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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, 2023

or

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

FOR THE TRANSITION PERIOD FROM ______________ TO ____________.

Commission file number 033-80623

Achieve Life Sciences, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

95-4343413

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification Number)

22722 29th Drive SE, Suite 100, Bothell, WA 98021

1040 West Georgia Street, Suite 1030, Vancouver, British Columbia, Canada V6E 4H1

(Address of Principal Executive Offices)

(604) 210-2217

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

Trading Symbol

Name of exchange on which registered

Common Stock, par value $0.001 per share

ACHV

The NASDAQ Capital Market

 

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

Indicate by check mark whether the registrant has submitted electronically 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

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

As of May 9, 2023 there were 18,040,760 shares of the registrant’s Common Stock, $0.001 par value per share, outstanding.

 

 


Achieve Life Sciences, Inc.

Index to Form 10-Q

 

 

Page

Number

 

 

Part I. Financial Information

5

 

 

 

Item 1

Consolidated Financial Statements (unaudited)

5

 

 

 

 

Consolidated Balance Sheets as of March 31, 2023 (unaudited) and December 31, 2022

5

 

 

 

 

Consolidated Statements of Loss and Comprehensive Loss (unaudited) for the three months ended March 31, 2023 and March 31, 2022

6

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2023 and March 31, 2022

7

 

 

 

 

Consolidated Statements of Stockholders’ Equity (unaudited) for the three months ended March 31, 2023 and March 31, 2022

8

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

9

 

 

 

Item 2.

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

21

 

 

 

 

 

 

Item 4.

Controls and Procedures

31

 

 

Part II. Other Information

32

 

 

 

Item 1A.

Risk Factors

32

 

 

 

Item 6.

Exhibits

61

 

 

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

 

 

 

Signatures

62

 

 

2


INFORMATION REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of risks and uncertainties. We caution readers that any forward-looking statement is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking statement. These statements are based on current expectations of future events. Such statements include, but are not limited to, statements about future financial and operating results, plans, objectives, expectations and intentions, costs and expenses, interest rates, outcome of contingencies, financial condition, results of operations, liquidity, business strategies, cost savings, objectives of management and other statements that are not historical facts. You can find many of these statements by looking for words like “believes,” “expects,” “anticipates,” “estimates,” “may,” “should,” “will,” “could,” “plan,” “intend” or similar expressions in this Quarterly Report on Form 10-Q or in documents incorporated by reference into this Quarterly Report on Form 10-Q. We intend that such forward-looking statements be subject to the safe harbors created thereby. Examples of these forward-looking statements include, but are not limited to:

our ability to raise additional capital as needed to fund our planned development and commercialization efforts and repay our existing debt;
progress and preliminary and future results of any clinical trials;
anticipated regulatory filings and U.S. Food and Drug Administration responses, recommendations, requirements or additional future clinical trials;
the performance of, and our ability to obtain sufficient supply of cytisinicline in a timely manner from, third-party suppliers and manufacturers;
timing and plans for the expansion of our focus to address other methods of nicotine addiction;
timing and amount of future contractual payments, product revenue and operating expenses
market acceptance of our products and the estimated potential size of these markets; and
our expectations regarding the impact of the macroeconomic and geopolitical environment, including inflation, rising interest rates, increased volatility in the debt and equity markets, instability in the global banking system, global health crises and pandemics and geopolitical conflict, and their potentially material adverse impact on our business and the execution of our preclinical studies and clinical trials.

 

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

All subsequent written or oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events, except as may be required under applicable U.S. securities law. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

 

Summary of Risk Factors

An investment in our common stock involves various risks, and prospective investors are urged to carefully consider the matters discussed in the section titled “Risk Factors” prior to making an investment in our common stock. These risks include, but are not limited to, the following:

Substantial doubt exists as to our ability to continue as a going concern. Our ability to continue as a going concern is subject to material uncertainty and dependent on our success at raising additional capital sufficient to meet our obligations on a timely basis. If we fail to obtain additional financing when needed, we may be unable to complete the development, regulatory approval and commercialization of our product candidate.
We have incurred substantial debt, which could impair our flexibility and access to capital and adversely affect our financial position, and our business would be materially adversely affected if we are unable to service our debt obligations.

3


We have incurred losses since inception, have a limited operating history on which to assess our business and anticipate that we will continue to incur losses for the foreseeable future.
We have never generated any revenue from product sales and may never be profitable.
We are dependent upon a single company for the manufacture and supply of cytisinicline.
Cytisinicline is currently our sole product candidate and there is no guarantee that we will be able to successfully develop and commercialize cytisinicline.
The development of our product candidate is dependent upon securing sufficient quantities of cytisinicline from trees and other plants, which grows outside of the United States in a limited number of locations.
If we do not obtain the necessary regulatory approvals in the United States and/or other countries, we will not be able to sell cytisinicline.
Cytisinicline may cause undesirable side effects or have other properties that could delay or prevent regulatory approval, limit the commercial viability of an approved label, or result in significant negative consequences following marketing approval, if any.
It is difficult to evaluate our current business, predict our future prospects and forecast our financial performance and growth.
We expect to continue to rely on third parties to manufacture cytisinicline for use in clinical trials, and we intend to exclusively rely on Sopharma to produce and process cytisinicline, if approved, which may be impacted by the military conflict between Russia and Ukraine, including the possibility of expanded regional or global conflict and related economic sanctions.
Our commercialization of cytisinicline could be stopped, delayed or made less profitable if Sopharma fails to obtain approval of government regulators, fails to provide us with sufficient quantities of product, or fails to do so at acceptable quality levels or prices.
Sopharma may breach its supply agreement with us and sell cytisinicline into our territories or permit third parties to export cytisinicline into our territories and negatively affect our commercialization efforts of our products in our territories.
We face substantial competition, and our competitors may discover, develop or commercialize products faster or more successfully than us.
We may not be successful in obtaining or maintaining necessary rights to cytisinicline, product compounds and processes for our development pipeline through acquisitions and in-licenses.

4


PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Achieve Life Sciences, Inc.

Consolidated Balance Sheets

(Unaudited)

(In thousands, except per share and share amounts)

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents [note 6]

 

$

16,514

 

 

$

24,771

 

Grant receivable [note 3]

 

 

89

 

 

 

105

 

Prepaid expenses and other assets

 

 

1,621

 

 

 

2,454

 

Total current assets

 

 

18,224

 

 

 

27,330

 

Right-of-use assets [note 9]

 

 

109

 

 

 

66

 

Other assets and restricted cash [note 6]

 

 

68

 

 

 

123

 

License agreement [note 4 and note 5]

 

 

1,363

 

 

 

1,418

 

Goodwill [note 5]

 

 

1,034

 

 

 

1,034

 

Total assets

 

$

20,798

 

 

$

29,971

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

1,063

 

 

$

1,660

 

Accrued liabilities other

 

 

699

 

 

 

403

 

Accrued clinical liabilities

 

 

1,363

 

 

 

1,729

 

Accrued compensation

 

 

747

 

 

 

1,678

 

Current portion of long-term obligations [note 9]

 

 

58

 

 

 

58

 

Convertible debt [note 6 and note 7]

 

 

16,371

 

 

 

16,071

 

Total current liabilities

 

 

20,301

 

 

 

21,599

 

Long-term obligations [note 9]

 

 

54

 

 

 

69

 

Total liabilities

 

 

20,355

 

 

 

21,668

 

Commitments and contingencies [note 9]

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Series A convertible preferred stock, $0.001 par value, 9,158 shares designated, zero
issued and outstanding at March 31, 2023 and
zero issued and outstanding at December 31, 2022

 

 

 

 

 

 

Series B convertible preferred stock, $0.001 par value, 6,256 shares designated, zero
issued and outstanding at March 31, 2023 and
zero issued and outstanding at December 31, 2022

 

 

 

 

 

 

Common stock, $0.001 par value, 150,000,000 shares authorized, 17,930,362 issued and outstanding at March 31, 2023 and 17,897,029 issued and outstanding at December 31, 2022

 

 

87

 

 

 

87

 

Additional paid-in capital

 

 

145,280

 

 

 

144,148

 

Accumulated deficit

 

 

(144,928

)

 

 

(135,936

)

Accumulated other comprehensive income

 

 

4

 

 

 

4

 

Total stockholders' equity

 

 

443

 

 

 

8,303

 

Total liabilities and stockholders' equity

 

$

20,798

 

 

$

29,971

 

Going concern [note 1]

 

 

 

 

 

 

 

See accompanying notes.

5


Achieve Life Sciences, Inc.

Consolidated Statements of Loss and Comprehensive Loss

(Unaudited)

(In thousands, except per share and share amounts)

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2023

 

 

2022

 

EXPENSES

 

 

 

 

 

 

Research and development

 

 

5,534

 

 

 

4,388

 

General and administrative

 

 

3,044

 

 

 

2,838

 

Total operating expenses

 

 

8,578

 

 

 

7,226

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

Interest income

 

 

162

 

 

 

4

 

Interest expense [note 7]

 

 

(573

)

 

 

(357

)

Other income (expense)

 

 

(3

)

 

 

6

 

Total other (expense)

 

 

(414

)

 

 

(347

)

Net loss and comprehensive loss

 

$

(8,992

)

 

$

(7,573

)

Basic and diluted net loss per common share [note 8[d]]

 

$

(0.50

)

 

$

(0.80

)

Weighted average shares used in computation of basic and diluted net loss per common share [note 8[d]]

 

 

17,917,769

 

 

 

9,458,745

 

 

 

 

 

 

 

 

See accompanying notes.

 

6


Achieve Life Sciences, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2023

 

 

2022

 

Operating Activities:

 

 

 

 

 

 

Net loss

 

$

(8,992

)

 

$

(7,573

)

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

 

 

 

 

 

 

Depreciation and amortization [note 4]

 

 

58

 

 

 

60

 

Stock-based compensation [note 8[c], note 8[e], note 8[f] and note 8[g]]

 

 

1,085

 

 

 

823

 

Shares issued as settlement with trade vendor

 

 

 

 

 

26

 

Accrued interest on SVB convertible debt [note 7]

 

 

300

 

 

 

271

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Grant receivable [note 3]

 

 

16

 

 

 

153

 

Prepaid expenses and other assets

 

 

886

 

 

 

(10

)

Accounts payable

 

 

(597

)

 

 

(423

)

Accrued liabilities other

 

 

296

 

 

 

300

 

Accrued clinical liabilities

 

 

(366

)

 

 

870

 

Accrued compensation

 

 

(931

)

 

 

(1,277

)

Lease obligation [note 9]

 

 

(58

)

 

 

1

 

Net cash used in operating activities

 

 

(8,303

)

 

 

(6,779

)

Financing Activities:

 

 

 

 

 

 

Proceeds from exercise of warrants

 

 

77

 

 

 

24

 

Proceeds from ATM, net of issuance costs

 

 

 

 

 

91

 

Financing costs relating to convertible debt with SVB

 

 

 

 

 

(20

)

Financing costs relating to November 2022 private placement

 

 

(30

)

 

 

 

Net cash provided by financing activities

 

 

47

 

 

 

95

 

Effect of exchange rate changes on cash

 

 

(1

)

 

 

(1

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(8,257

)

 

 

(6,685

)

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

 

 

24,821

 

 

 

43,072

 

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

 

$

16,564

 

 

$

36,387

 

See accompanying notes.

 

7


Achieve Life Sciences, Inc.

 

Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

Total,

 

 

 

Common Stock

 

 

Preferred Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balance, December 31, 2022

 

 

17,897,029

 

 

$

87

 

 

 

 

 

$

 

 

$

144,148

 

 

$

4

 

 

$

(135,936

)

 

$

8,303

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,085

 

 

 

 

 

 

 

 

 

1,085

 

Shares issued on exercise of warrants

 

 

33,333

 

 

 

 

 

 

 

 

 

 

 

 

77

 

 

 

 

 

 

 

 

 

77

 

Financing costs relating to November 2022 private placement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(30

)

 

 

 

 

 

 

 

 

(30

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,992

)

 

 

(8,992

)

Balance, March 31, 2023

 

 

17,930,362

 

 

$

87

 

 

 

 

 

$

 

 

$

145,280

 

 

$

4

 

 

$

(144,928

)

 

$

443

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

Total,

 

 

 

Common Stock

 

 

Preferred Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balance, December 31, 2021

 

 

9,453,542

 

 

$

79

 

 

 

 

 

$

 

 

$

121,545

 

 

$

4

 

 

$

(93,586

)

 

$

28,042

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

823

 

 

 

 

 

 

 

 

 

823

 

Shares issued on exercise of warrants

 

 

3,709

 

 

 

 

 

 

 

 

 

 

 

 

24

 

 

 

 

 

 

 

 

 

24

 

Shares issued from purchase agreement with Virtu

 

 

12,742

 

 

 

 

 

 

 

 

 

 

 

 

91

 

 

 

 

 

 

 

 

 

91

 

Shares issued as settlement with trade vendor

 

 

3,584

 

 

 

 

 

 

 

 

 

 

 

 

26

 

 

 

 

 

 

 

 

 

26

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,573

)

 

 

(7,573

)

Balance, March 31, 2022

 

 

9,473,577

 

 

$

79

 

 

 

 

 

$

 

 

$

122,509

 

 

$

4

 

 

$

(101,159

)

 

$

21,433

 

 

See accompanying notes.

8


Achieve Life Sciences, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND GOING CONCERN UNCERTAINTY

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

The unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required to be presented for complete financial statements. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting only of normal recurring items) which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The accompanying consolidated Balance Sheet at December 31, 2022 has been derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year then ended. The unaudited consolidated financial statements and related disclosures have been prepared with the assumption that users of the interim financial information have read or have access to the audited consolidated financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2022 and filed with the U.S. Securities and Exchange Commission, or the SEC, on March 16, 2023.

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

 

Going Concern Uncertainty

 

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

 

We have historically experienced recurring losses from operations and have incurred an accumulated deficit of $144.9 million through March 31, 2023. As of March 31, 2023, we had cash and cash equivalents of $16.5 million and a negative working capital balance of $2.1 million. For the three months ended March 31, 2023, we incurred a net loss of $9.0 million and net cash used in operating activities was $8.3 million.

 

Substantial doubt exists as to our ability to continue as a going concern. Our ability to continue as a going concern is subject to material uncertainty and dependent on our ability to obtain additional financing. We have historically financed our operations through equity and debt financings. There can be no assurance that financing from these or other sources will be available to us in the future. Without additional funds, we may be forced to delay, scale back or eliminate some of our research and development, or R&D, activities or other operations and potentially delay product development in an effort to provide sufficient funds to continue our operations. If any of these events occurs, our ability to achieve our development and commercialization goals would be adversely affected.

 

Our current resources are insufficient to fund our planned operations for the next twelve months. We will continue to require substantial additional capital to continue our clinical development activities. Accordingly, we will need to raise substantial additional capital to continue to fund our operations from the sale of our securities, debt, partnering arrangements, non-dilutive fundraising or other financing transactions in order to finance the remaining development and commercialization of our product candidate. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our clinical development efforts. The uncertainty with respect to our operations and the market generally due to increasing interest rates and inflation may also make it challenging to raise additional capital on favorable terms, if at all. In addition, current macroeconomic conditions have caused turmoil in the banking sector. For example, on March 10, 2023, Silicon Valley Bank, or SVB, one of our banking partners, was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation, or FDIC, as receiver. On March 26, 2023, it was announced that First-Citizens Bank & Trust Company would assume all of SVB’s deposits and loans as of March 27, 2023 and since that date we continue to have full access to our cash and cash equivalents. Failure to raise capital as and when needed, on favorable terms or at all, will have a negative impact on our financial condition and our ability to develop our product candidate. We expect our R&D expenses to substantially increase in connection with our ongoing activities, particularly as we advance our product candidate in clinical development.

 

9


As disclosed in Note 7, we are required to keep substantially all of our cash and cash equivalents with a single financial institution, SVB, as required by the covenants of our Debt Agreement (Note 7 – Convertible Debt), and we have a loan and security agreement, or Loan Agreement, with SVB under which we have the option to borrow up to $10.0 million of term loans having an aggregate original principal amount of up to $10.0 million, or Term Loans. As of March 31, 2023, no amounts had been drawn under the Term Loans. The availability of Term Loans under the Loan Agreement expired on April 30, 2023, with no amounts drawn under the facility. There can be no assurance that SVB, First Citizens or any successor lender(s) will be willing to work with us on any modifications to the current Convertible Debt agreement.

 

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

 

2. ACCOUNTING POLICIES

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed those estimates that we believe are critical and require the use of complex judgment in their application in our audited financial statements for the year ended December 31, 2022 in our Annual Report on Form 10-K filed with the SEC, on March 16, 2023. Since December 31, 2022, there have been no material changes to our critical accounting policies or the methodologies or assumptions we apply under them.

 

3. GOVERNMENT GRANT

 

In July 2021, we announced that we were awarded a grant from the National Institute on Drug Abuse, or NIDA, of the National Institutes of Health, or NIH, to evaluate the use of cytisinicline as a treatment for cessation of nicotine e-cigarette use. This initial grant award, in the amount of $0.3 million, commenced on August 1, 2021, and was utilized to complete critical regulatory and clinical operational activities, such as protocol finalization, clinical trial site identification, drug packaging, and submission of a new Investigational New Drug Application, or IND, to the U.S. Food and Drug Administration, or FDA, for investigating cytisinicline in nicotine e-cigarette users.

 

In November 2021, we announced that the FDA had completed their review and accepted the IND application to investigate cytisinicline as a cessation treatment in this population. In June 2022, following NIH review of completed milestones, we announced that we were awarded the next grant funding from the NIDA in the amount of approximately $2.5 million, which we have used to conduct the ORCA-V1 Phase 2 clinical trial.

 

In June 2022, we announced the initiation of the ORCA-V1 Phase 2 clinical trial. ORCA-V1 will evaluate the efficacy and safety of 3 mg cytisinicline dosed three times daily compared to placebo in approximately 160 adult e-cigarette users at five clinical trial locations in the United States. Participants were randomized to receive cytisinicline or placebo for 12 weeks in combination with standard cessation behavioral support.

 

The full grant award of $2.8 million is expected to cover approximately half of the total ORCA-V1 clinical study costs. The Primary Investigators for the grant are our Chief Medical Officer, Dr. Cindy Jacobs, and Dr. Nancy Rigotti, Professor of Medicine at Harvard Medical School and Director, Tobacco Research and Treatment Center, Massachusetts General Hospital.

For the three months ended March 31, 2023, we incurred $0.5 million in qualifying R&D expenditures under the NIDA/NIH grant, which has been recorded as a reduction in R&D expense.

As of March 31, 2023, we had $0.1 million in grant receivable related to the NIDA/NIH grant. Of the $2.5 million grant awarded, we have received $1.6 million in reimbursements from NIDA/NIH.

 

4. INTANGIBLES

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

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

The components of intangible assets were as follows:

 

10


 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

Gross Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

Gross Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

 

Value

 

 

Amortization

 

 

Value

 

 

Value

 

 

Amortization

 

 

Value

 

License Agreements

 

$

3,117

 

 

$

(1,754

)

 

$

1,363

 

 

$

3,117

 

 

$

(1,699

)

 

$

1,418

 

 

For each of the three months ended March 31, 2023 and 2022, we recorded license agreement amortization expense of $0.1 million. The following table outlines the estimated future amortization expense related to intangible assets held as of March 31, 2023:

 

Year Ending December 31,

 

 

 

2023

 

 

167

 

2024

 

 

223

 

2025

 

 

223

 

Thereafter

 

 

750

 

Total

 

$

1,363

 

 

We evaluate the carrying amount of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful life or that indicate the asset may be impaired. We conducted an analysis of potential impairment indicators for long lived assets, including the license and supply agreements for the active pharmaceutical ingredient cytisinicline, and concluded that there were no indicators of impairment identified as of March 31, 2023.

 

5. LICENSE AGREEMENTS

Sopharma License and Supply Agreements

We are party to a license agreement, or the Sopharma License Agreement, and a supply agreement, or the Sopharma Supply Agreement, with Sopharma, AD, or Sopharma. Pursuant to the Sopharma License Agreement, we were granted access to all available manufacturing, efficacy and safety data related to cytisinicline, as well as a granted patent in several European countries related to new oral dosage forms of cytisinicline providing enhanced stability. Additional rights granted under the Sopharma License Agreement include the exclusive use of, and the right to sublicense, certain cytisinicline trademarks in all territories described in the Sopharma License Agreement. Under the Sopharma License Agreement, we agreed to pay a nonrefundable license fee. In addition, we agreed to make certain royalty payments equal to a mid-single digit percentage of all net sales of cytisinicline products in our territory during the term of the Sopharma License Agreement, including those sold by a third party pursuant to any sublicense which may be granted by us. To date, any amounts paid to Sopharma pursuant to the Sopharma License Agreement have been immaterial.

 

6. FAIR VALUE MEASUREMENTS

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

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

Level 1 – Quoted prices in active markets for identical securities.
Level 2 – Other significant inputs that are observable through corroboration with market data (including quoted prices in active markets for similar securities).
Level 3 – Significant unobservable input that reflects management’s best estimate of what market participants would use in pricing the asset or liability.

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

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

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

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

11


Financial Instruments

Money Market Securities

Money market securities are classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets for identical securities.

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

March 31, 2023

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Money market securities (cash equivalents)

 

 

12,759

 

 

 

 

 

 

 

 

 

12,759

 

Restricted cash

 

 

50

 

 

 

 

 

 

 

 

 

50

 

Total assets

 

$

12,809

 

 

$

 

 

$

 

 

$

12,809

 

Cash equivalents consist of the following (in thousands):

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

March 31, 2023

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Money market securities

 

$

12,759

 

 

$

 

 

$

 

 

$

12,759

 

Total cash equivalents

 

$

12,759

 

 

$

 

 

$

 

 

$

12,759

 

Money market securities (restricted cash)

 

 

50

 

 

 

 

 

 

 

 

 

50

 

Total restricted cash

 

$

50

 

 

$

 

 

$

 

 

$

50

 

We only invest in A (or equivalent) rated securities. All securities included in cash and cash equivalents had maturities of 90 days or less at the time of purchase.

Concentration of Cash and Cash Equivalents Risk


We place our cash primarily in commercial checking accounts with various financial institutions. As of March 31, 2023, approximately $
3.7 million of our cash and $12.8 million or our cash equivalents is held in a single financial institution, SVB, as required by the covenants of our Convertible Debt Agreement (Note 7 – Convertible Debt). Our commercial bank balances exceed federal insurance limits. We have not experienced any losses in our cash and cash equivalents for the three months ended March 31, 2023 and 2022.

 

 

Fair Value of Long-Term Debt

 

December 2021 Convertible Debt

 

The principal amount, carrying value and related estimated fair value of our convertible debt reported in the consolidated balance sheets as of March 31, 2023 and December 31, 2022 was as follows (in thousands). The aggregate fair value of the principal amount of the convertible debt is a Level 2 fair value measurement.

 

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

Principal

 

 

Carrying

 

 

Fair

 

 

Principal

 

 

Carrying

 

 

Fair

 

 

 

Amount

 

 

Value

 

 

Value

 

 

Amount

 

 

Value

 

 

Value

 

December 2021 Convertible Debt

 

$

15,000

 

 

$

16,371

 

 

$

17,256

 

 

$

15,000

 

 

$

16,071

 

 

$

16,987

 

 

7. CONVERTIBLE DEBT

On December 22, 2021, we entered into a $25.0 million contingent convertible debt agreement, or Original Debt Agreement, with Silicon Valley Bank, or SVB, and SVB Innovation Credit Fund VIII, L.P., or, together with SVB, the Lenders. As part of the Original Debt Agreement, the Lenders funded $15.0 million in the form of convertible indebtedness, or Convertible Debt, at closing. On April 26, 2022, we entered into (i) the Loan Agreement with SVB for the remaining $10.0 million remaining in the Original Debt Agreement, pursuant to which SVB provided a commitment to extend the Term Loans, and (ii) a first amendment to the Original Debt Agreement, or the Amendment, and as amended by the Amendment, the Debt Agreement.

 

12


Under the terms of the Debt Agreement, the Convertible Debt matures on December 22, 2023 and may be extended to December 22, 2024 upon our written request and SVB’s approval on or prior to December 22, 2023. The Convertible Debt will accrue interest at the aggregate of (a) a floating rate per annum equal to the greater of (i) 2.25% and (ii) the prime rate minus 1.0%, which interest is payable in cash monthly in arrears, and (b) 7.0% per annum, which interest shall compound monthly.

Subject to certain terms and conditions, the Lenders may convert all or any part of the outstanding Convertible Debt and accrued and unpaid interest at any time prior to maturity into shares of our common stock at a conversion price equal to $9.34 per share, subject to customary anti-dilution adjustments. Additionally, all outstanding Convertible Debt, including accrued and unpaid interest, will mandatorily convert into shares of our common stock, at the conversion price, on such date, if any, when the closing price per share of our common stock has been equal to or greater than $24.00 for thirty consecutive trading days prior to such date).

We have the right, or Call Right, at any time to repay and retire all (but not less than all) of the outstanding Convertible Debt and accrued and unpaid interest, if any, prior to its conversion by payment of a premium determined based on the date of such repayment equal to:

i.
125% of the principal amount of the Convertible Debt including accrued paid-in-kind interest, or PIK, if the Call Right is exercised on or before the 18-month anniversary of the date of the Debt Agreement; and
ii.
150% of the principal amount of the Convertible Debt including accrued PIK, if the Call Right is exercised after the 18-month anniversary of the date of the Debt Agreement,

in either case together with all accrued and unpaid interest on the principal balance of the Convertible Debt. If the Call Right is exercised by us, the Lenders will retain certain lookback rights in the event we enter into an agreement to be acquired in the twelve months following the exercise of the Call Right. We agreed to grant the Lenders a security interest in virtually all of our assets, including our patents and other intellectual property as security for our obligations under the Debt Agreement.

 

Subject to the terms and conditions of the Loan Agreement, we could borrow Term Loans under the Loan Agreement until April 30, 2023. Amounts borrowed under the Loan Agreement incurred interest at a floating rate equal to the greater of 3.50% and the Wall Street Journal, or WSJ, prime rate, and will be subject to interest only payments through April 30, 2024. Commencing on May 1, 2024, the outstanding loans under the Loan Agreement will be repaid in 24 consecutive equal monthly installments of principal plus accrued and unpaid interest. The Term Loans mature on April 1, 2026. Upon the earliest to occur of the maturity date, repayment of the Term Loans in full, acceleration of the loans or termination of the Loan Agreement, we will be required to pay a final payment equal to the aggregate principal amount of the Term Loan advances extended by SVB multiplied by 6.0%. Our obligations under the Loan Agreement are secured by substantially all of our assets, other than our intellectual property.

 

Upon and after borrowing under the Loan Agreement, we must comply with certain financial covenants as set forth in the Loan Agreement and the Amendment, including a minimum liquidity ratio of at least 1.25 to 1.00, or at our election after receiving at least $30 million in net cash proceeds from the issuance and sale of equity securities, a minimum market capitalization of at least $250 million. The Loan Agreement also contains customary affirmative and restrictive covenants, including covenants regarding the incurrence of additional indebtedness or liens, investments, transactions with affiliates, delivery of financial statements, payment of taxes, maintenance of insurance, dispositions of property, mergers or acquisitions, among other customary covenants. We are also restricted from paying dividends or making other distributions or payments on its capital stock, subject to limited exceptions. The Loan Agreement includes customary representations and warranties, events of default and termination provisions. In addition to the financial covenants described above, the Amendment makes certain other changes to the Original Debt Agreement related to our entry into the Loan Agreement. As of March 31, 2023 no amounts had been drawn on the Term Loans. The availability of Term Loans under the Loan Agreement expired on April 30, 2023, with no amounts drawn under the facility.

Under ASU 2020-06, the embedded conversion feature was not required to be bifurcated and recognized separately, as a result the convertible debt including the conversion feature has been recognized as a single unit of debt. The debt issuance costs have been recognized against the single unit of debt and will be amortized into interest expense over the term of the loan.

 

As of March 31, 2023 and December 31, 2022, the Convertible Debt balance was comprised of the following:

 

 

March 31,

 

 

December 31,

 

 

2023

 

 

2022

 

Convertible Debt Information

 

 

 

 

 

Principal

$

15,000

 

 

$

15,000

 

Transaction Costs

 

(50

)

 

 

(67

)

Accrued paid-in-kind interest

 

1,421

 

 

 

1,138

 

 

 

16,371

 

 

 

16,071

 

 

13


8. COMMON STOCK

[a] Authorized

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

[b] Issued and outstanding shares

 

At-the-Market Sales Agreement

 

On December 21, 2021, we entered into an At-the-Market Offering Sales Agreement, or ATM, with Virtu Americas, LLC, as sales agent, pursuant to which we may sell shares of common stock with an aggregate offering price of up to $25 million.

 

Since entry into the ATM, from December 21, 2021 through March 31, 2023, we offered and sold an aggregate of 200,000 shares of our common stock. These aggregate sales resulted in gross proceeds to us of approximately $1.5 million. As of March 31, 2023, shares of our common stock having an aggregate value of approximately $23.5 million remained available for sale under the ATM.

 

During the three months ended March 31, 2023, we did not sell any shares of our common stock pursuant to the ATM.

 

November 2022 Private Placement

In November 2022, we entered into subscription agreements with certain accredited investors pursuant to which we sold to the purchasers in a private placement transaction approximately 4,093,141 units at a purchase price of $4.625 per unit, with each unit consisting of two shares of common stock and a common stock purchase warrant to purchase one share of common stock, or the November 2022 Warrants.

The November 2022 Warrants are exercisable at a price per share of common stock of $4.50, subject to adjustment. The November 2022 Warrants are exercisable beginning on the six-month anniversary of the initial closing date of the private placement offering, May 18, 2023, or the Initial Exercise Date, and will expire on the seven year anniversary of the initial closing date of the private placement offering, or November 18, 2029. The November 2022 Warrants cannot be exercised by a warrant holder if, after giving effect thereto, such warrant holder would beneficially own more than 19.99% of our outstanding common stock. Additionally, subject to certain exceptions, if, after the Initial Exercise Date, (i) the volume weighted average price of our common stock for each of 30 consecutive trading days, or the November 2022 Measurement Period, which November 2022 Measurement Period commenced on November 18, 2022, exceeds 300% of the exercise price (subject to adjustments for stock splits, recapitalizations, stock dividends and similar transactions), (ii) the average daily trading volume for such November 2022 Measurement Period exceeds $500,000 per trading day and (iii) certain other equity conditions are met, and subject to a beneficial ownership limitation, then we may call for cancellation of all or any portion of the November 2022 Warrants then outstanding.

 

We received approximately $17.8 million in net proceeds from the private placement after deducting placement agent expenses and commissions and offering expenses

Equity Award Issuances and Settlements

During the three months ended March 31, 2023 and 2022, we did not issue any shares of common stock to satisfy stock option exercises and we did not issue any common stock to satisfy restricted stock unit settlements.

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[c] Stock options

2018 Equity Incentive Plan

As of March 31, 2023, we had reserved, pursuant to the 2018 Equity Incentive Plan, or the 2018 Plan, 1,862,003 shares of common stock for issuance upon exercise of stock options and settlement of restricted stock units by employees, directors, officers and consultants of ours, of which 1,180,905 were reserved for options currently outstanding, 647,625 for restricted stock units currently outstanding, and 33,473 were available for future equity grants.

Under the 2018 Plan, we may grant options to purchase common shares or restricted stock units to our employees, directors, officers and consultants. The exercise price of the options is determined by our board of directors, or Board, but will be at least equal to the fair value of the shares of common stock at the grant date. The options vest in accordance with terms as determined by our Board, typically over three to four years for options issued to employees and consultants, and over one to three years for members of our Board. The expiry date for each option is set by our Board with a maximum expiry date of ten years from the date of grant. In addition, the 2018 Plan allows for accelerated vesting of outstanding equity awards in the event of a change in control. The terms for accelerated vesting, in the event of a change in control, is determined at our discretion and defined under the employment agreements for our officers and certain of our employees.

New Employee Inducement Grants

We grant stock options as a material inducement to new employees for entering into employment agreements with us in accordance with Nasdaq Listing Rule 5635(c)(4). The stock options approved under the inducement grants are issued pursuant to a stock option agreement on terms substantially similar to those described in our 2018 Plan. The exercise price of the options is determined by our board of directors but will be at least equal to the fair value of the common shares at the grant date. The options vest in accordance with terms as determined by our board of directors. The expiry date for each option is set by our board of directors with a maximum expiry date of ten years from the date of grant. For the three months ended March 31, 2023, we granted 40,000 inducement stock options to new employees. As of March 31, 2023, 135,000 stock options granted as new employee inducement grants were outstanding.

 

2017 Equity Incentive Plan

As of March 31, 2023, we had reserved, pursuant to the 2017 Equity Incentive Plan, or the 2017 Plan, 13,156 shares of common stock for issuance upon exercise of stock options, currently outstanding, by employees, directors and officers of ours. Upon the effectiveness of our 2018 Plan, we ceased granting equity awards under our 2017 Plan.

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

2010 Performance Incentive Plan

As of March 31, 2023, we had reserved, pursuant to the 2010 Performance Incentive Plan, or the 2010 Plan, 175 shares of common stock for issuance upon exercise of stock options and settlement of restricted stock units by employees, directors, officers and consultants of ours, of which 175