboration with the FDA, we were granted IND allowance to evaluate CG-806 as part of a Phase 1 program in patients with B cell malignancies, and we now are finalizing our strategy to perform the clinical studies in patients with AML/MDS. As clinical trials are lengthy, complex, costly, and uncertain processes, an estimate of the future costs is not reasonable at this time.

 

On December 26, 2017, we announced that the FDA granted orphan drug designation to CG-806 for the treatment of patients with AML. Orphan drug designation is granted by the FDA to encourage companies to develop therapies for the treatment of diseases that affect fewer than 200,000 individuals in the United States. Orphan drug status provides research and development tax credits, an opportunity to obtain grant funding, exemption from FDA application fees and other benefits. If CG-806 is approved to treat AML, the orphan drug designation provides us with seven years of marketing exclusivity.

 

APTO-253

 

Phase IB Trial

 

APTO-253, a small molecule inhibitor of MYC gene expression, is being evaluated by Aptose in a Phase Ib clinical trial in patients with relapsed / refractory (“R/R”) hematologic malignancies, particularly R/R-AML and high-risk MDS. The Phase Ib, multicenter, open-label, dose-escalation clinical trial of APTO-253 is designed to assess the safety, tolerability, pharmacokinetics and pharmacodynamic responses and efficacy of APTO-253 as a single agent and determine the recommended Phase II dose. APTO-253 will be administered once weekly, over a 28-day cycle. The dose escalation stage of the study could potentially enroll up to 20 patients with R/R-AML or high-risk MDS. The study is designed to then transition, as appropriate, to single-agent expansion cohorts in R/R-AML and/or high-risk MDS.

 

We initiated our first site in September 2018 and it is important to note 1) only one patient is required for each of the two lowest dose cohorts in this study, 2) that R/R-AML patients are acutely ill, and 3) that a DLT  in the first or second cohort could require expansion of the cohort to six patients. For these reasons, Aptose is exercising a highly judicious selection process for patients in the lowest two dose cohorts. On November 28, 2018 we announced that we dosed the first patient in the re-initiation of the Phase 1b Clinical Study of APTO-253. In January 2019, we provided data on the Aptose website that we observed meaningful reductions in MYC expression in the PBMC from the first patient dosed with the new formulation of APTO-253. Efforts continue to activate additional clinical sites and recruit AML/MDS patients with high performance status.

 

We are continuing to manufacture additional drug substance and drug product for use in the ongoing trial. We have completed a second 2kg GMP batch of drug substance and plan shortly to manufacture an additional batch of GMP drug product.

 

We expect to initiate studies to investigate additional drug delivery methods for APTO-253 and to initiate additional non-clinical studies for solid tumor and hematologic cancer development. As preparing, submitting, and advancing applications for regulatory approval, developing drugs and drug product and clinical trials are sometimes complex, costly, and time-consuming processes, an estimate of the future costs is not reasonable at this time.

 

Clinical Hold – 2015, Resolved

 

APTO-253, a small molecule MYC inhibitor, was being evaluated by Aptose in a Phase Ib clinical trial in patients with R/R hematologic malignancies, particularly R/R-AML and high-risk MDS before being placed on clinical hold by the FDA in November 2015. The Phase Ib trial of APTO-253 was placed on clinical hold as a consequence of an event that occurred at a clinical site with the infusion procedure. Ultimately, a root cause investigation determined that the event resulted from chemistry and manufacturing based issues, all of which were incorporated into a Chemistry, Manufacturing and Control amendment to the IND application. Effective June 29, 2018, the clinical hold was lifted and the APTO-253 clinical trial was re-initiated.

 

17

 

 

The Phase Ib trial was placed on clinical hold in order to solve a chemistry-based formulation issue, and the chemistry of the API and the formulation had undergone minor modifications to deliver a stable and soluble drug product for return to the clinical setting. In December 2016, we had successfully manufactured multiple non-GMP batches of a new drug product formulation for APTO-253; however, a batch that was the intended clinical supply encountered an unanticipated mishap during the filling process that compromised the stability of that batch of drug product. We conducted formal root cause analyses studies, identified the reason for the drug product stability failure, and established a corrective and prevention action plan for the manufacture of future batches of drug product. During the first quarter of 2018, we manufactured a new GMP clinical supply of drug product and performed studies required to demonstrate the fitness of the drug product for clinical usage. The release specifications for the new clinical supply were met, and we presented the findings to the FDA in the second quarter of 2018. On June 28, 2018, the FDA notified us that it had lifted the clinical hold on APTO-253.

 

We then completed all tasks required to return APTO-253 to the Phase Ib clinical trial.

 

Preclinical data presented at scientific forums are as follows:

 

·On April 17, 2018, at the 2018 Annual Meeting of the American Association for Cancer Research (AACR), we presented preclinical data demonstrating that APTO-253 is a new addition to the repertoire of drugs that can exploit DNA BRCA1/2 deficiency, broadening the potential applicability of APTO-253 towards solid cancer indications.

 

·On June 4, 2018, we announced that preclinical data elucidating the mechanism of action of APTO-253 were published in two separate articles in the June 2018 issue (Volume 17, Number 6) of Molecular Cancer Therapeutics, a peer-reviewed journal of the American Associate for Cancer Research. The most important finding disclosed in the published articles is the ability of the APTO-253 small molecule to bind to and stabilize a G-quadruplex DNA motif found in the promoter regulatory region of the MYC oncogene and to inhibit expression of the MYC gene, thereby depleting the cells of the MYC oncoprotein and leading to cancer cell death. These findings make APTO-253 the only clinical stage molecule that can directly target the MYC gene and inhibit its expression.

 

·On April 1, 2019, at the 2019 Annual Meeting of the American Association for Cancer Research (AACR), Aptose, we presented in vitro studies that further define the mechanism of action of APTO-253. Researchers found that APTO-253 targets a G-quadruplex motif in the P1/P2 promoter region of the MYC gene and inhibits MYC gene expression to induce apoptosis, resulting in its ability to potently kill hematologic malignant cell lines and primary samples from AML and CLL patients. In this study, researchers performed long-term in vitro studies to determine if and how cells might develop resistance to APTO-253. MYC driven Raji cells required three years in increasing concentrations of APTO-253 in order to adopt multiple modifications and develop high level resistance to APTO-253. These modifications include up-regulation of the ABCG2 transporter, acquisition of a more stable MYC protein lacking the conserved core sequence of MYC Box III generated by deletion of an internal region of the MYC gene exon 2, and utilization of alternate P3 promoter not inhibited by G4 binding and stabilization.

 

Multi-Targeting Epigenetic Program

 

In November 2015, we announced an exclusive drug discovery partnership with Laxai Avanti Life Sciences (“LALS”) for the development of next generation epigenetic-based therapies. Under the agreement, LALS was responsible for optimizing candidates derived from our collaboration with the Moffitt Cancer Center, which was terminated in January 2017, for the development of dual-targeting single agent inhibitors for the treatment of hematologic and solid tumor cancers and we would own global rights to all newly discovered candidates characterized and optimized under the collaboration, including all generated intellectual property. As of November 2016, LALS and we had generated novel compounds that inhibit both the bromodomain proteins and oncogenic kinases, while improving pharmaceutical properties that could serve as a basis for further optimization towards a lead preclinical candidate. However, due to a prioritization of development efforts, LALS and we suspended work on the program in January 2017, and the collaboration with LALS was terminated. However, the program delivered novel intellectual property and compelling hit molecules for further optimization.

 

18

 

 

On March 7, 2018, we entered into an exclusive global license agreement with Ohm Oncology (“OHM”), an affiliate of LALS that was formed in 2016 to advance the clinical development of compelling molecules derived from the LALS initiative, for the development, manufacture and commercialization of APL-581, as well as related molecules from our dual bromodomain and extra-terminal domain motif protein and kinase inhibitor program. Under the agreement, we will retain reacquisition rights to certain molecules, while OHM/LALS will have the rights to develop and sublicense all other molecules. We have received two separate upfront cash payments and are eligible to receive up to $125 million of additional payments based on the achievement of certain development, regulatory and sales milestones, as well as significant royalties on future sales generated from the program, if any.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Since our inception, we have financed our operations and technology acquisitions primarily from equity financing, proceeds from the exercise of warrants and stock options, and interest income on funds held for future investment.

 

The following table presents our cash and cash equivalents, investments and working capital as at March 31, 2019 and December 31, 2018.

 

(in thousands) 

Balances at

March 31, 2019

 

Balances at

December 31, 2018

Cash and cash equivalents  $16,581   $15,299 
Investments   449    440 
Total  $17,030   $15,739 
           
Working capital  $14,687   $13,697 

 

Working capital reflects cash, cash equivalents, investments and prepaid expenses and other current assets less current liabilities. Current liabilities of $2.977 million as at March 31, 2019 include approximately $485 thousand related to the current portion of the Company’s lease liability. There is no comparable amount in current liabilities of $2.789 million as at December 31, 2018. See “Critical Accounting Policies” below.

 

We do not expect to generate positive cash flow from operations for the foreseeable future due to additional research and development costs, including costs related to drug discovery, preclinical testing, clinical trials, and manufacturing, as well as operating expenses associated with supporting these activities. It is expected that negative cash flow will continue until such time, if ever, that we receive regulatory approval to commercialize any of our products under development and/or royalty or milestone revenue from any such products exceeds expenses.

 

Cash flows:

 

The following table presents a summary of our cash flows for the three months ended March 31, 2019 and 2018:

 

   For the Three Months Ended,
(in thousands)  March 31, 2019  March 31, 2018
       
Net cash provided by (used in):          
Operating activities  $(4,874)  $(4,054)
Investing activities   (24)   (24)
Financing activities   6,178    8,855 
Effect of exchange rates changes on cash and cash equivalents   2    -   
Net increase in cash and cash equivalents  $1,282   $4,777 

 

We are an early stage development company and we currently do not earn any significant revenues from our drug candidates. The continuation of our research and development activities and the commercialization of the targeted therapeutic products are dependent upon our ability to successfully finance and complete our research and development programs through a combination of equity financing and payments from strategic partners. We have no current sources of significant payments from strategic partners.

 

19

 

 

In managing our liquidity risk, we have considered our available cash and cash equivalents and investments as at March 31, 2019. We have also considered our ability to continue to raise funds in 2019 through the ATM Facility with Cantor Fitzgerald and through the 2018 Purchase Agreement with Aspire Capital, each of which is described further below, in assessing whether we will have sufficient resources to fund research and development operations through to at least the twelve-month period ending from the date of this report.

 

At-The-Market Facility

 

On March 27, 2018, we entered into an at-the-market equity facility (“ATM Facility”) with Cantor Fitzgerald & Co (“Cantor Fitzgerald”), acting as sole agent. Under the terms of this facility, we may, from time to time, sell our Common Shares having an aggregate offering value of up to $30 million through Cantor Fitzgerald. We determine, at our sole discretion, the timing and number of shares to be sold under the ATM Facility.

 

During the year ended December 31, 2018, we issued 4,085,615 Common Shares under the ATM Facility at an average price of $2.71 for gross proceeds of approximately $11.1 million ($10.7 million net of share issue costs). In the three-month period ended March 31, 2019, we issued an additional 77,349 Common Shares under this facility at an average price of $2.37 for gross proceeds of approximately $183.0 thousand. As at the filing date of this Quarterly Report on Form 10-Q , there is approximately $18.7 million available on this facility.

 

Common Shares Purchase Agreements

 

In October 2017, we entered into a Common Shares Purchase Agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”) to sell up to $15.5 million of Common Shares to Aspire Capital. Under the terms of the Purchase Agreement, in October 2017, Aspire Capital made an initial purchase of 357,143 Common Shares at a price of $1.40 per share, representing gross proceeds of approximately $500.0 thousand ($324.0 thousand net of share issue costs). We also issued 321,429 Common Shares at a value of $1.40 per share to Aspire Capital as consideration for Aspire Capital entering into the Purchase Agreement. During the year ended December 31, 2018, we issued 5,231,953 Common Shares under the Purchase Agreement at an average price of $2.77 for gross proceeds of approximately $15 million.

 

On a cumulative basis, we raised a total of $15.5 million under the Purchase Agreement, the total amount that was available under the Purchase Agreement.

 

In May 2018, we entered into a second Common Share Purchase Agreement (the “2018 Purchase Agreement”) with Aspire Capital to sell up to $20.0 million of Common Shares to Aspire Capital. Under the terms of the 2018 Purchase Agreement, Aspire Capital has committed to purchase up to an aggregate of $20.0 million of our Common Shares, at our request from time to time during a 30-month period beginning on the effective date of a registration statement related to the transaction and at prices based on the market price at the time of each sale. The registration statement was made effective on June 8, 2018. Under the terms of the 2018 Purchase Agreement, we issued 170,261 Common Shares at a value of $3.524 per share to Aspire Capital as consideration for Aspire Capital entering into the 2018 Purchase Agreement, and during the year ended December 31, 2018, we issued 907,547 Common Shares at an average price of $2.12 for gross proceeds of approximately $1.9 million. In the three months ended March 31, 2019, we issued 3,259,955 shares at an average price of $1.84 per share for gross proceeds of $6.0 million. Subsequent to March 31, 2019, we issued 2,242,478 Common Shares at a price of approximately $1.78 per share for gross and net proceeds of $4.0 million. As of May 2, 2019, the Company has issued 6,409,980, the maximum number of shares issuable under this facility without shareholder approval and on May 7, 2019 the agreement was terminated.

 

On May 7, 2018 we entered into a new Common Share Purchase Agreement (the “Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”) where Aspire Capital has committed to purchase up to $20MM of common shares of Aptose, at Aptose’s request from time to time, for up to 30 months.  The Agreement is subject to approval by the Toronto Stock Exchange (“TSX”) and NASDAQ, limits the amount of Aptose’s common shares that Aspire can own at one time to 9.99% of the issued and outstanding common shares of the Company, and limits the maximum number of common shares that can be issued under the Agreement to 19.99% of the Company’s outstanding common shares on the date of the Agreement unless shareholder approval is obtained or the shares issued to date once the 19.99% threshold is reached have an average purchase price equal to or exceeding $2.10.

 

Upon receipt of the TSX and NASDAQ approval, as consideration for Aspire Capital’s obligation under the Agreement Aptose will issue 171,428 common shares to Aspire Capital as a commitment fee.

 

We will need additional cash in order to execute our research and development plans for our CG-806 and APTO-253 programs and associated general and administrative overhead costs. The Company will use the most efficient source of capital available to it which may include funds available from the ATM Facility.

 

Contractual Obligations

 

During the three-month period ended March 31, 2019, we entered into an operating lease agreement to renew our existing laboratory space for a three-year period. Minimum lease payments are as follows: $61 thousand for the remaining 9 months of 2019, $84 thousand for the year ended December 31, 2020; $86 thousand for the year ended December 31, 2021 and $14 thousand for the year ended December 31, 2022. These lease payments, along with our lease payments for our other operating leases, have been recorded as a right-of-use asset and lease liability on the statement of financial position. See “Critical Accounting Policies” below.

 

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Other than the above, there were no material changes to our contractual obligations and commitments described under Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which can be found on EDGAR at www.sec.gov/edgar.shtml and on SEDAR at www.sedar.com.

 

RESULTS OF OPERATIONS

 

A summary of the results of operations for the three month period ended March 31, 2019 and 2018 is presented below:

 

   Three months ended March 31,
(in thousands)  2019  2018
       
Revenues  $-     $-   
Research and development expenses   3,340    3,140 
General and administrative expenses   2,260    3,702 
Total other income   94    28 
Net loss   (5,506)   (6,814)
Other comprehensive gain/( loss)   9    (2)
Total comprehensive loss   (5,497)   (6,816)
Basic and diluted loss per common share   (0.14)  $(0.23)

 

The net loss for the three-month period ended March 31, 2019 decreased by $1.3 million to $5.5 million as compared with $6.8 million for the comparable period primarily as a result of a decrease of $1.6 million lower stock-based compensation in the current period, higher professional fees related to regulatory filings in the comparable period in support of financing activities and offset by higher operational costs (such as rent, salaries and travel) associated with having two molecules in clinical development.

 

Research and Development

 

The research and development expenses for the three-month period ended March 31, 2019 and 2018 are as follows:

 

   Three months ended March 31,
(in thousands)  2019  2018
       
Program costs – CG-806  $1,386   $1,354 
Program costs – APTO-253   1,128    921 
Personnel expenses   699    489 
Stock-based compensation   118    367 
Depreciation of equipment   9    9 
    3,340    3,140 

 

Research and development expenses of $3.3 million for the three-month period ended March 31, 2019 were comparable with $3.1 million for the comparative period. Changes to the components of our research and development expenses presented in the table above are primarily as a result of the following events:

 

·In the three-month period ended March 31, 2019, program costs for our CG-806 consisted mostly of costs to complete the preclinical studies and prepare regulatory filings in support of an IND filing, and the manufacturing of drug product for the Phase 1clinical trial. In the comparative period, expenses reflected the completion of two dose range finding studies and the manufacturing of a batch of the drug substance to be used in toxicity studies.
·In the three-month period ended March 31, 2019, program costs for our APTO-253 program consisted mostly of costs related to the Phase 1b clinical trial, and manufacturing costs for a second GMP batch of APTO-253. In the comparative period, the Company completed production of a GMP batch of drug product, and initiated necessary studies to present to the FDA in support of removing the clinical hold.
·An increase in personnel expenses mostly related to additional clinical research staff to support two Phase 1 clinical trials.
·A decrease in stock option compensation related mostly to stock options granted in the three-month period ended March 31, 2018, of which 100,000 with a grant date fair value of $2.03 vested immediately, contributing to higher expenses in that period.

 

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General and Administrative

 

The general and administrative expenses for the three-month periods ending March 31, 2019 and 2018 are as follows:

 

   Three months ended March 31,
(in thousands)  2019  2018
       
General and administrative, excluding non-cash items  $1,696   $1,834 
Stock-based compensation   544    1,861 
Depreciation of equipment   20    7 
   $2,260   $3,702 

 

General and administrative expenses of $2.3 million for the three-month period ended March 31, 2019 decreased by approximately $1.4 million compared with $3.7 million for the comparative period, primarily as a result of the following:

 

·General and administrative expenses, excluding non-cash items, decreased by approximately $138.0 thousand, primarily as a result of higher professional and regulatory fees in support of financing activities in the three months ended March 31, 2018, and offset by higher travel, rent and salaries expense in the current period, in support of increased activities in the business.
·Stock-based compensation decreased by approximately $1.3 million in the three months ended March 31, 2019, compared with the three months ended March 31, 2018 mostly related to approximately 1,059,000 stock options granted to directors, executive officers and general and administrative employees in the three-month period ended March 31, 2018, of which 750,000 with a grant date fair value of $2.03 vested immediately. In the current period, 1,024,000 stock options were granted to directors, executive officers and general and administrative employees with a grant date fair value of $1.29. Stock options granted by the Company during the three months ended March 31, 2019, vest over four years, except for 335,000 options which vest after one year.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

As at March 31, 2019, we are not party to any off-balance sheet arrangements.

 

CRITICAL ACCOUNTING POLICIES

 

Critical Accounting Policies and Estimates

 

We periodically review our financial reporting and disclosure practices and accounting policies to ensure that they provide accurate and transparent information relative to the current economic and business environment. As part of this process, we have reviewed our selection, application and communication of critical accounting policies and financial disclosures. Management has discussed the development and selection of the critical accounting policies with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the disclosure relating to critical accounting policies in this Management’s Discussion and Analysis.

 

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Significant accounting judgments and estimates

 

A “critical accounting policy” is one which is both important to the portrayal of our financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For additional information, please see the discussion of our significant accounting policies in Note 2 to the Financial Statements included in our Annual Report for the fiscal year ended December 31, 2018 on Form 10-K filed with the United States Securities Exchange Commission (the “SEC”) on March 12, 2019. With the exception of the change to our accounting policy noted below as a result of the adoption of Accounting Standards Update, or ASU, No. 2016-02, Leases (Topic 842)  there were no material changes to our critical accounting policies and estimates during the three months ended March 31, 2019.

 

Effective January 1, 2019, the Company adopted Financial Accounting Standards Board, or FASB, standard ASU No. 2016-02, “Leases (Topic 842)”. The Company’s operating leases of tangible property with terms greater than twelve months are recognized as right-of-use assets, which represents the lessee’s right to use, or control the use of, a specified asset for the lease term, and a corresponding lease liability, which represents the lessee’s obligation to make lease payments under a lease, measured on a discounted basis. The Company adopted the new standard using the alternative transition method, which permits a company to use its effective date as the date of initial application without restating comparative period financial statements. Landlord inducements in the form of free rent periods are netted against lease payments to the landlord in measuring right-of-use assets.

 

As a result of adopting Topic 842, we recorded as of January 1, 2019, a right-of-use asset of approximately $1.680 million, and a lease liability of approximately $1.757 million. Upon adoption, landlord inducements of approximately $78 thousand were de-recognized and a corresponding adjustment was made to right-of-use assets. The impact of the adopting Topic 842 on the Statement of Loss and Comprehensive Loss was nominal.

 

Management’s assessment of our ability to continue as a going concern involves making a judgment, at a particular point in time, about inherently uncertain future outcomes and events or conditions. Please see the “Liquidity and Capital Resources” section in this Quarterly Report on Form 10-Q for a discussion of the factors considered by management in arriving at its assessment.

 

Other important accounting policies and estimates made by management are the valuation of contingent liabilities, the valuation of tax accounts, and the assumptions used in determining the valuation of share-based compensation.

 

Updated share information

 

As at May 7, 2019, we had 43,764,509 Common Shares issued and outstanding. In addition, there were 5,778,488 Common Shares issuable upon the exercise of outstanding stock options and upon the vesting of restricted share units.

 

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 this information.

 

ITEM 4. CONTROLS AND PROCEDURES

 

As of the end of our fiscal quarter ended March 31, 2019, an evaluation of the effectiveness of our “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the United States Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out by our management, with the participation of our principal executive officer and principal financial officer. Based upon that evaluation, our principal executive officer and principal financial officer have concluded that as of the end of our fiscal quarter ended March 31, 2019, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officers, to allow timely decisions regarding required disclosure.

 

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It should be noted that while our principal executive officer and principal financial officer believe that our disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors or fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive and financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

 

As of March 31, 2019, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013 Framework). Based on this assessment, our management concluded that, as of March 31, 2019, our internal control over financial reporting was effective based on those criteria. We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during our fiscal quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

 

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PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are not currently party to any material legal proceedings.

 

ITEM 1A. RISK FACTORS

 

Risk Factors and Uncertainties

 

Any of the risks and uncertainties described below could significantly and negatively affect our business, prospects, financial condition, operating results, or credit ratings, which could cause the trading price of our Common Shares to decline. Additional risks and uncertainties not presently known to us, or risks that we currently consider immaterial, could also impair our business operations or financial condition. The following discussion of risk factors contains “forward-looking” statements, as discussed above. 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 12, 2019.

 

Risks Related to our Business

 

We are an early stage development company with no significant revenues from product sales.(*)

 

We are at an early stage of development. In the past five years, none of our potential products has obtained regulatory approval for commercial use and sale in any country and as such, no significant revenues have resulted from product sales. Significant additional investment will be necessary to complete the development of any of our product candidates. Preclinical and clinical trial work must be completed before our potential products could be ready for use within the markets that we have identified. We may fail to develop any products, obtain regulatory approvals, enter clinical trials or commercialize any products. We do not know whether any of our potential product development efforts will prove to be effective, meet applicable regulatory standards, obtain the requisite regulatory approvals, be capable of being manufactured at a reasonable cost or be accepted in the marketplace. We also do not know whether sales, license fees or related royalties will allow us to recoup any investment we make in the commercialization of our products.

 

The product candidates we are currently developing are not expected to be commercially viable for at least the next several years and we may encounter unforeseen difficulties or delays in commercializing our product candidates. In addition, our potential products may not be effective or may cause undesirable side effects.

 

Our product candidates require significant funding to reach regulatory approval assuming positive clinical results. For example, our product candidate APTO-253 began enrollment in a Phase Ib clinical trial in patients with relapsed or refractory AML and high risk MDS and was placed on clinical hold by the FDA following a voluntary suspension of dosing by us. That hold has been lifted, but significant additional funding will be necessary to complete the restarted Phase Ib clinical and, if required, Phase II or Phase III clinical trials. Similarly, we have recently received FDA approval to initiate a Phase 1 clinical trial with our product candidate CG-806 for patients with B-Cell Malignancies. Significant additional capital will be necessary to complete the Phase 1 clinical trial, and if required, Phase II or Phase III clinical trials. Such funding for our product candidates may be difficult, or impossible to raise in the public or private markets or through partnerships. If funding or partnerships are not readily attainable, the development of our product candidates may be significantly delayed or stopped altogether. The announcement of a delay or discontinuation of development would likely have a negative impact on our share price.

 

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We need to raise additional capital.

 

We have an ongoing need to raise additional capital. To obtain the necessary capital, we must rely on some or all of the following: additional share issues, debt issuances (including promissory notes), collaboration agreements or corporate partnerships and grants and tax credits to provide full or partial funding for our activities. Additional funding may not be available on terms that are acceptable to us or in amounts that will enable us to carry out our business plan.

 

Our need for capital may require us to:

 

·engage in equity financings that could result in significant dilution to existing investors;

 

·delay or reduce the scope of or eliminate one or more of our development programs;

 

·obtain funds through arrangements with collaborators or others that may require us to relinquish rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves;

 

·license rights to technologies, product candidates or products on terms that are less favorable to us than might otherwise be available;

 

·considerably reduce operations; or

 

·cease our operations.

 

We have a history of operating losses. We expect to incur net losses and we may never achieve or maintain profitability.

 

We have not been profitable since our inception in 1986. We reported net losses of $28.8 million in the fiscal year ended December 31, 2018, and $11.7 million in the fiscal year ended December 31, 2017, and as of December 31, 2018, we had an accumulated deficit of $276.0 million.

 

We have not generated any significant revenue to date and it is possible that we will never have sufficient product sales revenue (if any) to achieve profitability. We expect to continue to incur losses for at least the next several years as we or our collaborators and licensees pursue clinical trials and research and development efforts. To become profitable, we, either alone or with our collaborators and licensees, must successfully develop, manufacture and market our current product candidates APTO-253 or CG-806 as well as continue to identify, develop, manufacture and market new product candidates. It is possible that we will never have significant product sales revenue or receive royalties on our licensed product candidates. If funding is insufficient at any time in the future, we may not be able to develop or commercialize our products, take advantage of business opportunities or respond to competitive pressures.

 

We currently do not earn any revenues from our drug candidates and are therefore considered to be in the development stage. The continuation of our research and development activities and the commercialization of the targeted therapeutic products are dependent upon our ability to successfully finance and complete our research and development programs through a combination of equity financing and payments from strategic partners. We have no current sources of significant payments from strategic partners.

 

We heavily rely on the capabilities and experience of our key executives and scientists and the loss of any of them could affect our ability to develop our products.

 

The loss of our executive officers could harm our operations and our ability to achieve strategic objectives. While we have employment agreements with our Chief Executive Officer and our Chief Financial Officer, such employment agreements do not guarantee their retention. We also depend on our scientific and clinical collaborators and advisors, all of whom have outside commitments that may limit their availability to us. In addition, we believe that our future success will depend in large part upon our ability to attract and retain highly skilled scientific, managerial, medical, clinical and regulatory personnel, particularly as we expand our activities and seek regulatory approvals for clinical trials. We routinely enter into consulting agreements with our scientific and clinical collaborators and advisors, key opinion leaders and academic partners in the ordinary course of our business. We also enter into contractual agreements with physicians and institutions who will recruit patients into our clinical trials on our behalf in the ordinary course of our business. Notwithstanding these arrangements, we face significant competition for these types of personnel from other companies, research and academic institutions, government entities and other organizations. We cannot predict our success in hiring or retaining the personnel we require for continued growth. The loss of the services of any of our executive officers or other key personnel could potentially harm our business, operating results or financial condition.

 

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Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have a material adverse effect on our business.

 

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include failures to comply with FDA/Health Canada regulations, provide accurate information to the FDA/Health Canada, comply with manufacturing standards we have established, comply with federal, state and provincial health-care fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a substantial impact on our business and results of operations, including the imposition of substantial fines or other sanctions.

 

We have no sales, marketing or distribution experience and would have to invest significant financial and management resources to establish these capabilities.

 

We have no sales, marketing or distribution experience. We currently expect to rely heavily on third parties to launch and market our products, if they are approved. However, if we elect to develop internal sales, distribution and marketing capabilities, we will need to invest significant financial and management resources. For products where we decide to perform sales, marketing and distribution functions ourselves, we could face a number of additional risks, including: 

 

·our inability to attract and build a significant marketing or sales force;

 

·the revenues generated by any particular product not justifying the cost of establishing a marketing or sales force; and

 

·the failure of our direct sales and marketing efforts.

 

If we are unable to develop our own sales, marketing and distribution capabilities, we will not be able to successfully commercialize our products without reliance on third parties.

 

We may expand our business through the acquisition of companies or businesses or by entering into collaborations or by in-licensing product candidates, each of which could disrupt our business and harm our financial condition.

 

We may in the future seek to expand our pipeline and capabilities by acquiring one or more companies or businesses, entering into collaborations or in-licensing one or more product candidates. For example, in June 2016, we entered into a definitive agreement with CG, granting Aptose an exclusive option to research, develop and commercialize CG-806 in all countries of the world except Korea, for all fields of use.

 

Acquisitions, collaborations and in-licenses involve numerous risks, including, but not limited to:

 

·substantial cash expenditures;

 

·technology development risks;

 

·potentially dilutive issuances of equity securities;

 

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·incurrence of debt and contingent liabilities, some of which may be difficult or impossible to identify at the time of acquisition;

 

·difficulties in assimilating the operations of the acquired companies;

 

·potential disputes regarding contingent consideration;

 

·diverting our management’s attention away from other business concerns;

 

·entering markets in which we have limited or no direct experience;

 

·potential loss of our key employees or key employees of the acquired companies or businesses; and

 

·failure of the in-licenses agents or technologies to deliver the desired activities or functions.

 

We have experience in entering collaborations and in-licensing product candidates; however, we cannot provide assurance that any acquisition, collaboration or in-license will result in short-term or long-term benefits to us. We may incorrectly judge the value or worth of an acquired company or business or in-licensed product candidate. In addition, our future success would depend in part on our ability to manage the rapid growth associated with some of these acquisitions, collaborations and in-licenses. We cannot assure you that we would be able to successfully combine our business with that of acquired businesses, manage a collaboration or integrate in-licensed product candidates. Furthermore, the development or expansion of our business may require a substantial capital investment by us.

 

Fluctuations in exchange rates can cause us to incur losses.

 

We may be exposed to fluctuations of the United States dollar against certain other currencies because we hold most of our cash and cash equivalents in United States dollars, while we incur some of our expenses in foreign currencies, primarily the Canadian dollar. Fluctuations in the value of currencies could cause us to incur currency exchange losses, and we do not currently employ a hedging strategy against exchange rate risk. As a result, changes in the exchange rate between the Canadian dollar and the U.S. dollar could materially impact our reported results of operations and distort period to period comparisons. In particular, to the extent that foreign currency-denominated (i.e., non-U.S. dollar) monetary assets do not equal the amount of our foreign currency denominated monetary liabilities, foreign currency gains or losses could arise and materially impact our financial statements. As a result of such foreign currency fluctuations, it could be more difficult to detect underlying trends in our business and results of operations. In addition, to the extent that fluctuations in currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors, the trading price of our Common Shares could be adversely affected.

 

Risks Related to Development, Clinical Testing and Regulatory Approval of Our Product Candidates (*)

 

Clinical trials are long, expensive and uncertain processes and the FDA or Health Canada may ultimately not approve any of our product candidates. We may never develop any commercial drugs or other products that generate revenues.

 

In the past five years, none of our product candidates has received regulatory approval for commercial use and sale in North America. We cannot market a pharmaceutical product in any jurisdiction until it has completed thorough preclinical testing and clinical trials in addition to that jurisdiction’s extensive regulatory approval process. Approval in one country does not assure approval in another country. In general, significant research and development and clinical studies are required to demonstrate the safety and effectiveness of our product candidates before we can submit any regulatory applications.

 

Clinical trials are long, expensive and uncertain processes. Clinical trials may not be commenced or completed on schedule and the FDA or Health Canada or any other regulatory body may not ultimately approve our product candidates for commercial sale. The clinical trials of any of our drug candidates could be unsuccessful, which would prevent us from advancing, commercializing or partnering the drug.

 

Even if the results of our preclinical studies or clinical trials are initially positive, it is possible that we will obtain different results in the later stages of drug development or that results seen in clinical trials will not continue with longer term treatment. Positive results in Phase I clinical trials may not be repeated in larger Phase II or Phase III clinical trials.

 

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Our preclinical studies and clinical trials may not generate positive results that will allow us to move towards the commercial use and sale of our product candidates. Furthermore, negative preclinical or clinical trial results may cause our business, financial condition, or results of operations to be materially adversely affected. For example, our Phase Ib clinical trial of APTO-253 in patients with relapsed or refractory AML and high risk MDS was placed on clinical hold by the FDA in November 2015 and since that time we have encountered manufacturing setbacks which further delayed the return of APTO-253 to the clinic. There can be no assurance that we will have the resources, or that we will decide, to continue the development of APTO-253. Even though the Phase Ib of APTO-253 has restarted , there is a long development path ahead that will take many years to complete and is prone to the risks of failure or delays inherent in drug development. Likewise, our CG-806 product candidate was recently approved for a Phase 1 clinical trial in patients with B-Cell malignancies, and it is expected to undergo many years of testing and regulatory examinations prior to any potential regulatory approvals.

 

Preparing, submitting and advancing applications for regulatory approval is complex, expensive and time intensive and entails significant uncertainty. A commitment of substantial resources to conduct time-consuming research, preclinical studies and clinical trials is required if we are to complete development of our products.

 

Clinical trials of our products require that we identify and enroll a large number of patients with the illness under investigation. We may not be able to enroll a sufficient number of appropriate patients to complete our clinical trials in a timely manner, particularly in smaller indications and indications where there is significant competition for patients. If we experience difficulty in enrolling a sufficient number of patients to conduct our clinical trials, we may need to delay or terminate ongoing clinical trials and will not accomplish objectives material to our success. Delays in planned patient enrollment or lower than anticipated event rates in our current clinical trials or future clinical trials also may result in increased costs, program delays, or both.

 

In addition, unacceptable toxicities or adverse side effects may occur at any time in the course of preclinical studies or human clinical trials or, if any product candidates are successfully developed and approved for marketing, during commercial use of any approved products. The appearance of any unacceptable toxicities or adverse side effects could interrupt, limit, delay or abort the development of any of our product candidates or, if previously approved, necessitate their withdrawal from the market. Furthermore, disease resistance or other unforeseen factors may limit the effectiveness of our potential products.

 

Our failure to develop safe, commercially viable drugs would substantially impair our ability to generate revenues and sustain our operations and would materially harm our business and adversely affect our share price.

 

We may not achieve our projected development goals in the time frames we announce and expect.

 

We set goals for, and make public statements regarding, the expected timing of the accomplishment of objectives material to our success, such as the submission of an Investigational New Drug (“IND”) application, the commencement and completion of clinical trials and the expected costs to develop our product candidates. The actual timing and costs of these events can vary dramatically due to factors within and beyond our control, such as delays or failures in our IND submissions or clinical trials, issues related to the manufacturing of drug supply, uncertainties inherent in the regulatory approval process, market conditions and interest by partners in our product candidates, among other things. We may not make regulatory submissions or receive regulatory approvals as planned; our clinical trials may not be completed; or we may not secure partnerships for any of our product candidates. Any failure to achieve one or more of these milestones as planned would have a material adverse effect on our business, financial condition and results of operations.

 

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Delays in clinical testing could result in delays in commercializing our product candidates and our business may be substantially harmed.

 

We cannot predict whether any clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Our product development costs will increase if we experience delays in clinical testing. Significant clinical trial delays could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before us, which would impair our ability to successfully commercialize our product candidates and may harm our financial condition, results of operations and prospects. The recommencement and completion of clinical trials for our products, including the APTO-253 Phase I clinical trial and Phase I clinical trial for CG-806, may be delayed for a number of reasons, including delays related, but not limited, to:

 

·failure by regulatory authorities to grant permission to proceed or placing the clinical trial on hold;

 

·patients failing to enroll or remain in our trials at the rate we expect;

 

·suspension or termination of clinical trials by regulators for many reasons, including concerns about patient safety or failure of our contract manufacturers to comply with Current Good Manufacturing Practice (“cGMP”) requirements;

 

·any changes to our manufacturing process that may be necessary or desired;

 

·delays or failure to obtain GMP-grade clinical supply from contract manufacturers of our products necessary to conduct clinical trials;

 

·product candidates demonstrating a lack of safety or efficacy during clinical trials;

 

·patients choosing an alternative treatment for the indications for which we are developing any of our product candidates or participating in competing clinical trials;

 

·patients failing to complete clinical trials due to dissatisfaction with the treatment, side effects or other reasons;

 

·reports of clinical testing on similar technologies and products raising safety and/or efficacy concerns;

 

·competing clinical trials and scheduling conflicts with participating clinicians;

 

·clinical investigators not performing our clinical trials on their anticipated schedule, dropping out of a trial, or employing methods not consistent with the clinical trial protocol, regulatory requirements or other third parties not performing data collection and analysis in a timely or accurate manner;

 

·failure of our contract research organizations to satisfy their contractual duties or meet expected deadlines;

 

·inspections of clinical trial sites by regulatory authorities or IRBs , or ethics committees finding regulatory violations that require us to undertake corrective action, resulting in suspension or termination of one or more sites or the imposition of a clinical hold on the entire study;

 

·one or more IRBs or ethics committees rejecting, suspending or terminating the study at an investigational site, precluding enrollment of additional subjects, or withdrawing its approval of the trial; or

 

·failure to reach agreement on acceptable terms with prospective clinical trial sites.

 

Our product development costs will increase if we experience delays in testing or approval or if we need to perform more or larger clinical trials than planned. Additionally, changes in regulatory requirements and policies may occur, and we may need to amend study protocols to reflect these changes. Amendments may require us to resubmit our study protocols to regulatory authorities or IRBs or ethics committees for re-examination, which may impact the cost, timing or successful completion of that trial. Delays or increased product development costs may have a material adverse effect on our business, financial condition and prospects.

 

We rely on contract manufacturers over whom we have limited control. If we are subject to quality, cost or delivery issues with the preclinical and clinical grade materials supplied by contract manufacturers, our business operations could suffer significant harm.

 

We rely on contract manufacturing organizations (“CMOs”), to manufacture our product candidates for some preclinical studies and clinical trials. We rely on CMOs for manufacturing, filling, packaging, storing and shipping of drug product in compliance with cGMP regulations applicable to our products. The FDA ensures the quality of drug products by carefully monitoring drug manufacturers’ compliance with cGMP regulations. The cGMP regulations for drugs contain minimum requirements for the methods, facilities and controls used in manufacturing, processing and packing of a drug product.

 

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We contracted with multiple CMOs for the manufacture of APTO-253 and CG-806 to supply drug supply and then drug product for our clinical trials. The synthesis of CG-806 drug supply is challenging from a scale-up synthetic chemistry perspective. The formulation and manufacture of APTO-253 is a complex process with many variables involved. We pre-qualified CMOs to have the capacity, the systems and the experience to supply CG-806 and APTO-253 for our clinical trials. We have qualified the manufacturing facilities and the FDA has also performed site audits for our selected CMOs. In spite of the efforts to prequalify CMOs, delays and errors may occur, and any such manufacturing failures, delays or compliance issues could cause delays in the completion of our clinical trial programs.

 

There can be no assurances that CMOs will be able to meet our timetable and requirements. We have contracted with alternate suppliers in the event our current CMOs are unable to scale up production, or if our current CMOs otherwise experience any other significant problems in the manufacture of CG-806 and APTO-253. However, it is possible that all third-party manufacturing sources may experience failure or delays and may demand commercially unreasonable terms, which may lead to further delays in the development of our product candidates. Further, contract manufacturers must operate in compliance with cGMP and failure to do so could result in, among other things, the disruption of product supplies. Our dependence upon third parties for the manufacture of our products may adversely affect our profit margins and our ability to develop and deliver products on a timely and competitive basis.

 

If we have difficulty enrolling patients in clinical trials, the completion of the trials may be delayed or cancelled.

 

As our product candidates advance from preclinical testing to clinical testing, and then through progressively larger and more complex clinical trials, we will need to enroll an increasing number of patients that meet our eligibility criteria. There is significant competition for recruiting cancer patients in clinical trials, and we may be unable to enroll the patients we need to complete clinical trials on a timely basis or at all. Certain factors that affect enrollment of patients onto our clinical trials are impacted by external forces that may be beyond our control. Such factors include, but are not limited to, the following:

 

·size and nature of the patient population;

 

·eligibility and exclusion criteria for the trial;

 

·design of the study protocol;

 

·competition with other companies for clinical sites or patients;

 

·the perceived risks and benefits of the product candidate under study;

 

·the patient referral practices of physicians; and

 

·the number, availability, location and accessibility of clinical trial sites.

 

If we are unable to successfully develop companion diagnostics for our therapeutic product candidates, or experience significant delays in doing so, we may not achieve marketing approval or realize the full commercial potential of our therapeutic product candidates.

 

We plan to develop companion diagnostics for our therapeutic product candidates. We expect that, at least in some cases, regulatory authorities may require the development and regulatory approval of a companion diagnostic as a condition to approving our therapeutic product candidates. We have limited experience and capabilities in developing or commercializing diagnostics and plan to rely in large part on third parties to perform these functions. We do not currently have any agreement in place with any third party to develop or commercialize companion diagnostics for any of our therapeutic product candidates.

 

Companion diagnostics are subject to regulation by the FDA, Health Canada and comparable foreign regulatory authorities as medical devices and may require separate regulatory approval or clearance prior to commercialization. If we, or any third parties that we engage to assist us, are unable to successfully develop companion diagnostics for our therapeutic product candidates, or experience delays in doing so, our business may be substantially harmed.

 

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We rely and will continue to rely on third parties to conduct and monitor many of our preclinical studies and our clinical trials, and their failure to perform as required could cause substantial harm to our business.

 

We rely and will continue to rely on third parties to conduct a significant portion of our preclinical and clinical development activities. Preclinical activities include in vivo studies providing access to specific disease models, pharmacology and toxicology studies, and assay development. Clinical development activities include trial design, regulatory submissions, clinical patient recruitment, clinical trial monitoring, clinical data management and analysis, safety monitoring and project management, contract manufacturing and quality assurance. If there is any dispute or disruption in our relationship with third parties, or if they are unable to provide quality services in a timely manner and at a feasible cost, our active development programs will face delays. Further, if any of these third parties fails to perform as we expect or if their work fails to meet regulatory requirements, our testing could be delayed, cancelled or rendered ineffective.

 

Negative results from clinical trials or studies of others and adverse safety events involving the targets of our products may have an adverse impact on our future commercialization efforts.

 

From time to time, studies or clinical trials on various aspects of biopharmaceutical products are conducted by academic researchers, competitors or others. The results of these studies or trials, when published, may have a significant effect on the market for the biopharmaceutical product that is the subject of the study. The publication of negative results of studies or clinical trials or adverse safety events related to our product candidates, or the therapeutic areas in which our product candidates compete, could adversely affect our share price and our ability to finance future development of our product candidates, and our business and financial results could be materially and adversely affected.

 

The design or our execution of clinical trials may not support regulatory approval.

 

The design or execution of a clinical trial can determine whether its results will support regulatory approval and flaws in the design or execution of a clinical trial may not become apparent until the clinical trial is well advanced. In some instances, there can be significant variability in safety or efficacy results between different trials of the same product candidate due to numerous factors, including changes in trial protocols, differences in size and type of the patient populations, adherence to the dosing regimen and other trial protocols and the rate of dropout among clinical trial participants. We do not know whether any Phase II, Phase III or other clinical trials that we may conduct will demonstrate consistent or adequate efficacy and safety to obtain regulatory approval to market our product candidates.

 

Further, the FDA, Health Canada and comparable foreign regulatory authorities have substantial discretion in the approval process and in determining when or whether regulatory approval will be obtained for any of our product candidates. Our product candidates may not be approved even if they achieve their primary endpoints in future Phase III clinical trials or registration trials. The FDA, Health Canada or other regulatory authorities may disagree with our trial design and our interpretation of data from preclinical studies and clinical trials. In addition, any of these regulatory authorities may change requirements for the approval of a product candidate even after reviewing and providing comments or advice on a protocol for a pivotal Phase III clinical trial that has the potential to result in FDA, Health Canada or other agencies’ approval. In addition, any of these regulatory authorities may also approve a product candidate for fewer or more limited indications than we request or may grant approval contingent on the performance of costly post-marketing clinical trials. The FDA, Health Canada or other regulatory authorities may not approve the labeling claims that we believe would be necessary or desirable for the successful commercialization of our product candidates.

 

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As a result of intense competition and technological change in the biotechnical and pharmaceutical industries, the marketplace may not accept our products or product candidates, and we may not be able to compete successfully against other companies in our industry and achieve profitability.

 

Many of our competitors have:

 

·drug products that have already been approved or are in development, and operate large, well-funded research and development programs in the biotechnical and pharmaceutical fields;

 

·substantially greater financial, technical and management resources, stronger intellectual property positions and greater manufacturing, marketing and sales capabilities, areas in which we have limited or no experience; and

 

·significantly greater experience than we do in undertaking preclinical testing and clinical trials of new or improved pharmaceutical products and obtaining required regulatory approvals.

 

Consequently, our competitors may obtain FDA, Health Canada and other regulatory approvals for product candidates sooner and may be more successful in manufacturing and marketing their products than we or our collaborators are.

 

Our competitors’ existing and future products, therapies and technological approaches will compete directly with the products we seek to develop. Current and prospective competing products may be more effective than our existing and future products insofar as they may provide greater therapeutic benefits for a specific problem or may offer easier delivery or comparable performance at a lower cost.

 

For CG-806 and APTO-253 in AML, examples of potential competitors include companies that have developed, approved or are currently developing inhibitors that directly target the wild type include AbbVie (IMBRUVICA) and AstraZeneca (CALQUENCE) and Beigene Co., Ltd,. (Zanubrutinib).

 

Others that are developing inhibitors that target the C481S-mutant BTK include Arqule, Inc. (ARQ 531), Roche, Sunesis Pharmaceuticals (SNS-062) and Eli Lilly amongst others.

 

For CG-806 and APTO-253 in AML, examples of potential competitors include companies that have developed, approved or are currently developing non-targeted therapies include Jazz (VYXEOS), Pfizer (MYLOTARG) and Roche (VENCLEXTA), among others. Others that have developed or are developing highly targeted therapies such as FLT-3 include Novartis (RYDAPT), Astellas (XOSAPTA), Daiichi Sankyo (QUIZARTINIB), Arog (CRENOLANIB), and IDH1 include Agios (TIBSOVO) and Celgene/BMS (IDHIFA) among others.

 

Any product candidate that we develop and that obtains regulatory approval must then compete for market acceptance and market share. Our products may not gain market acceptance among physicians, patients, healthcare payers, insurers, the medical community and other stakeholders. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including:

 

·efficacy and potential advantages compared to alternative treatments;

 

·the ability to offer its product candidates for sale at competitive prices;

 

·convenience and ease of administration compared to alternative treatments;

 

·the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

 

·the strength of marketing and distribution support;

 

·sufficient third-party coverage or reimbursement; and

 

·the prevalence and severity of any side effects.

 

Further, any products we develop may become obsolete before we recover any expenses we incurred in connection with the development of these products. As a result, we may never achieve profitability.

 

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Risks Related to our Intellectual Property

 

We may be unable to obtain patents to protect our technologies from other companies with competitive products, and patents of other companies could prevent us from manufacturing, developing or marketing our products.

 

Patent protection

 

The patent positions of pharmaceutical and biotechnology companies are uncertain and involve complex legal and factual questions. The USPTO and many other patent offices in the world have not established a consistent policy regarding the breadth of claims that they will allow in biotechnology patents.

 

Our pending patent applications may not result in issued patents and our issued patents may not be held valid and enforceable if challenged. Competitors may be able to circumvent any such issued patents by adoption of a competitive, though non-infringing product or process. Interpretation and evaluation of pharmaceutical or biotechnology patent claims present complex and often novel legal and factual questions. Our business could be adversely affected by increased competition in the event that any patent granted to it is held to be invalid or unenforceable or is inadequate in scope to protect our operations.

 

Allowable patentable subject matter and the scope of patent protection obtainable may differ between jurisdictions. If a patent office allows broad claims, the number and cost of patent interference proceedings in the United States, or analogous proceedings in other jurisdictions and the risk of infringement litigation may increase. If it allows narrow claims, the risk of infringement may decrease, but the value of our rights under our patents, licenses and patent applications may also decrease.

 

The scope of the claims in a patent application can be significantly modified during prosecution before the patent is issued. Consequently, we cannot know whether our pending applications will result in the issuance of patents or, if any patents are issued, whether they will provide us with significant proprietary protection or will be circumvented, invalidated or found to be unenforceable.

 

Publication of discoveries in scientific or patent literature often lags behind actual discoveries. Patent applications filed in the United States generally will be published 18 months after the filing date unless the applicant certifies that the invention will not be the subject of a foreign patent application. In many other jurisdictions, such as Canada, patent applications are published 18 months from the priority date. We may not be aware of such literature. Accordingly, we cannot be certain that the named inventors of our products and processes were the first to invent that product or process or that we were the first to pursue patent coverage for our inventions.

 

In addition, United States patent laws may change, which could prevent or limit us from filing patent applications or patent claims in the United States to protect our products and technologies or limit the exclusivity periods that are available to patent holders for United States patents. For example, the Leahy-Smith America Invents Act, (the “Leahy-Smith Act”) was signed into law in 2011 and includes a number of significant changes to United States patent law. These include changes to transition from a “first-to-invent” system to a “first-to-file” system and to the way issued patents are challenged. These changes may favor larger and more established companies that have more resources to devote to patent application filing and prosecution. It is not clear what, if any, impact the Leahy-Smith Act will ultimately have on the cost of prosecuting our patent applications in the United States, our ability to obtain patents in the United States based on our discoveries and our ability to enforce or defend our United States issued patents.

 

Until such time, if ever, that further patents are issued to us, we will rely upon the law of trade secrets to the extent possible given the publication requirements under international patent treaty laws and/or requirements under foreign patent laws to protect our technology and our products incorporating the technology. In this regard, we have adopted certain confidentiality procedures. These include: limiting access to confidential information to certain key personnel; requiring all directors, officers, employees and consultants and others who may have access to our intellectual property to enter into confidentiality agreements which prohibit the use of or disclosure of confidential information to third parties; and implementing physical security measures designed to restrict access to such confidential information and products. Our ability to maintain the confidentiality of our technology is crucial to our ultimate possible commercial success. The procedures adopted by us to protect the confidentiality of our technology may not be effective, third parties may gain access to our trade secrets or our trade secrets or those of our collaborators may be independently discovered by others. Our collaborators, employees and consultants and other parties may not comply with the terms of their agreements with us, and we might be unable to adequately enforce our rights or obtain adequate compensation for the damages caused by unauthorized disclosure or use of our trade secrets or know how. Further, by seeking patent protection in various countries, it is inevitable that a substantial portion of our technology will become available to our competitors, through publication of such patent applications.

 

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Enforcement of intellectual property rights

 

Protection of the rights revealed in published patent applications can be complex, costly and uncertain. Our commercial success depends in part on our ability to maintain and enforce our proprietary rights. If third parties engage in activities that infringe on our proprietary rights, our management’s focus will be diverted and we may incur significant costs in asserting our rights. We may not be successful in asserting our proprietary rights, which could result in our patents being held invalid or a court holding that the third party is not infringing, either of which would harm our competitive position.

 

Others may design around our patented technology. We may have to participate in interference proceedings declared by the USPTO, European opposition proceedings, or other analogous proceedings in other parts of the world to determine priority of invention and the validity of patent rights granted or applied for, which could result in substantial cost and delay, even if the eventual outcome is favorable to us. Our pending patent applications, even if issued, may not be held valid or enforceable.

 

Our products and product candidates may infringe the intellectual property rights of others, or others may infringe on our intellectual property rights, which could increase our costs.

 

Our success also depends on avoiding infringement of the proprietary technologies of others. In particular, there may be certain issued patents and patent applications claiming subject matter which we or our collaborators may be required to license in order to research, develop or commercialize APTO-253 or CG-806. In addition, third parties may assert infringement or other intellectual property claims against us. An adverse outcome in these proceedings could subject us to significant liabilities to third-parties, require disputed rights to be licensed from third-parties or require us to cease or modify our use of the technology. If we are required to license third-party technology, a license under such patents and patent applications may not be available on acceptable terms or at all. Further, we may incur substantial costs defending ourselves in lawsuits against charges of patent infringement or other unlawful use of another’s proprietary technology. We may also need to bring claims against others who we believe are infringing our rights in order to become or remain competitive and successful. Any such claims can be time consuming and expensive to pursue.

 

We may incur substantial cost in defending our intellectual property.

 

While we believe that our products and technology do not infringe on the proprietary rights of others, third parties may assert infringement claims in the future and such claims could be successful. Even if challenges are unsuccessful, we could incur substantial costs in defending ourselves against patent infringement claims brought by others or in prosecuting suits against others. In addition, others may obtain patents that we would need to license, which may not be available to us on reasonable terms. Whether we are able to obtain a necessary license would depend on the terms offered, the degree of risk of infringement and the need for the patent.

 

We have licensed important portions of our intellectual property from CG, and are subject to significant obligations under that license agreement.

 

The rights we hold under our license agreement with CG are critical to our business. Our CG-806 program is built around patents exclusively in-licensed from CG, which permit us to research, develop and commercialize CG-806 worldwide except for the Republic of Korea. Under our agreement with CG, we are subject to significant obligations, including diligence obligations with respect to development and commercialization activities, payment obligations upon achievement of certain milestones and royalties on product sales, as well as other material obligations. CG is eligible for payments upon the achievement of developmental, regulatory and commercial-based milestones, as well as low single-digit royalties on product sales in all territories outside of the Republic of Korea.

 

If there is any conflict, dispute, disagreement or issue of non-performance between us and CG regarding our rights or obligations under the license agreements, including any conflict, dispute or disagreement arising from our failure to satisfy diligence or payment obligations under such agreements, CG may have a right to terminate the license. The loss of this license agreement could materially and adversely affect our ability to use intellectual property that could be critical to our drug discovery and development efforts, as well as our ability to enter into future collaboration, licensing and/or marketing agreements for one or more affected drug candidates or development programs.

 

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Our business depends, in part, on our ability to use technology that we have licensed or will in the future license from third parties, including CG, and, if these licenses were terminated or if we were unable to license additional technology we may need in the future, our business would be adversely affected.

 

We currently hold licenses for certain technologies that are or may be critical to our current and subsequent product candidates. These include our exclusive license to research, develop and commercialize CG-806 worldwide except for the Republic of Korea. The license from CG is subject to termination in the event of a breach by us of the license, if we fail to cure the breach following notice and the passage of a cure period. We may need to acquire additional licenses in the future to technologies developed by others. Furthermore, future license agreements may require us to make substantial milestone payments. We may also be obligated to make royalty payments on the sales, if any, of products resulting from the license. The termination of a license or the inability to license future technologies on acceptable terms may adversely affect our ability to develop or sell our products.

 

Legal and Regulatory Risk

 

Our ability to develop, produce and market our products is subject to extensive government regulation.

 

Government regulation is a significant factor in the development, production and marketing of our products. Research and development, testing, manufacture, marketing and sales of pharmaceutical products or related products are subject to extensive regulatory oversight, often in multiple jurisdictions, which may cause significant additional costs and/or delays in bringing products to market, and in turn, may cause significant losses to investors. The regulations applicable to our product candidates may change. Even if granted, regulatory approvals may include significant limitations on the uses for which products can be marketed or may be conditioned on the conduct of post-marketing surveillance studies. Failure to comply with applicable regulatory requirements can, among other things, result in warning letters, the imposition of civil penalties or other monetary payments, delay in approving or refusal to approve a product candidate, suspension or withdrawal of regulatory approval, product recall or seizure, operating restrictions, interruptions of clinical trials or manufacturing, injunctions or criminal prosecution. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates.

 

Requirements for regulatory approval vary widely from country to country. Whether or not approved in Canada or the United States, regulatory authorities in other countries must approve a product prior to the commencement of marketing the product in those countries. The time required to obtain any such approval may be longer or shorter than in Canada or the United States. Approved drugs, as well as their manufacturers, are subject to continuing and ongoing review, and discovery of problems with these products or the failure to adhere to manufacturing or quality control requirements may result in regulatory restrictions being imposed.

 

Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and affect the prices we may obtain. 

 

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could, among other things, prevent or delay marketing approval of our product candidates, restrict or regulate post approval activities and affect our ability to profitably sell any products for which we obtain marketing approval.

 

For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care Education Reconciliation Act, or collectively the Affordable Care Act, was enacted to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for health care and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Additionally, the Drug Supply Chain Security Act, enacted in 2013, imposed new obligations on manufacturers of pharmaceutical products related to product tracking and tracing.

 

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Members of Congress and the Trump Administration have considered legislation to fundamentally change or repeal the Affordable Care Act. While Congress has not passed repeal legislation to date, the Tax Cuts and Jobs Act (“TCJA”) includes a provision repealing the individual insurance coverage mandate included in the Affordable Care Act, effective January 1, 2019. Further, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the Affordable Care Act to waive, defer, grant exemptions from, or delay the implementation of any provision of the Affordable Care Act that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. On October 13, 2017, the President signed an Executive Order terminating the cost-sharing subsidies that reimburse insurers under the Affordable Care Act. Several state Attorneys General filed suit to stop the administration from terminating the subsidies, but their request for a restraining order was denied by a federal judge in California on October 25, 2017. In addition, the Centers for Medicare and Medicaid Services has recently proposed regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the Affordable Care Act for plans sold through such marketplaces. Congress may consider other legislation to replace elements of the Affordable Care Act. The implications of the Affordable Care Act, its possible repeal, any legislation that may be proposed to replace the Affordable Care Act, or the political uncertainty surrounding any repeal or replacement legislation for our business and financial condition, if any, are not yet clear.

 

We cannot predict what healthcare reform initiatives may be adopted in the future. Further federal and state legislative and regulatory developments are likely, and we expect ongoing initiatives in the United States to increase pressure on drug pricing. Such reforms could have an adverse effect on anticipated revenues from product candidates that we may successfully develop and for which we may obtain regulatory approval and may affect our overall financial condition and ability to develop drug candidates.

 

Legislative and regulatory proposals have also been made to expand post approval requirements and restrict sales and promotional activities for pharmaceutical products. Any healthcare reforms enacted in the future may, like the Affordable Care Act, be phased in over a number of years but, if enacted, could reduce our revenue, increase our costs, or require us to revise the ways in which we conduct business or put us at risk for loss of business. We are not sure whether additional legislative changes will be enacted, or whether the current regulations, guidance or interpretations will be changed, or what the impact of such changes on our business, if any, may be.

 

Coverage and adequate reimbursement may not be available for our product candidates, which could make it difficult for us to sell our products profitably.

 

Market acceptance and sales of any drug candidates that we develop will depend in part on the extent to which reimbursement for these products and related treatments will be available from third party payors, including government health administration authorities and private health insurers. Third party payors decide which drugs they will pay for and establish reimbursement levels. Third party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. However, decisions regarding the extent of coverage and amount of reimbursement to be provided for each of our drug candidates will be made on a plan by plan basis. One payor's determination to provide coverage for a product does not assure that other payors will also provide coverage, and adequate reimbursement, for the product. Additionally, a third party payor's decision to provide coverage for a drug does not imply that an adequate reimbursement rate will be approved. Each plan determines whether or not it will provide coverage for a drug, what amount it will pay the manufacturer for the drug, and on what tier of its formulary the drug will be placed. The position of a drug on a formulary generally determines the copayment that a patient will need to make to obtain the drug and can strongly influence the adoption of a drug by patients and physicians. Patients who are prescribed treatments for their conditions and providers performing the prescribed services generally rely on third party payors to reimburse all or part of the associated healthcare costs. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products. 

 

A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Third party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure that coverage and reimbursement will be available for any product that we commercialize and, if reimbursement is available, what the level of reimbursement will be. Inadequate coverage and reimbursement may impact the demand for, or the price of, any product for which we obtain marketing approval. If coverage and adequate reimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize any drug candidates that we develop.

 

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Additionally, there have been a number of legislative and regulatory proposals to change the healthcare system in the United States and in some foreign jurisdictions that could affect our ability to sell any future drugs profitably. These legislative and regulatory changes may negatively impact the reimbursement for any future drugs, following approval.

 

We are subject to U.S. and Canadian healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm, fines, disgorgement, exclusion from participation in government healthcare programs, curtailment or restriction of our operations and diminished profits and future earnings.

 

Healthcare providers, physicians and others will play a primary role in the recommendation and prescription of any products for which we obtain marketing approval. Our future arrangements with healthcare providers, patients and third party payors will expose us to broadly applicable U.S. and Canadian fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and collaborative partners through which we market, sell and distribute any products for which we obtain marketing approval.

 

Efforts to ensure that our collaborations with third parties, and our business generally, will comply with applicable U.S. and Canadian healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental laws and regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion of products from government funded healthcare programs, contractual damages, reputational harm, disgorgement, curtailment or restricting of our operations, any of which could substantially disrupt our operations and diminish our profits and future earnings. If any of the physicians or other providers or entities with whom we expect to do business is found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations.

 

If product liability, clinical trial liability or environmental liability claims are brought against us or we are unable to obtain or maintain product liability, clinical trial or environmental liability insurance, we may incur substantial liabilities that could reduce our financial resources.

 

The clinical testing and commercial use of pharmaceutical products involves significant exposure to product liability, clinical trial liability, environmental liability and other risks that are inherent in the testing, manufacturing and marketing of our products. These liabilities, if realized, could have a material adverse effect on our business, results of operations and financial condition.

 

We have obtained limited product liability insurance coverage for our clinical trials on humans; however, our insurance coverage may be insufficient to protect us against all product liability damages. Regardless of merit or eventual outcome, liability claims may result in decreased demand for a future product, injury to reputation, withdrawal of clinical trial volunteers, loss of revenue, costs of litigation, distraction of management and substantial monetary awards to plaintiffs. Additionally, if we are required to pay a product liability claim, we may not have sufficient financial resources to complete development or commercialization of any of our product candidates and our business and results of operations will be adversely affected. In general, insurance will not protect us against some of our own actions, such as negligence.

 

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As our development activities progress towards the commercialization of product candidates, our liability coverage may not be adequate, and we may not be able to obtain adequate product liability insurance coverage at a reasonable cost, if at all. Even if we obtain product liability insurance, our financial position may be materially adversely affected by a product liability claim. A product liability claim could also significantly harm our reputation and delay market acceptance of our product candidates. Additionally, product recalls may be issued at the direction of the FDA, other government agencies or other companies having regulatory control for pharmaceutical sales. If a product recall occurs in the future, such a recall could adversely affect our business, financial condition or reputation.

 

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

 

We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemicals and radioactive and biological materials. Our operations also produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties.

 

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

 

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

 

We may be unable to obtain partnerships for our product candidates, which could curtail future development and negatively affect our share price. In addition, our partners might not satisfy their contractual responsibilities or devote sufficient resources to our partnership.

 

Our strategy for the research, development and commercialization of our products requires entering into various arrangements with corporate collaborators, licensors, licensees and others, and our commercial success is dependent upon these outside parties performing their respective contractual responsibilities. The amount and timing of resources that such third parties will devote to these activities may not be within our control. These third parties may not perform their obligations as expected and our collaborators may not devote adequate resources to our programs. In addition, we could become involved in disputes with our collaborators, which could result in a delay or termination of the related development programs or result in litigation. We intend to seek additional collaborative arrangements to develop and commercialize some of our products. We may not be able to negotiate collaborative arrangements on favorable terms, or at all, in the future, and our current or future collaborative arrangements may not be successful.

 

If we cannot negotiate collaboration, license or partnering agreements, we may never achieve profitability and we may not be able to continue to develop our product candidates. Commencing Phase I, Phase II and Phase III clinical trials for CG-806 and continuing Phase Ib, and commencing Phase II and Phase III clinical trials for APTO-253 would require significant amounts of funding and such funding may not be available to us.

 

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Risks Related to Our Common Shares

 

Our share price has been and is likely to continue to be volatile and an investment in our Common Shares could suffer a decline in value.

 

You should consider an investment in our Common Shares as risky and invest only if you can withstand a significant loss and wide fluctuations in the market value of your investment. The market price of our Common Shares has been highly volatile and is likely to continue to be volatile. This leads to a heightened risk of securities litigation pertaining to such volatility. Factors affecting our Common Share price include but are not limited to:

 

·our ability to continue as a going concern;

 

·our ability to raise additional capital;

 

·the progress of our pre-clinical and clinical trials;

 

·our ability to obtain partners and collaborators to assist with the future development of our products;

 

·general market conditions;

 

·announcements of technological innovations or new product candidates by us, our collaborators or our competitors;

 

·published reports by securities analysts;

 

·developments in patent or other intellectual property rights;

 

·the cash and investments held by us and our ability to secure future financing;

 

·public concern as to the safety and efficacy of drugs that we and our competitors develop;

 

·shareholder interest in our Common Shares; and

 

·low liquidity in the daily trading volume of our Common Shares.

 

Future sales of our Common Shares by us or by our existing shareholders could cause our share price to fall.

 

The issuance of Common Shares by us could result in significant dilution in the equity interest of existing shareholders and adversely affect the market price of our Common Shares. Sales by existing shareholders of a large number of our Common Shares in the public market and the issuance of Common Shares in connection with strategic alliances, or the perception that such additional sales could occur, could cause the market price of our Common Shares to decline and have an undesirable impact on our ability to raise capital.

 

We are susceptible to stress in the global economy and therefore, our business may be affected by the current and future global financial conditions.

 

If the increased level of volatility and market turmoil that have marked recent years continue, our operations, business, financial condition and the trading price of our Common Shares could be materially adversely affected. Furthermore, general economic conditions may have a great impact on us, including our ability to raise capital, our commercialization opportunities and our ability to establish and maintain arrangements with others for research, manufacturing, product development and sales.

 

An active trading market in our Common Shares may not be sustained.

 

Our Common Shares are listed for trading on the Nasdaq Capital Market and the TSX. However, an active trading market in our Common Shares on the stock exchanges may not be sustained and we may not be able to maintain our listings.

 

Certain Canadian laws could delay or deter a change of control.

 

Limitations on the ability to acquire and hold our Common Shares may be imposed by the Competition Act in Canada. This legislation permits the Commissioner of Competition of Canada to review any acquisition of a significant interest in us. This legislation grants the Commissioner jurisdiction to challenge such an acquisition before the Canadian Competition Tribunal if the Commissioner believes that it would, or would be likely to, result in a substantial lessening or prevention of competition in any market in Canada. The Investment Canada Act subjects an acquisition of control of a company by a non-Canadian to government review if the value of our assets, as calculated pursuant to the legislation, exceeds a threshold amount. A reviewable acquisition may not proceed unless the relevant minister is satisfied that the investment is likely to result in a net benefit to Canada. Any of the foregoing could prevent or delay a change of control and may deprive or limit strategic opportunities for our shareholders to sell their shares.

 

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The exercise of all or any number of outstanding stock options, the award of any additional options, restricted stock units or other stock-based awards or any issuance of shares to raise funds or acquire a business may dilute your Common Shares.

 

We have in the past and may in the future grant to some or all of our directors, officers and employees options to purchase our Common Shares and other stock-based awards as non-cash incentives to those persons. The issuance of any equity securities could, and the issuance of any additional shares would, cause our existing shareholders to experience dilution of their ownership interests.

 

Any additional issuance of shares or a decision to acquire other businesses through the sale of equity securities may dilute our investors’ interests, and investors may suffer dilution in their net book value per share depending on the price at which such securities are sold. Such issuance may cause a reduction in the proportionate ownership and voting power of all other shareholders. The dilution may result in a decline in the price of our Common Shares or a change in control.

 

We do not expect to pay dividends for the foreseeable future.

 

We have not paid any cash dividends to date and we do not intend to declare dividends for the foreseeable future, as we anticipate that we will reinvest future earnings, if any, in the development and growth of our business. Therefore, investors will not receive any funds unless they sell their Common Shares, and shareholders may be unable to sell their shares on favorable terms or at all. We cannot assure you of a positive return on investment or that you will not lose the entire amount of your investment in our Common Shares. Prospective investors seeking or needing dividend income or liquidity should not purchase our Common Shares.

 

Other Risks

 

It may be difficult for non-Canadian investors to obtain and enforce judgments against us because of our Canadian incorporation and presence.

 

We are a corporation existing under the laws of Canada. Some of our directors and officers, and many of the experts named in this Quarterly Report on Form 10-Q, are residents of Canada, and all or a substantial portion of their assets, and a substantial portion of our assets, are located outside the United States. Consequently, although we have appointed an agent for service of process in the United States, it may be difficult for holders of our shares who reside in the United States to effect service within the United States upon our directors and officers and experts who are not residents of the United States. It may also be difficult for holders of our shares who reside in the United States to realize in the United States upon judgments of courts of the United States predicated upon our civil liability and the civil liability of our directors, officers and experts under the United States federal securities laws. Investors should not assume that Canadian courts (i) would enforce judgments of United States courts obtained in actions against us or our directors, officers or experts predicated upon the civil liability provisions of the United States federal securities laws or the securities or “blue sky” laws of any state within the United States or (ii) would enforce, in original actions, liabilities against us or our directors, officers or experts predicated upon the United States federal securities laws or any such state securities or “blue sky” laws. In addition, we have been advised by our Canadian counsel that in normal circumstances, only civil judgments, and not other rights arising from United States securities legislation, are enforceable in Canada and that the protections afforded by Canadian securities laws may not be available to investors in the United States.

 

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We are likely a “passive foreign investment company” which may have adverse United States federal income tax consequences for United States shareholders.

 

United States investors in our Common Shares should be aware that we believes the Company was classified as a passive foreign investment company (“PFIC”) during the tax year ended December 31, 2017, and based on the nature of our business, the projected composition of our gross income and the projected composition and estimated fair market value of our assets, we expect to be a PFIC for the current tax year ending December 31, 2018 and may be a PFIC in subsequent tax years. If the Company is a PFIC for any year during a United States shareholder’s holding period, then such United States shareholder generally will be required to treat any gain realized upon a disposition of Common Shares, or any so-called “excess distribution” received on its Common Shares, as ordinary income, and to pay an interest charge on a portion of such gain or distributions, unless the shareholder makes a timely and effective “qualified electing fund” election (“QEF election”) or a “mark-to-market” election with respect to the Common Shares. A United States shareholder who makes a QEF election generally must report on a current basis its share of the Company’s net capital gain and ordinary earnings for any year in which we are a PFIC, whether or not we distribute any amounts to its shareholders. However, United States shareholders should be aware that we do not intend to satisfy record keeping requirements that apply to a qualified electing fund, and we do not intend to supply United States shareholders with information that such United States shareholders require to report under the QEF election rules, in the event that we are a PFIC and a United States shareholder wishes to make a QEF election. Thus, United States shareholders should assume that they will not be able to make a QEF election with respect to their Common Shares. A United States shareholder who makes the mark-to-market election generally must include as ordinary income each year the excess of the fair market value of the Common Shares over the taxpayer’s basis therein. Each United States shareholder should consult its own tax advisor regarding the United States federal, United States local, and foreign tax consequences of the PFIC rules and the acquisition, ownership, and disposition of our Common Shares.

 

We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our Common Shares less attractive to investors.

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”), reduced disclosure obligations regarding executive compensation in our periodic reports and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

 

We will cease to be an emerging growth company upon the earliest of:

 

·the last day of the fiscal year during which we have total annual gross revenues of $1,000,000,000 (as such amount is indexed for inflation every five years by the SEC or more;

 

·the last day of our fiscal year following the fifth anniversary of the completion of our first sale of common equity securities pursuant to an effective registration statement under the Securities Act of 1933, as amended(the “Securities Act”), which will be in September 2020;

 

·the date on which we have, during the previous three-year period, issued more than $1,000,000,000 in non- convertible debt; or

 

·the date on which we are deemed to be a “large accelerated filer”, as defined in Rule 12b–2 of the Exchange Act , which would occur if the market value of our ordinary shares that are held by non-affiliates exceeds $700,000,000 as of the last day of our most recently-completed second fiscal quarter.

 

We cannot predict if investors will find our Common Shares less attractive because we may rely on these exemptions. If some investors find our Common Shares less attractive as a result, there may be a less active trading market for our Common Shares and our share price may be more volatile.

 

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Any failure to maintain an effective system of internal controls may result in material misstatements of our consolidated financial statements or cause us to fail to meet our reporting obligations or fail to prevent fraud; and in that case, our shareholders could lose confidence in our financial reporting, which would harm our business and could negatively impact the price of our Common Shares.

 

Section 404(a) of SOX requires that our management assess and report annually on the effectiveness of our internal controls over financial reporting and identify any material weaknesses in our internal controls over financial reporting. Although Section 404(b) of SOX requires our independent registered public accounting firm to issue an annual report that addresses the effectiveness of our internal controls over financial reporting, we have opted to rely on the exemptions provided to us by virtue of being an emerging growth company, and consequently will not be required to comply with SEC rules that implement Section 404(b) of SOX until we lose our emerging growth company status.

 

Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. If we fail to maintain an effective system of internal controls, we might not be able to report our financial results accurately or prevent fraud; and in that case, our shareholders could lose confidence in our financial reporting, which would harm our business and could negatively impact the price of our Common Shares. While we believe that we have sufficient personnel and review procedures to allow us to maintain an effective system of internal controls, we cannot assure you that we will not experience potential material weaknesses in our internal control. Even if we conclude that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our results of operations or cause us to fail to meet our future reporting obligations.

 

If we fail to timely achieve and maintain the adequacy of our internal control over financial reporting, we may not be able to produce reliable financial reports or help prevent fraud. Our failure to achieve and maintain effective internal control over financial reporting could prevent us from complying with our reporting obligations on a timely basis, which could result in the loss of investor confidence in the reliability of our consolidated financial statements, harm our business and negatively impact the trading price of our Common Shares.

 

Prior to December 31, 2018, we were a foreign private issuer and were therefore not subject to certain United States securities law disclosure requirements that apply to a domestic United States issuer, which may limit the historical information publicly available to our shareholders.

 

As a foreign private issuer prior to December 31, 2018, we were exempt from certain rules under the Exchange Act that impose disclosure requirements as well as procedural requirements for proxy solicitations under Section 14 of the Exchange Act. In addition, our officers, directors and principal shareholders were exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act. Moreover, we were not required to file periodic reports and financial statements with the SEC as frequently or as promptly as a company that files as a domestic issuer whose securities are registered under the Exchange Act, nor were we generally required to comply with the SEC’s Regulation Fair Disclosure, which restricts the selective disclosure of material non-public information. For as long as we were a “foreign private issuer” we filed our annual financial statements on Form 20-F and furnished our quarterly updates on Form 6-K to the SEC. However, the information we filed or furnished was not the same as the information required in annual and quarterly reports on Form 10-K or Form 10-Q for United States domestic issuers. Accordingly, there may be less historical information publicly available concerning us than there is for a company that has filed as a domestic issuer for longer.

 

Data security incidents and privacy breaches could result in important remediation costs, increased cyber security costs, litigation and reputational harm.

 

Cyber security incidents can result from deliberate attacks or unintentional events. Cyber-attacks and security breaches could include unauthorized attempts to access, disable, improperly modify or degrade our information, systems and networks, the introduction of computer viruses and other malicious codes and fraudulent “phishing” emails that seek to misappropriate data and information or install malware onto users’ computers. Cyber-attacks in particular vary in technique and sources, are persistent, frequently change and are increasingly more targeted and difficult to detect and prevent. Our network security and data recovery measures and those of third parties with which we contract, may not be adequate to protect against cyber-attacks.

 

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Disruptions due to cyber security incidents could adversely affect Aptose’s business. In particular, a cyber security incident could result in the loss or corruption of data from Aptose’s research and development activities, including clinical trials, which may cause significant delays to some or all of our clinical programs. Also, our trade secrets, including unpatented know how, technology and other proprietary information could be disclosed to competitors as a result of a breach, which would harm our business and competitive position. We expect that risks and exposures related to cyber security attacks will remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats. While we have invested in the protection of data and information technology, there can be no assurance that our efforts to implement adequate security measures would be sufficient to protect us against cyber-attacks.

 

We may fail to successfully upgrade and maintain our information technology systems.

 

We rely on various information technology systems to manage our operations. There are inherent costs and risks associated with maintaining, modifying and/or changing these systems and implementing new systems, including potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate its systems, demands on management time and other risks and costs of delays or difficulties in transitioning to new systems or of integrating new systems into our current systems. In addition, our information technology system implementations may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. The implementation of new information technology systems may also cause disruptions in our business operations and have an adverse effect on our business, prospects, financial condition and operating results.

 

Item 5. Other Information

 

On May 7, 2019, we entered into a Common Shares Purchase Agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”), under which Aspire Capital has, subject to applicable stock exchange approval, committed to purchase up to US$20 million of our common shares, at our request from time to time for up to 30 months. Under the Purchase Agreement, we will have the right, on any business day, to direct Aspire Capital to purchase up to 200,000 common shares with a value not exceeding US$500,000. However, upon mutual agreement, we will be permitted to direct Aspire Capital to purchase up to an additional 2,000,000 common shares. In connection with the entering of the Purchase Agreement, the parties agreed to terminate the prior Common Shares Purchase Agreement, dated May 30, 2018, between us and Aspire Capital.

The purchase price will be equal to the lesser of: (i) the lowest sale price of our common shares on NASDAQ on the purchase date, or (ii) the average of the three lowest closing sale prices of the common shares on NASDAQ during the 10 business days prior to the purchase date. 

In addition to the regular purchases, we will also have the right to require Aspire Capital to purchase up to an additional 30% of the trading volume of the common shares for the next business day at a purchase price (the “VWAP Purchase Price”) equal to the lesser of: (i) the closing sale price of the common shares on NASDAQ on the VWAP purchase date, or (ii) ninety-seven percent (97%) of the VWAP purchase date’s volume weighted average price on NASDAQ (each such purchase, a “VWAP Purchase”).  

We will have the right, in our sole discretion, to determine a maximum number of common shares and set a minimum market price threshold for each VWAP Purchase and there will be no limits on the number of VWAP Purchases that we may require.

For any business day that the closing sale price of our common shares on NASDAQ is below US$0.25, the obligation of Aspire Capital to purchase common shares will be automatically suspended for that business day only.

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Aspire Capital will not be allowed to own at one time more than 9.99% of our issued and outstanding common shares. The number of common shares that may be issued under the Purchase Agreement will be limited to 19.99% of our outstanding common shares as of the date of the Purchase Agreement, unless shareholder approval is obtained to issue more than such 19.99%. However, the 19.99% limitation will not apply if at the time that the 19.99% limitation is reached and at all times thereafter the average purchase price for all common shares issued under the Purchase Agreement is equal to or above a minimum price of US$2.10 (representing the average of the 5 closing prices on NASDAQ immediately preceding the signing of the Purchase Agreement). 

No sales of common shares will be made in Canada under the Purchase Agreement and any sale of common shares by Aspire Capital is expected to be made to arm’s length parties. There are no limitations on use of proceeds, financial covenants or restrictions on future financings and there are no rights of first refusal, participation rights, penalties or liquidated damages in the Purchase Agreement. We may terminate the Purchase Agreement at any time, at our discretion, without any additional cost or penalty.

As consideration for Aspire Capital’s obligation under the Purchase Agreement, we have agreed to issue 171,428 common shares to Aspire Capital as a commitment fee (the “Commitment Shares”).

Concurrently with entering into the Purchase Agreement, we also entered into a registration rights agreement with Aspire Capital (the “Registration Rights Agreement”), in which we agreed to file with the Securities and Exchange Commission (the “SEC”) one or more registration statements, as necessary, and to the extent permissible and subject to certain exceptions, to register under the Securities Act of 1933, as amended, for the sale of the common shares that may be issued to Aspire Capital under the Purchase Agreement. We plan to file with the SEC a prospectus supplement to our effective shelf Registration Statement on Form S-3 (File 333-230218) registering all of the common shares that may be offered to Aspire Capital from time to time. 

Item 6. – Exhibits

 

Exhibit Number Description of Document
10.1 Form of Common Share Purchase Agreement dated May 7, 2019 by and between the Company and Aspire Capital Fund, LLC
10.2 Form of Registration Rights Agreement dated May 7, 2019 by and between the Company and Aspire Capital Fund, LLC
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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Signatures

 

Pursuant to the requirements of the Securities Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, on the 7th day of May, 2019.

 

  Aptose Biosciences Inc.  
       
  By: /s/ William G. Rice  
    William G. Rice  
    Chairman, Chief Executive Officer and President

 

 

 

 

 

 

 

 

 

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