UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20-F

 

(Mark One)

 

¨ Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934.
Or  
x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Or  
¨ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Or  
¨

Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

Date of event requiring this shell company report _______________.

 

Commission file number 001-32001

 

APTOSE BIOSCIENCES INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Canada

(Jurisdiction of Incorporation or Organization)

 

5955 Airport Road, Suite #228

Mississauga, Ontario

L4V 1R9

Canada

(Address of Principal Executive Offices)

 

Gregory Chow

Chief Financial Officer

5955 Airport Road, Suite #228

Mississauga, Ontario

L4V 1R9

Canada

Telephone: (647) 479-9828

Facsimile: (905) 234-2120

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

 

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

 

Title of Each Class   Name of Each Exchange On Which Registered
Common Shares   The NASDAQ Capital Market

 

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

 

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

 

 
 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

Common Shares, without par value, at December 31, 2015: 12,047,452

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes ¨ No x

 

If this is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

Yes ¨ No x

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes ¨ No ¨

 

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

 

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x

 

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

 

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

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

Item 17 ¨ Item 18 ¨

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

 

Yes ¨ No x

 

 
 

TABLE OF CONTENTS

 

    Page
     
PART I   1
     
Item 1. Identity of Directors, Senior Management and Advisors 1
Item 2. Offer Statistics and Expected Timetable 1
Item 3. Key Information 1
Item 4. Information on the Company 15
Item 4A. Unresolved Staff Comments 32
Item 5. Operating and Financial Review and Prospects 32
Item 6. Directors, Senior Management and Employees 33
Item 7. Major Shareholders and Related Party Transactions 46
Item 8. Financial Information 49
Item 9. The Offer and Listing 49
Item 10. Additional Information 51
Item 11. Qualitative and Quantitative Disclosures about Market Risk 59
Item 12. Description of Securities Other Than Equity Securities 60
     
PART II   61
     
Item 13. Defaults, Dividends, Arrearages and Delinquencies 61
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 61
Item 15. Controls and Procedures 61
Item 16. [Reserved] 62
Item 16A. Audit Committee Financial Expert 62
Item 16B. Code of Ethics 62
Item 16C. Principal Accountant Fees and Services 62
Item 16D. Exemptions from the Listing Standards for Audit Committees 62
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 63
     
PART III   64
     
Item 17. Financial Statements 64
Item 18. Financial Statements 64
Item 19. Exhibits 64

 

i
 

GENERAL

 

On July 10, 2007 (the ”Arrangement Date”), the Company completed a plan of arrangement and corporate reorganization with, among others, 4325231 Canada Inc. (now Global Summit Real Estate Inc.), formerly Lorus Therapeutics Inc. (“Old Lorus”), 6707157 Canada Inc. and Pinnacle International Lands, Inc. (the “Arrangement”). As a result of the plan of arrangement and reorganization, among other things, each common share of Old Lorus was exchanged for one common share (“Common Share”) of the Company and the assets (excluding certain deferred tax assets) and liabilities of Old Lorus (including all of the shares of its subsidiaries) were transferred, directly or indirectly, to the Company and/or our subsidiaries. We continued the business of Old Lorus after the Arrangement Date with the same officers and employees and continued to be governed by the same directors as Old Lorus prior to the Arrangement Date.

 

On August 28, 2014 (the “Name Change Date”), we changed our name from Lorus Therapeutics Inc. to Aptose Biosciences Inc. In this Annual Report on Form 20-F, all references to “Aptose”, the “Corporation”, the “Company”, “we”, “our”, “us” and similar expressions, unless otherwise stated, are references to Old Lorus prior to the Arrangement Date, Lorus Therapeutics Inc. after the Arrangement Date and Aptose Biosciences Inc. after the Name Change Date. References to this “Form 20-F” and this “Annual Report” mean references to this Annual Report on Form 20-F for the twelve months ended December 31, 2015.

 

We use the Canadian dollar as our reporting currency. All references in this Annual Report to “dollars” or “$” are expressed in Canadian dollars, unless otherwise indicated. See also “Item 3. Key Information” for more detailed currency and conversion information. Our consolidated financial statements, which form part of this Annual Report, are presented in Canadian dollars and are prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”), which differ in certain respects from accounting principles generally accepted in the United States (“U.S. GAAP”).

 

On October 1, 2014, we consolidated our outstanding Common Shares on the basis of one post-consolidation Common Share for each twelve pre-consolidation Common Shares. Historical trading prices and volumes disclosed are on a post-consolidated basis and reflect the one for twelve consolidation.

 

Our reporting and functional currency is the Canadian dollar. Unless otherwise indicated, all references to “dollars” or the use of the symbol “$” or “CDN$” are to Canadian dollars. See Item 3“Key Information - Exchange Rate Information”.

 

FORWARD-LOOKING STATEMENTS

 

This Annual Report contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 or “forward-looking information” (within the meaning of applicable Canadian securities legislation). Such statements include, but are not limited to, statements relating to:

 

·our business strategy;

 

·our clinical development plans;

 

·our ability to obtain the substantial capital we require to fund research and operations;

 

·our plans to secure strategic partnerships to assist in the further development of our product candidates and to build our pipeline;

 

·our plans to conduct clinical trials and pre-clinical programs;

 

·our expectations regarding the progress and the successful and timely completion of the various stages of our drug discovery, pre-clinical and clinical studies and the regulatory approval process;

 

·our plans, objectives, expectations and intentions; and

 

ii
 

·other statements including words such as “anticipate”, “contemplate”, “continue”, “believe”, “plan”, “estimate”, “expect”, “intend”, “will”, “should”, “may”, and other similar expressions.

 

The forward-looking statements reflect our current views with respect to future events, are subject to significant risks and uncertainties, and are based upon a number of estimates and assumptions that, while considered reasonable by us, are inherently subject to significant business, economic, competitive, political and social uncertainties and contingencies. Many factors could cause our actual results, performance or achievements to be materially different from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements, including, among others:

 

·our ability to obtain the substantial capital we require to fund research and operations;

 

·our lack of product revenues and history of operating losses;

 

·our early stage of development, particularly the inherent risks and uncertainties associated with (i) developing new drug candidates generally, (ii) demonstrating the safety and efficacy of these drug candidates in clinical studies in humans, and (iii) obtaining regulatory approval to commercialize these drug candidates;

 

·our drug candidates require time-consuming and costly preclinical and clinical testing and regulatory approvals before commercialization;

 

·clinical studies and regulatory approvals of our drug candidates are subject to delays, and may not be completed or granted on expected timetables, if at all, and such delays may increase our costs and could delay our ability to generate revenue;

 

·the regulatory approval process;

 

·our ability to recruit patients for clinical trials;

 

·the progress of our clinical trials;

 

·our ability to find and enter into agreements with potential partners;

 

·our ability to attract and retain key personnel;

 

·our ability to obtain and maintain patent protection;

 

·our ability to protect our intellectual property rights and not infringe on the intellectual property rights of others;

 

·our ability to comply with applicable governmental regulations and standards;

 

·development or commercialization of similar products by our competitors, many of which are more established and have or have access to greater financial resources than us;

 

·commercialization limitations imposed by intellectual property rights owned or controlled by third parties;

 

·our business is subject to potential product liability and other claims;

 

·our ability to maintain adequate insurance at acceptable costs;

 

·further equity financing may substantially dilute the interests of our shareholders;

 

iii
 

·changing market conditions; and

 

·other risks detailed from time-to-time in our on-going quarterly filings, annual information forms, annual reports and annual filings with Canadian securities regulators and the United States Securities and Exchange Commission (“SEC”), and those which are discussed under the heading “Item 3. Key Information—D. Risk Factors” in this document.

 

Should one or more of these risks or uncertainties materialize, or should the assumptions set out in the section entitled “Item 3. Key Information—D. Risk Factors” underlying those forward-looking statements prove incorrect, actual results may vary materially from those described herein. These forward-looking statements are made as of the date of this Annual Report or, in the case of documents incorporated by reference herein, as of the date of such documents, and we do not intend, and do not assume any obligation, to update these forward-looking statements, except as required by law. Such statements may not prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. Investors are cautioned that forward-looking statements are not guarantees of future performance and accordingly investors are cautioned not to put undue reliance on forward-looking statements due to the inherent uncertainty therein. New factors emerge from time to time, and it is not possible for management of the Company to predict all of these factors or to assess in advance the impact of each such factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement.

 

 

 

 

 

iv
 

PART I

 

Item 1. Identity of Directors, Senior Management and Advisers

 

Not applicable.

 

Item 2. Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3. Key Information

 

A.Selected financial data.

 

The following tables present our selected consolidated financial data. You should read these tables in conjunction with our audited consolidated financial statements and accompanying notes included in Item 18 of this Annual Report and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 5 of this Annual Report.

 

The selected consolidated financial information set forth below has been derived from the Company's audited consolidated financial statements that are prepared in accordance with IFRS, which differ in certain respects from the principles the Company would have followed had its consolidated financial statements been prepared in accordance with U.S. GAAP. The selected audited consolidated financial information should be read in conjunction with our audited consolidated financial statements and related notes thereto.

 

Effective July 17, 2014, we changed our fiscal year end from May 31 to December 31. As a result of that change, the period ending December 31, 2014 is for a seven month transition period.

 

The following table presents a summary of our consolidated statements of operations derived from our audited consolidated financial statements for the fiscal year ended December 31, 2015, the seven months ended December 31, 2014 and fiscal years ended May 31, 2014, 2013 and 2012.

 

Consolidated statements of operations data

 

(In thousands, except per share data)
   December 31,
2015
  December 31,
2014
  May 31,
2014
  May 31,
2013
  May 31,
2012
In accordance with IFRS                         
Revenue  $   $   $-   $   $ 
Research and development  $6,254   $2,404   $3,015   $3,317   $2,170 
General and administrative  $9,845   $5,542   $7,317   $2,257   $2,417 
Operating expenses  $16,099   $7,946   $10,332   $5,589   $4,600 
Finance expense  $43   $104   $297   $21   $33 
Finance income  $(1,516)  $(279)  $(76)  $(30)  $(6)
Net loss  $(14,626)  $(7,771)  $(10,553)  $(5,565)  $(4,614)
Basic and diluted loss per Common Share (post-consolidation)  $(1.23)  $(0.67)  $(2.02)  $(1.58)  $(2.76)
Weighted average number of Common Shares outstanding (post-consolidation)   11,906    11,605    5,216    3,521    1,688 

 

The following table presents a summary of our consolidated balance sheets as at December 31, 2015, 2014 and May 31, 2014, 2013 and 2012.

 

1
 

Consolidated balance sheet data

 

(In thousands, except per share data)  As at December 31  As at May 31,
   2015  2014  2014  2013  2012
In accordance with IFRS                         
Cash and cash equivalents  $11,503   $14,365   $19,367   $653   $320 
Investments  $8,245   $16,180   $11,019   $-   $- 
Total assets  $21,249   $31,600   $30,899   $1,035   $668 
Total liabilities  $2,356   $2,328   $2,460   $1,816   $2,696 
Total shareholders’ equity (deficit)  $18,893   $29,272   $28,439   $(781)  $(2,028)
Number of Common Shares outstanding (post- consolidation)   12,048    11,700    10,388    3,521    1,769 
Dividends paid on Common Shares                    
                          

 

Exchange Rate Information

 

The following table sets out the average exchange rates of CDN$1.00 for US$1.00 for the following periods as taken from the Bank of Canada’s website.

 

Period  Average Close
Fiscal Year Ended December 31, 2015   1.2787 
Seven Months Ended December 31, 2014   1.1080 
Fiscal Year Ended May 31, 2014   1.0662 
Fiscal Year Ended May 31, 2013   1.0042 
Fiscal Year Ended May 31, 2012   1.0005 
Fiscal Year Ended May 31, 2011   1.0066 

 

The following table sets forth the high and low exchange rates of CDN$1.00 for US$1.00 for each month during the previous six months.

 

Period  High  Low
February 2016  $1.4082   $1.3480 
January 2016  $1.4661   $1.3983 
December 2015  $1.4003   $1.3398 
November 2015  $1.3390   $1.3112 
October 2015  $1.3280   $1.2940 
September 2015  $1.3457   $1.3205 

 

On March 29, 2016, the noon buying rate of CDN$1.00 for US$1.00, as per the Bank of Canada, was USD $1.00=CDN$1.3154.

 

B.Capitalization and indebtedness.

 

Not applicable.

 

C.Reasons for the offer and use of proceeds.

 

Not applicable.

 

D.Risk factors.

 

Investing in our securities involves a high degree of risk. Before making an investment decision with respect to our Common Shares, you should carefully consider the following risk factors, in addition to the other information included or incorporated by reference in this Annual Report. Additional risks not currently known by us or that we consider immaterial at the present time may also impair our business, financial condition, prospects or results of operations. If any of the following risks occur, our business, financial condition, prospects or results of operations would likely be materially adversely affected. In that case, the trading price of our Common Shares could decline and you may lose all or part of the money you paid to buy our Common Shares. The risks set out below are not the only risks and uncertainties we currently face; other risks may arise in the future.

 

2
 

RISKS RELATED TO OUR BUSINESS

 

We are an early stage development company.

 

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 lead product candidate APTO-253 began enrolment in a Phase I clinical trial in patients with relapsed or refractory hematologic malignancies and was placed on clinical hold by the United States Food and Drug Administration (“FDA”) following a voluntary suspension of dosing by us. We are currently working with the FDA to have such hold lifted but significant additional funding or a partnership will be necessary to complete, if required, Phase II or Phase III clinical trials. Such funding may be very difficult, or impossible to raise in the public or private markets or through partnerships. If funding or partnerships are not attainable, the development of these 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.

 

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; or

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

·considerably reduce operations; or

·cease our operations.

 

3
 

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 $14.6 million in the fiscal year ended December 31, 2015, $7.8 million in the 7 months ended December 31, 2014 and $10.6 million in the fiscal years ended May 31, 2014, and as of December 31, 2015, we had an accumulated deficit of $232.9 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 candidate APTO-253 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.

 

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 commencement and completion of clinical trials for our products, including the APTO-253 phase I clinical trial, 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 cGMP requirements;
    any changes to our manufacturing process that may be necessary or desired;
    delays or failure to obtain 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, or CROs, to satisfy their contractual duties or meet expected deadlines;
    inspections of clinical trial sites by regulatory authorities or Institutional Review Boards, 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.

 

4
 

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, or 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.

 

We have contracted with multiple CMOs for the manufacture of APTO-253 to supply both the Active Pharmaceutical Ingredient (“API”) as well as to perform formulation and optimization studies with the intent of supplying drug product acceptable to the FDA for our phase I clinical trial. The formulation and manufacture of APTO-253 is a complex process with many variables involved. We believe these pre-qualified CMOs have the capacity, the systems and the experience to supply APTO-253 for our phase I clinical trial and future clinical trials. We have qualified the manufacturing facilities and the FDA has also performed site audits for our selected CMOs. Any manufacturing failures, delays or compliance issues could cause further delays in the re-initiation of the phase I clinical trial. If we are able to re-initiate the phase I clinical trial any manufacturing failures, delays or compliance issues could impact our ability to complete the phase I clinical trial.

 

There can be no assurances that CMOs will be able to meet our timetable and requirements. We have not 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. If we are unable to arrange for alternative third-party manufacturing sources on commercially reasonable terms or in a timely manner, we may be further delayed 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.

 

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.

 

5
 

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 lead product candidate APTO-253 has entered a Phase Ib testing in patients with relapsed or refractory hematologic malignancies for which 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.

 

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 enrolment 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 commencement and completion of clinical trials and our ability to secure the financing necessary to continue the development of our product candidates. The actual timing of these events can vary dramatically due to factors within and beyond our control, such as delays or failures in our 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. Our clinical trials may not be completed; we may not make regulatory submissions or receive regulatory approvals as planned; 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.

 

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.

 

6
 

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.

 

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.

 

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 Dr. William G. Rice, our Chairman, President and Chief Executive Officer, or other key members of our staff, including Gregory Chow, our Senior Vice President and Chief Financial Officer, or Avanish Vellanki, our Senior Vice President and Chief Business Officer, could harm us. We have employment agreements with Dr. Rice and Mr. Chow and Mr. Vellanki, although 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.

 

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 regulations, provide accurate information to the FDA, comply with manufacturing standards we have established, comply with federal and state 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.

 

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Exchange rate risk

 

We are exposed to fluctuations of the Canadian dollar against certain other currencies because we publish our consolidated financial statements and hold most of our investments in Canadian dollars, while we incur many of our expenses in foreign currencies, primarily the United States dollar. Fluctuations in the value of currencies such as the recent depreciation of the Canadian dollar against the United States dollar could cause us to incur currency exchange losses. We do not currently employ a hedging strategy against exchange rate risk. We cannot assert with any assurance that we will not suffer losses as a result of unfavorable fluctuations in the exchange rates between the Canadian dollar, the United States dollar and other currencies.

 

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 November 2015, we licensed intellectual property from the Moffitt Cancer Center for exclusive global rights to potent, multi-targeting, single-agent inhibitors for the treatment of hematologic and solid tumor cancers.

 

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;
    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.

 

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.

 

8
 

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 competitor’s 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.

 

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. 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.

 

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 United States Patent and Trademark Office 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.

 

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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, U.S. 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 U.S. 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 U.S. 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 favour 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 U.S. 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 disclose our confidential technology. 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.

 

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 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 United States Patent and Trademark Office, 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 favourable to us. Our pending patent applications, even if issued, may not be held valid or enforceable.

 

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Trade secrets

 

We also rely on trade secrets, know-how and confidentiality provisions in our agreements with our collaborators, employees and consultants to protect our intellectual property. However, these 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. Our trade secrets or those of our collaborators also may be independently discovered by others.

 

We may incur substantial cost in defending our intellectual property.

 

While we believe that our products and technology do not infringe 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.

 

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, our lead product candidate. 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.

 

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 the Company’s 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.

 

As the Company’s development activities progress towards the commercialization of product candidates, our liability coverage may not be adequate, and the Company may not be able to obtain adequate product liability insurance coverage at a reasonable cost, if at all. Even if the Company obtains product liability insurance, its financial position may be materially adversely affected by a product liability claim. A product liability claim could also significantly harm the Company’s reputation and delay market acceptance of its 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.

 

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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 favourable 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. 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.

 

Extensive Government Regulation

 

Government regulation is a significant factor in the development, production and marketing of the Company’s 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 the Company's 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 many not approve the labeling claims that are necessary or desirable for the successful commercialization of the Company’s 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.

 

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 raise additional capital;
·the progress of our clinical trials;
·our ability to obtain partners and collaborators to assist with the future development of our products;
12
 
·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 shares issued 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 condition.

 

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 (“NASDAQ”) and the Toronto Stock Exchange (“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.

 

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 Annual Report and the documents incorporated by reference into this Annual Report, 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.

 

13
 

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

 

U.S. investors in our Common Shares should be aware that the Company believes it was classified as a passive foreign investment company (“PFIC”) during the tax year ended December 31, 2015, 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, the Company expects to be a PFIC for the current tax year ending December 31, 2016 and may be a PFIC in subsequent tax years. If the Company is a PFIC for any year during a U.S. shareholder’s holding period, then such U.S. 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 U.S. 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 the Company is a PFIC, whether or not the Company distributes any amounts to its shareholders. However, U.S. 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 U.S. shareholders with information that such U.S. shareholders require to report under the QEF election rules, in the event that we are a PFIC and a U.S. shareholder wishes to make a QEF election. Thus, U.S. shareholders should assume that they will not be able to make a QEF election with respect to their Common Shares. A U.S. 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. This paragraph is qualified in its entirety by the discussion below under the heading “Certain United States Federal Income Tax Considerations.” Each U.S. shareholder should consult its own tax advisor regarding the U.S. federal, U.S. 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 U.S. Jumpstart Our Business Startups Act of 2012, or 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, 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:

 

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.

 

14
 

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 the Sarbanes-Oxley Act of 2002, as amended, or 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 the 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 a foreign private issuer and 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 IFRS, 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.

 

As a foreign private issuer, we are not subject to certain United States securities law disclosure requirements that apply to a domestic United States issuer, which may limit the information which would be publicly available to our shareholders.

 

As a foreign private issuer, we are 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 are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act. Moreover, we are 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 are we generally required to comply with the SEC’s Regulation FD, which restricts the selective disclosure of material non-public information. For as long as we are a “foreign private issuer” we intend to file our annual financial statements on Form 20-F and furnish our quarterly updates on Form 6-K to the SEC for so long as we are subject to the reporting requirements of Section 13(g) or 15(d) of the Exchange Act. However, the information we file or furnish is not the same as the information that is required in annual and quarterly reports on Form 10-K or Form 10-Q for U.S. domestic issuers. Accordingly, there may be less information publicly available concerning us than there is for a company that files as a domestic issuer.

 

Item 4. Information on the Company

 

A.History and development of the Company.

 

15
 

Old Lorus was incorporated under the Business Corporations Act (Ontario) on September 5, 1986 under the name RML Medical Laboratories Inc. On October 28, 1991, RML Medical Laboratories Inc. amalgamated with Mint Gold Resources Ltd., resulting in Old Lorus becoming a reporting issuer (as defined under applicable securities law) in Ontario, on such date. On August 25, 1992, Old Lorus changed its name to IMUTEC Corporation. On November 27, 1996, Old Lorus changed its name to Imutec Pharma Inc., and on November 19, 1998, Old Lorus changed its name to Lorus Therapeutics Inc. On October 1, 2005, Old Lorus continued under the Canada Business Corporations Act.

 

On the Arrangement Date, Old Lorus completed a plan of arrangement and corporate reorganization with, among others, 6650309 Canada Inc. (“New Lorus”), 6707157 Canada Inc. and Pinnacle International Lands, Inc. As a result of the plan of arrangement and reorganization, each Common Share of Old Lorus was exchanged for one Common Share of New Lorus. New Lorus continued the business of Old Lorus after the Arrangement Date with the same officers and employees and continued to be governed by the same board of directors as Old Lorus prior to the Arrangement Date.

 

On August 28, 2014, New Lorus changed its name from Lorus Therapeutics Inc. to Aptose Biosciences Inc. and on October 1, 2014 we consolidated our outstanding Common Shares on the basis of one post-consolidation Common Share for each twelve pre-consolidation Common Shares.

 

The address of the Company’s head and registered office is 5955 Airport Road Suite #228, Mississauga, Ontario, Canada, L4V 1R9 and our phone number is (647) 479-9828. Our corporate website is www.aptose.com. The contents of the website and items accessible through the website are specifically not incorporated in this Annual Report by reference.

 

Aptose has three subsidiaries: Aptose Biosciences U.S. Inc. (“Aptose USA”), a company incorporated under the laws of Delaware, USA, Aptose Suisse GmbH (“Aptose Suisse”) a company incorporated under the laws of Zug, Switzerland and NuChem Pharmaceuticals Inc. (“NuChem”), a company incorporated under the laws of Ontario, Canada. Aptose owns 100% of the issued and outstanding voting share capital of Aptose USA and Aptose Suisse and 80% of the issued and outstanding voting share capital of NuChem.

 

Our Common Shares are listed on the NASDAQ under the symbol “APTO” and on the TSX under the symbol “APS”.

 

Aptose is a clinical stage biotechnology company with a commitment to the development of targeted therapies addressing unmet medical needs in oncology. We develop therapeutics focused on epigenetic processes and signal transduction abnormalities at the leading edge of cancer research, coupled with companion diagnostics to identify the optimal patient population for our products. Our product pipeline includes cancer drug candidates that exert potent activity as stand-alone agents and that enhance the activities of other anticancer agents without causing overlapping toxicities. Indeed, we believe our targeted products can emerge as first-in-class or best-in-class agents that deliver single agent benefit and can serve as the backbone of combination therapies for specific populations of cancer patients.

 

We believe the future of cancer treatment and management lies in the prospective selection and treatment of patients having malignancies that are genetically or epigenetically predisposed to response based on a drug’s unique mechanism of action. We are of the view that many drugs currently approved for the treatment and management of cancer are not selective for the specific genetic alterations (targets) that cause the patient’s tumor and hence lead to significant toxicities due to off-target effects. Aptose’s strategy is to develop agents that address a common underlying disease-promoting pathway within a patient population, and we intend to apply this strategy across several therapeutic indications in oncology, including hematologic malignancies and solid tumor indications. Our lead program, APTO-253, is a first-in-class inducer of the Krüppel-like factor 4 gene (the “Klf4 Gene”) for patients with advanced hematologic malignancies, including acute myeloid leukemia (“AML”) and myelodysplastic syndromes (“MDS”).

 

The following table sets forth various product conditions in our pipeline and their respective stages of development.

  

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APTOSE PROGRAM PIPELINE

 

 

Capital Expenditures and Divestitures

 

Not applicable.

 

B.Business overview.

 

As noted above, Aptose is committed to the development of anticancer drugs that target specific epigenetic processes and signal transduction abnormalities that underlie a particular life-threatening malignancy. This targeted approach is intended to impact the disease-causing events in cancer cells without affecting normal processes within cells. Such an approach requires that we first identify the underlying oncogenic mechanism in particular cancer cells and then create a therapeutic that selectively impacts that oncogenic mechanism. As described below, an underlying oncogenic process has been identified as operative in the majority of patients with AML (acute myeloid leukemia), an aggressive cancer of the blood and bone marrow for which there is a tremendous need for safe and effective anticancer drugs. Aptose has created a small molecule targeted drug (APTO-253) that selectively impacts that underlying oncogenic process, and the drug is under development as a novel therapy for AML and the related MDS.

 

APTO-253

 

APTO-253 is a novel small molecule that can induce expression of the genes that codes for the Krüppel-like factor 4 (KLF4) master transcription factor and the p21 cell cycle inhibitor protein, and can inhibit expression of the c-Myc oncogene, leading to cell cycle arrest and programmed cell death (apoptosis) in human-derived solid tumor and hematologic cancer cells.  Likewise, in nonclinical pharmacology studies APTO-253 demonstrates in vivo anti-tumor activity against xenograft models of solid tumors and hematologic cancers, with acute myeloid leukemia (AML) cells exhibiting a particular sensitivity to APTO-253.  A Phase 1 study with APTO-253 in patients with advanced solid tumors was completed in mid-2013. That trial, which employed a suboptimal dosing schedule, demonstrated modest clinical activity in the all-comer solid tumor patient population.

 

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The vast majority of patients with AML are reported to exhibit inappropriate activation of the CDX2 gene and resultant epigenetic down-regulation (silencing) of KLF4 expression, as well as inappropriate upregulation of c-Myc as key leukemogenic events. Aptose scientists performed RT-qPCR expression analysis of KLF4 and CDX2 levels in normal PBMC and AML cell lines and confirmed the silencing of KLF4 expression and elevated expression of CDX2 in AML cells, and multiple publications have reported the elevation of c-Myc oncogene expression in AML cells. In addition to AML, similar roles for KLF4 silencing and c-Myc upregulation have been reported in subpopulations of adult T-cell leukemia, lymphoma, multiple myeloma and high-risk MDS.  Induction of KLF4 expression and suppression of c-Myc by APTO-253 may therefore be an effective therapeutic approach in these patient populations.  Because of the robust scientific evidence linking KLF4 silencing and c-Myc upregulation to cellular transformation in hematologic malignancies, Aptose undertook an ongoing Phase 1b clinical study with escalating doses of APTO-253 followed by two planned disease-specific expansions in adults with hematologic malignancies. This Phase 1b trial is currently on clinical hold (see discussion below).

 

Preclinical In Vitro Evaluation of APTO-253

 

APTO-253 demonstrated potent and selective in vitro antiproliferative activity against a variety of leukemia cell lines, including AML, ALL and chronic myeloid leukemia (CML), as well as non-Hodgkin’s lymphoma (NHL) cell lines, with IC50 values ranging from ~0.007 – 0.3 µM. These hematologic cell lines appeared to be far more sensitive to APTO-253 than the solid tumor cell lines, including colon cancer, non-small cell lung cancer (NSCLC), prostate cancer and melanoma, which exhibited IC50 values of ~0.04– 2.6 µM, which had previously served to support the completed Phase 1 solid tumor study.  However, new insights from academic publications into the significance of KLF4 suppression in patients with hematologic malignancies appear to be broadly corroborated by these data.

 

APTO-253 Induces Expression of the KLF4 Gene

 

Inappropriate expression of CDX2 in AML cells results in epigenetic silencing of the KLF4 gene and subsequent downstream silencing of the pro-apoptotic p21 gene. To characterize the effect of APTO-253 treatment of AML cells, the levels of CDX2, KLF4 and p21 gene expression were measured as a function of the concentration of APTO-253 and as a function treatment time. As shown in Figure 3, KLF4 and p21 gene expression increased in cells treated with APTO-253, while there was no change in the levels of CDX2 expression. 

 

 

APTO-253 Induces Expression of KLF4 and p21. The MV4-11 AML cell line was treated with the indicated concentrations of APTO-253 or Vehicle for 24 hours (left panel) or with 500 nM APTO-253 or Vehicle for the indicated period of time (right panel) and the expression of KLF4, p21 and CDX2 mRNA levels were determined by qRT-PCR.

 

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Because AML cells are known to exhibit extreme epigenetic plasticity and to have inappropriate expression of the c-Myc oncogene, we queried if APTO-253 might also inhibit the expression of c-Myc. Indeed, APTO-253 induced a dose-dependent inhibition of c-Myc mRNA expression in three different AML cell lines, and caused reductions in the c-Myc protein. In a time course assay, APTO-253 induces the simultaneous induction of the KLF4 gene and the suppression of the c-Myc gene in AML cells. Moreover, in studies conducted to evaluate apoptotic events, AML cells treated with APTO-253 displayed changes in apoptotic markers, including high level induction of caspase-3 activity.  APTO-253-treated AML cells demonstrated a high percentage of apoptotic (Annexin V-positive) cells that correlated with drug concentration. Together, these preclinical studies demonstrate that APTO-253 can affect critical oncogenic process (expression of KLF4, c-Myc and p21 genes) which should lead to programmed cell death in AML cells.

 

Phase Ib Trial

 

On July 28, 2014, we announced that the U.S. FDA had completed its review and cleared the Investigational New Drug (“IND”) application of APTO-253 for the treatment of hematologic malignancies, including AML, high-risk MDS, lymphomas and multiple myeloma. The Phase Ib trial will evaluate safety, tolerability, pharmacokinetics, pharmacodynamic responses and efficacy of APTO-253 as a single agent.

 

For the study, a modified dose schedule was selected, such that APTO-253 is being administered on the first two days of each 7-day dosing period of a 28-day cycle (i.e., days 1, 2, 8, 9, 15, 16, 22, 23).  This results in lower per-administration dose levels to provide the same overall exposure per cycle achieved in the prior Phase 1 solid tumor study, and to more consistently achieve the minimum exposure levels at the end of each dosing period that may be important for efficacy.

 

Approximately 15 patients will be enrolled in each of two arms of the dose escalation phase of the study: arm (A) will include patients with acute leukemias (including AML) and high-risk myelodysplastic syndromes, or MDS; arm (B) will include patients with lymphomas (Hodgkin’s and non-Hodgkin’s Lymphoma) and multiple myeloma, followed by enrollment of an additional 15 patients in each of two disease-specific expansion cohorts, for a total estimated enrollment of 60 patients.

 

The primary objectives of the Phase Ib trial are: (i) to further assess safety on a new and optimized dosing schedule, and (ii) to identify the recommended dose for APTO-253 for the upcoming Phase Ib single-agent expansion trials which will include one expansion in AML for up to 15 patients and one expansion in MDS for up to 15 patients, in hematologic malignancies as well as in subsequent Phase 2 combination trials.

 

We plan to monitor patient Krüppel-like factor 4 (“KLF4”) and the product of the embryonic Cdx2 Gene, the CDX2 Protein levels upon entry into the study, throughout the study, and during a post-treatment period. We will not exclude patients based on KLF4 or CDX2 status from participating in this first study as we believe this approach may be useful in further validating our companion diagnostic and observing potential responses among the broader population.

 

For future development, upon selection of a lead hematologic indication from this Phase 1b study, combination of APTO-253 with a standard therapy will be considered.

 

Indications for APTO-253 Clinical Studies

 

APTO-253 is being administered to patients who have any of the following hematologic malignancies that have failed standard therapies.

 

·Acute leukemias (including AML, but not including acute promyelocytic leukemia)

·High-risk MDS syndromes

·Lymphoma (Hodgkin’s and Non-Hodgkin’s)

·Multiple myeloma

 

Upon completion of the dose-escalation stage of the study and determination of the recommended Phase 2 dose (RP2D), two hematologic cancer indications will be selected from those indications studied in the dose-escalation phase, for enrollment in two disease-specific single-agent expansion cohorts.

 

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Clinical Hold and Current Status

 

We announced in November 2015 that the Food and Drug Administration (FDA), following a voluntary suspension of dosing by us and discussions with us, placed our Phase Ib clinical trial of APTO-253 in patients with hematologic cancers on clinical hold. This hold was intended to ensure patient safety within the trial and to ensure manufacturing and dosing procedures are consistent with the appropriate documented quality standards.

 

The voluntary suspension of dosing by Aptose was initiated as a result of a preliminary review, which was accelerated to evaluate manufacturing processes and procedures upon the report of an operational difficulty with an IV infusion pump at a clinical site. The pump experienced back pressure during IV patient dosing at the point of the filter. Further review discovered preliminary concerns regarding the documentation records of the manufacturing procedures of the drug product associated with APTO-253. A complete safety review of all patient files had been completed prior to initial discovery of the manufacturing documentation irregularities, and there have been no drug-related serious adverse events (SAEs) reported. The observed pharmacokinetic levels in the patients treated were within the expected range. Thus, the clinical hold is based on a manufacturing issue and is not related to safety, efficacy or pharmacokinetics.

 

Currently, Aptose is guiding a qualified CMO to introduce new procedures to formulate APTO-253 into a drug product that is safe and stable, and which should not result in filter clogging events in the future. The CMO now has manufactured new GMP batches of the API to provide material for formulation studies and to supply the clinical trials into the future. Aptose also qualified a separate CMO with expertise in liquid formulations to perform formulation development studies and to manufacture the final form of the drug product for return to the clinic. The CMO has performed numerous formulation studies using a variety of methodologies and is now evaluating their solubility and stability over time to select the best methodology to manufacture the new batch of drug product to take to the FDA. In order to have the clinical hold lifted and to return APTO-253 to the clinical trial, Aptose must articulate the root cause of the filter clogging incident to the FDA and demonstrate to the FDA that a newly manufactured batch of GMP-grade APTO-253 drug substance has been formulated and is unlikely to cause such incidents in the future. The ultimate decisions regarding the lift of the clinical hold, the appropriateness of the new drug product, and the starting dose for the trial will reside with the FDA.

 

Biomarker Strategy for APTO-253 in a Clinical Setting

 

Previous basic research studies have utilized RT-qPCR analyses of CDX2, KLF4 and p21 transcripts in AML cell lines and the primary blood cells of AML patients (Scholl et al., 2007; Faber et al., 2013).  Aptose has now optimized the RT-qPCR reagents and procedures for measurement of the CDX2, KLF4 and p21 mRNA expression levels in human AML cells. Consequently, analytically validated RT-qPCR assays for the relative quantification of CDX2, KLF4 and p21 transcripts may be used to select patients expected to be most sensitive for response to APTO-253 therapy.  In addition, these assays may be used to monitor on-treatment responses.

 

Biopsies are collected from lymphoma patients that are enrolled in the clinical trial.  Blood and bone marrow are collected from AML patients and bone marrow aspirates are collected from MDS patients.  FFPE core needle biopsy tissue and CD34+ cell pellets derived from blood and bone marrow will be used for gene expression profiling.  A RT-qPCR method is being developed, optimized and validated for the analysis of CDX2, KLF4 and p21 target transcripts and appropriate reference gene transcripts in the samples collected from patients enrolled in the clinical trial.

 

BEAT AML Preclinical Studies of APTO-253 Against Patient Isolates

 

On September 29, 2014, we announced, along with the Knight Cancer Institute at Oregon Health & Science University (OHSU) and The Leukemia & Lymphoma Society (LLS) that we entered into a formal collaboration with the Beat AML initiative. Beat AML is a groundbreaking research initiative that includes industry and academic collaborators led by top scientists within the Knight Cancer Institute in collaboration with The Leukemia & Lymphoma Society. Its goal is to accelerate development of potential therapies for AML.

 

During the 2015 American Society of Hematology (ASH) Conference, Aptose’s collaborators at OHSU’s Knight Cancer Institute presented preclinical data on APTO-253 that are derived from our participation in the Beat AML Initiative with Dr. Brian Druker. The poster presentation was entitled “Broad Activity of APTO-253 in AML and Other Hematologic Malignancies Correlates with KLF4 Expression Level”. The Beat AML initiative, a groundbreaking initiative that was formed in collaboration with The Leukemia & Lymphoma Society and the Knight Cancer Institute, has allowed Aptose to evaluate the effect of APTO-253, alone or in combination with other anti-cancer agents, in fresh bone marrow isolates from patients with AML, myelodysplastic syndrome (MDS), chronic myeloid leukemia (CML) and chronic lymphocytic leukemia (CLL).

 

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In the 2015 OHSU ASH presentation, researchers used a range of doses, from low nanomolar to ten micromolar, and found that APTO-253 killed AML cells at an IC50 of less than 1uM in a significant number of AML patient samples, with a trend toward correlation with baseline KLF4 expression level. Moreover, APTO-253 demonstrated enhanced killing of AML patient samples when combined with two other therapeutic strategies, the BET bromodomain inhibitor JQ1 and the FLT3 inhibitor quizartinib. Such data support the development of APTO-253 for the treatment of AML, support the role of KLF4 in the mechanism of action of APTO-253, and support the ultimate use of APTO-253 in combination with other high profile drugs under development for the treatment of AML. OHSU continues to evaluate APTO-253 in additional samples across AML and other hematologic malignancies, along with other novel therapeutic combinations.

 

Acute Myeloid Leukemia

 

AML is a rapidly progressing cancer of the blood and bone marrow characterized by the uncontrolled proliferation of dysfunctional myeloblasts that do not mature into healthy blood cells. It is the most common form of acute leukemia in adults. The American Cancer Society estimates there will be approximately 19,950 new cases of AML and approximately 10,430 deaths from AML in the U.S. in 2016. Standard induction therapy with chemotherapy is successful in many AML patients, but the majority of these patients will relapse with treatment refractory disease. The average age of a patient with AML is 67 years.  Approximately 48% patients less than age 60, and 34% of patients greater than or equal to age 60, with residual disease after induction therapy will achieve a remission, as reported by Datamonitor.

 

Myelodysplastic Syndromes

 

MDS are a group of blood and bone marrow disorders. In MDS, stem cells do not mature normally, and the number of blasts (immature cells) and dysplastic (abnormally developed) cells increases. Also, the number of healthy mature cells decreases, meaning there are fewer normal red blood cells, white blood cells, and platelets. The numbers of blood cells are often called blood cell counts. Because of the decrease in healthy cells, people with MDS often have anemia (a lowered blood cell count), and may have neutropenia (a low white blood cell count) and thrombocytopenia (a low platelet count). Also, the chromosomes (long strands of genes) in the bone marrow cells may be abnormal. According to the American Cancer Society, there are approximately 13,000 new cases of MDS annually in the US. Additionally, Datamonitor Healthcare reports median survival in higher risk MDS patients may range between five months and two years. There are several subtypes of MDS, and some subtypes of MDS may eventually turn into AML.

 

Solid Tumors

 

Phase I data with APTO-253 in patients with solid tumors and preclinical data in solid tumor cells, including non-small cell lung cancer (“NSCLC”), identified an opportunity for APTO-253 in patients possessing cancers with reduced Klf4 Gene expression. Our prior Phase 1 study with APTO-253 also revealed a favorable safety profile for APTO-253. Various solid tumors have exhibited suppressed levels of Klf4 Gene in scientific publications, including colorectal, gastric, pancreatic, prostate and cervical cancers, as well as NSCLC. NSCLC is an indication that we consider to have a large market potential and important unmet need worldwide, in which the Klf4 Gene is a tumor suppressor that is present in case-matched normal cells but depressed in NSCLC tumor cells. Aptose may in the future evaluate the clinical utility of APTO-253 in additional studies in a subset of NSCLC patients that may be predisposed to a response with a therapeutically activating the Klf4 Gene.

 

In January 2011, Aptose announced the first patient enrolment in a Phase I dose-escalation study for APTO-253 in patients with advanced or metastatic solid tumors who are unresponsive to conventional therapy or for which no effective therapy is available. The study was initially being conducted at Memorial Sloan-Kettering Cancer Center in New York and later added MD Anderson Cancer Center in Houston as a second site. Objectives of the study included determination or characterization of the safety profile, maximum tolerated dose, and antitumor activity of APTO-253, as well as pharmacokinetics and a recommended Phase II dose for subsequent clinical trials.

 

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In June 2012, Aptose announced the addition of MD Anderson Cancer Center as a second site in the then ongoing APTO-253 Phase I clinical trial, under the direction of Dr. Jennifer Wheler as the principal investigator. In addition, Aptose announced that the study had successfully completed the accelerated drug dose escalation stage (Stage 1), with further escalation under way in the non-accelerated dose escalation stage (Stage 2) for the purpose of determining the maximal tolerated dose level and recommended Phase II dose. The addition of a second site expanded patient availability for enrollment.

 

In January 2013, Aptose announced that Phase I clinical study of APTO-253 has successfully escalated to the target dose level based on predicted and observed clinical effects without limitation by toxicity. The success of this study allowed Aptose to initiate a biomarker clinical investigation to further explore the effects of the drug at relevant doses determined in the clinical trial.

 

In April 2013, Aptose announced the presentation of preclinical data at the 2013 Annual Meeting of the American Association for Cancer Research (“AACR”), held in Washington, DC from April 6, 2013 through April 10, 2013. The poster presentation titled “Utilization of KLF4 as a pharmacodynamic biomarker for in vivo anticancer activity of a novel small molecule drug APTO-253” covered data from preclinical studies on anticancer activity and tumor biomarker analysis for APTO-253 in animal models of human NSCLC. The studies demonstrate that APTO-253 has antitumor activity with a dose-response effect in NSCLC that is associated with a dose dependent increase of the KLF4 gene.

 

In July 2013, Aptose announced the results of the Phase 1 clinical trial of APTO-253. In this first-in-man, dose-escalation clinical study, APTO-253 demonstrated a favorable safety profile, as well as encouraging signs of antitumor activity. The design of this trial consisted of APTO-253 as a single agent in patients with advanced solid tumors resistant to multiple standard therapies. The study enrolled 27 patients, all of which had failed a median of four prior chemotherapies. Although this was primarily a dose-escalation safety study, efficacy and pharmacokinetics were also explored.

 

The clinical trial enrolled patients at seven dose levels ranging from 20 to 229 mg/m2. Of the 27 patients enrolled, 17 were evaluable for efficacy. Of these 17 patients, seven (41%) achieved stable disease by Response Evaluation Criteria In Solid Tumors (“RECIST”). This included patients with colorectal, lung, appendiceal, liver and uterine cancers. Dose related activity was demonstrated at the higher dose levels (176 and 229 mg/m2). At these two highest dose levels, four of five evaluable patients (80%) achieved sustained stable disease by RECIST ranging from 5.6 months to 8 months, representative of disease control. Of these, a patient with non-small cell lung cancer at the highest dose level additionally demonstrated non-index tumor shrinkage.

 

The safety assessment indicated that APTO-253 was well tolerated at all dose levels tested in this trial. The dose escalation was not limited by toxicity. The most common adverse event was Grade 1 or 2 fatigue seen in three patients. There was one Grade 3 toxicity, asymptomatic low blood phosphate level that was reversible by supplementation with phosphates. The pharmacokinetic profile was consistent with the predictive profile seen preclinically, and the elimination profile and half-life in patients were suggestive of a very rapid distribution phase and prolonged retention.

 

Small Molecule Program

 

In April 2013, Aptose entered into a research and license option agreement with Elanco, the animal health division of Eli Lilly and Company (“Elanco”), to investigate a new proprietary series of Aptose compounds for veterinary medicine. Pursuant to the agreement, Elanco will fund the research program and was granted an exclusive option to license the worldwide rights to selected compounds for veterinary use; the terms of which will be negotiated if the option is exercised by Elanco. Aptose retains the rights to develop and commercialize these compounds for human use. Lead optimization is underway and the next goal is to identify a clinical drug candidate.

 

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Multi-Targeting Bromodomain Program

 

In November 2015, Aptose entered into a definitive agreement with Moffitt Cancer Center for exclusive global rights to potent, multi-targeting, single-agent inhibitors for the treatment of hematologic and solid tumor cancers. These small molecule agents are highly differentiated inhibitors of the Bromodomain and Extra-Terminal motif (BET) protein family members, which simultaneously target specific kinase enzymes. The molecules developed by Moffitt exhibit single-digit nanomolar potency against the BET family members and specific oncogenic kinases which, when inhibited, are synergistic with BET inhibition. Under the agreement, Aptose will gain access to the drug candidates developed by Moffitt and the underlying intellectual property covering the chemical modifications enabling potent bromodomain (BRD) inhibition on the chemical backbone of a kinase inhibitor. Aptose expects lead clinical candidates to emerge from the collaboration by late 2016.

 

In December 2015, collaborators from Moffitt Cancer Center presented preclinical data for one of the candidates in the collaboration, MA2-014, at the 57th Annual American Society of Hematology (ASH) Meeting. The MA2-014 program was developed to inhibit both the bromodomain 4 (BRD4) protein and the Janus kinase 2 (JAK2) for the potential treatment of various hematologic and solid tumor cancers. Moffitt researchers presented data for MA2-014 that exhibited similar anti-JAK2 activity as a known JAK2 inhibitor, TG101209, with an approximate ten-fold improvement in anti-BRD activity. Moffitt researchers also demonstrated a ten-fold improvement in the ability of MA2-014 to inhibit JAK2-V617F signaling over TG101209, and comparable to ruxolitinib. Ruxolitinib is the only FDA approved JAK inhibitor for MPNs. However, MA2-014 retained its potency against ruxolitinib-resistant cells. Moffitt researchers also determined in long-term culture assays that JAK2-V617F driven MPN Uke1 cells do not experience resistance to MA2-014 as readily as they do to TG101209 or ruxolitinib.

 

Multi-Targeting Epigenetic Program

 

In November 2015, Aptose also announced an exclusive drug discovery partnership with Laxai Avanti Life Sciences (LALS) for their expertise in next generation epigenetic-based therapies. Under the agreement, LALS will be responsible for developing multiple clinical candidates, including optimizing candidates derived from Aptose's relationship with the Moffitt Cancer Center. Aptose will own global rights to all newly discovered candidates characterized and optimized under the collaboration, including all generated intellectual property.

 

Discontinued Programs

 

As of January 2016, Aptose has provided notification of termination to Genentech for the intellectual property for IL-17E, and will cease further development activities for APTO-500 (MELK inhibitor), as the programs fall outside of the scope of Aptose’s pipeline and vision.

 

Business OF THE COMPANY

 

NASDAQ listing

 

On October 21, 2014, Aptose announced that its Common Shares were approved for listing on NASDAQ under the symbol “APTO” and began trading on NASDAQ on October 23, 2014. Aptose has retained its listing on the TSX under the symbol “APS”.

 

Reverse Stock Split

 

On October 1, 2014, Aptose filed articles of amendment to give effect to the reverse stock split (consolidation) of its Common Shares on the basis of one post-consolidation Common Share for each 12 pre-consolidation Common Shares (the “Reverse Stock Split”). The number of Common Shares outstanding as of the time of the announcement was 139,324,451. The number of Common Shares outstanding immediately following the Reverse Stock Split was 11,610,402.

 

Name and year end change

 

On September 2, 2014, we announced that we had changed our name to Aptose Biosciences Inc. from the previous name of Lorus Therapeutics Inc. The new name reflects our new focus and clinical-stage pipeline strategy, as an oncology research and development organization advancing new therapeutics and molecular diagnostics based on insights into the genetic profiles of certain cancers and patient populations.  Our lead product candidate APTO-253 exerts its antitumor effects by activating a key apoptotic pathway in tumor cells. The term "apoptosis" represents the innate self-killing capacity of cells triggered upon the onset of cellular damage, and cancer cells employ various mechanisms to avoid apoptosis. For these reasons, "apoptosis" is the intuitive root of the name of "Aptose Biosciences." In addition, our stated goal with respect to the name change is to align the product portfolio and product development with the strategic course set by its new management team.

 

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Effective July 17, 2014, we changed our fiscal year end from May 31 to December 31. As a result of that change the prior year period is for the seven months ended December 31, 2014 while the current year comparative period is for the twelve months ended December 31, 2015, and therefore not directly comparable to the seven month period.

 

Changes in Management

 

On October 28, 2013, William G. Rice, Ph.D., was appointed as Chief Executive Officer and Chairman of the Board while Dr. Aiping Young continued as President and Chief Operating Officer of the Company until she departed the Company on March 18, 2014. Aptose also appointed Daniel D. Von Hoff, M.D., to serve as a special advisor to fulfill the functions of the Company’s Senior Vice President of Medical Affairs. Dr. Von Hoff is an independent contractor and advisor but is not an employee of Aptose. The Board, after receiving the recommendation of the Special Committee, unanimously approved the appointments. In doing so, the Board determined that such appointments were in the best interest of Aptose, as they were considered to enhance the management team and advisory team with the addition of two seasoned and experienced biotechnology executives bringing extensive clinical development and capital raising experience and improving the awareness and presence of the Company in the United States. On April 10, 2014, Dr. Rice was additionally appointed as President of the Company.

 

On October 29, 2013, Brian Druker, M.D., was appointed as the Chair of the Company’s Scientific Advisory Board. Like Dr. Von Hoff, Dr. Druker is an independent contractor and advisor but not an employee of Aptose.

 

On December 2, 2013, Avanish Vellanki was appointed as Chief Business Officer of the Company, to manage global business development, licensing and corporate strategy, and Gregory K. Chow was appointed as Chief Financial Officer, with responsibility for corporate finance and accounting functions for the Company. On April 10, 2014, Messrs. Vellanki and Chow were additionally appointed as Senior Vice Presidents of the Company.

 

On September 8, 2014, Stephen B. Howell was appointed Chief Medical Officer of the Company.

 

Financial Strategy

 

To meet our future financing requirements, we intend to finance our operations through some or all of the following methods: public or private equity financings, collaborative and licensing agreements. We intend to pursue financing opportunities as they arise. See “Item 3. Key Information—D. Risk Factors” above.

 

At-The-Market (“ATM”) Facility

 

On April 2, 2015, we entered into an ATM equity facility with Cowen and Company, LLC, acting as sole agent. Under the terms of this facility, we may, from time to time, sell shares of our common stock having an aggregate offering value of up to US$20 million through Cowen and Company, LLC on the Nasdaq Capital Market. We determine, at our sole discretion, the timing and number of shares to be sold under this ATM facility. During the twelve months ended December 31, 2015, the Company issued 1,504 Common Shares under the ATM at a price of US$5.20 per share for gross proceeds of approximately Cdn $10 thousand.

 

April 2014 Public Offering

 

In April 2014, we completed a public offering in Canada and a simultaneous private placement in the United States of Common Shares. Aptose issued 4,708,334 (56,500,000 pre-consolidation) Common Shares at a purchase price of $6.00 ($0.50 pre-consolidation) per Common Share including 541,667 (6,500,000 pre-consolidation) Common Shares pursuant to the partial exercise of an over-allotment option, for aggregate gross proceeds of $28,250,000. The total costs associated with the transaction were approximately $2,665,914 which includes a cash commission of $1,977,500 based on 7% of the gross proceeds received as part of the offering.

 

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December 2013 Public Offering

 

In December 2013, Aptose completed a public offering of Common Shares. Aptose issued 1,060,833 (pre-consolidation 12,730,000) common shares at a price of $6.60 (pre-consolidation $0.55) per common share and an additional 159,125 (pre-consolidation 1,909,500) common shares upon the exercise of the overallotment option for aggregate gross proceeds of $8.1 million.

 

The total costs associated with the transaction were approximately $1.1 million which include a cash commission of $483 thousand based on 6% of the gross proceeds received as part of the offering, and the issuance of 73,198 (pre-consolidation 878,370) broker warrants with an estimated fair value of $350 thousand. The fair value of these warrants was determined using the Black Scholes model with a 24 month time to maturity, an assumed volatility of 130% and a risk free interest rate of 1.5%. Each broker warrant was exercisable into one common share of the Company at a price of $6.60 (pre-consolidation $0.55) for a period of twenty four months following closing of the offering.

 

June 2013 Promissory Notes and Warrants

 

In June 2013, we completed a private placement of units at a price of $1,000 per unit, for aggregate gross proceeds of $918,000. Each unit consisted of (i) a $1,000 principal amount of unsecured promissory note and (ii) 1,000 Common Share purchase warrants. The promissory notes bore interest at a rate of 10% per annum, payable monthly and were due June 19, 2014. Each warrant entitled the holder to purchase one Common Share of Aptose at a price per Common Share equal to $3.00 ($0.25 pre-consolidation) at any time until June 19, 2015. These notes and any interest accrued thereon were repaid in full in April 2014.

 

September 2013 Convertible Promissory Notes

 

In September 2013, we completed a private placement of convertible promissory notes for aggregate gross proceeds of $600,000. Each convertible promissory note consisted of a $1,000 principal amount of unsecured promissory note convertible into Common Shares of the Company at a price per share of $3.60 ($0.30 pre-consolidation). The promissory notes bore interest at a rate of 10% per annum, payable quarterly and were due September 26, 2015. At December 31, 2015, all of the convertible promissory notes had been converted into Common Shares of the Company.

 

September 2013 Loans payable

 

In September 2013, we entered into loan agreements for proceeds of $150,000. The loan agreements were unsecured, bore interest at a rate of 10% per annum payable quarterly and were due September 30, 2015. We repaid the loans and all accrued and unpaid interest thereon on April 25, 2014.

 

Warrant Exercises

 

During the year ended December 31, 2015, 81,000 Common Share purchase warrants were exercised for proceeds of $348,000.

 

Warrants exercised during the year ended December 31, 2015:
(in thousands)  Number  Proceeds
           
August 2011 warrants (i)   16   $86 
June 2013 private placement warrants (ii)   47    141 
December 2013 broker warrants (iii)   18    121 
Total   81   $348 

 

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In addition to the cash proceeds received, the original fair value related to these warrants of $155 thousand was transferred from warrants to share capital. This resulted in a total amount of $503 thousand credited to share capital.

 

During the seven months ended December 31, 2014, 1,231,000 Common Share purchase warrants were exercised for proceeds of $6,648,000.

 

Warrants exercised during the seven months ended December 31, 2014:
(in thousands)  Number  Proceeds
       
August 2011 warrants (i)   8   $48 
June 2012 private placement warrants (iv)   1,223    6,600 
Total   1,231   $6,648 

 

During the year ended May 31, 2014, 868,000 Common Share purchase warrants were exercised for proceeds of $4,458,000.

 

Warrants exercised during the year ended May 31, 2014:
(in thousands)  Number  Proceeds
       
August 2011 warrants (i)   327   $1,764 
June 2012 private placement warrants (iv)   409    2,210 
June 2012 finder warrants   103    396 
June 2013 private placement warrants (iii)   29    88 
Total   868   $4,458 

 

(i)August 2011 warrants are exercisable into Common Share of Aptose at a price per share of $5.40 ($0.45 pre-consolidation) and expire in August 2016.

(ii)June 2013 private placement warrants were exercisable into Common Shares of Aptose at a price per share of $3.00 ($0.25 pre-consolidation) and expired in June 2015.
(iii)December 2013 broker warrants were exercisable into Common Shares of Aptose at a price per share of $6.60 ($0.55 pre-consolidation) and expired in December 2015.
(iv)June 2012 warrants were exercisable into Common Shares of Aptose at a price per share of $5.40 ($0.45 pre-consolidation) and expired on June 8, 2014.

 

Agreements

 

Manufacturing Agreements

 

We currently rely upon subcontractors for the manufacture of our drug candidates. The subcontractors manufacture clinical material according to current Good Manufacturing Practices, or GMPs, at contract manufacturing organizations that have been approved by our quality assurance department staff, after having conducted audits to ensure such manufacturers meet the requirements of the relative regulatory authorities.

 

Manufactured product for clinical purposes is tested for conformance with product specifications prior to release by our quality assurance staff. GMP batches of our drug candidates are subjected to prospectively designed stability test protocols.

 

License Agreements

 

Moffitt Cancer Center

 

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In November 2015, Aptose entered into a definitive agreement with Moffitt Cancer Center for exclusive global rights to potent, multi-targeting, single-agent inhibitors for the treatment of hematologic and solid tumor cancers. Under the agreement, Aptose will gain access to the drug candidates developed by Moffitt and the underlying intellectual property covering the chemical modifications enabling potent bromodomain (BRD) inhibition on the chemical backbone of a kinase inhibitor. Moffitt Cancer Center received an undisclosed upfront payment under the terms of the definitive agreement, and will receive milestone payments based on potential successful clinical development, regulatory submissions and approval, and commercialization.

 

Laxai Avanti Life Sciences (LALS)

 

In November 2015, Aptose also announced an exclusive drug discovery partnership with Laxai Avanti Life Sciences (LALS) for their expertise in next generation epigenetic-based therapies. Under the agreement, LALS will be responsible for developing multiple clinical candidates, including optimizing candidates derived from Aptose's relationship with the Moffitt Cancer Center. Aptose will own global rights to all newly discovered candidates characterized and optimized under the collaboration, including all generated intellectual property. LALS will receive milestone payments based on successful pre-clinical and clinical development, and regulatory accomplishment by Aptose.

 

Elanco

 

In April 2013, Aptose entered into a research and license option agreement with Elanco, the animal health division of Eli Lilly and Company, to investigate a new proprietary series of Aptose’s compounds for veterinary medicine. Pursuant to the agreement, Elanco agreed to fund the research program and was granted an exclusive option to license from Aptose our worldwide rights for selected compounds for veterinary use; the terms of which will be negotiated if the option is exercised by Elanco. Aptose retains the rights to develop and commercialize these compounds for human use and intends to use the animal data from the collaboration as a basis for a partnership with a third party to develop the technology for the treatment of patients with cancer. Lead optimization is underway and the next goal is to identify a clinical drug candidate that can be developed for both human and animal use.

 

Other

 

From time to time, we enter into other research and technology agreements with third parties under which research is conducted and monies expended. These agreements outline the responsibilities of each participant and the appropriate arrangements in the event the research produces a product candidate.

 

Intellectual Property and Protection of Confidential Information and Technology

 

We believe that our issued patents and pending applications are important in establishing and maintaining a competitive position with respect to our products and technology.

 

APTO-253

 

We have been issued 21 patents and have 16 pending patents worldwide for our in-house small molecules.  These patents cover APTO-253 composition of matter and methods of treating different cancers with APTO-253, including solid tumors and leukemia.   Composition of matter patents expire in 2028 in the United States and 2026 in other countries.  Our patents also include several compounds that are similar to APTO-253, which provide protection from competitors seeking to develop anticancer products that are related in chemical structure to APTO-253.

 

Multi-Targeting Bromodomain Program

 

Aptose has an exclusive global license from Moffitt Cancer Center for intellectual property covering dual BRD4-kinase inhibition.  Encompassed in this estate are two pending patent applications.  The first is an International Patent Application entitled “Potent Dual BRD4-Kinase Inhibitors as Cancer Therapeutics,” filed on September 3, 2015.  This International Patent Application can be filed in any PCT (Patent Cooperative Treaty) member countries prior to certain national phase filing deadlines and any patent issued from such national phase filing is expected to expire September 3, 2035 without any patent term extensions or adjustments.  The second application is a provisional patent application entitled “BRD4-Kinase Inhibitors as Cancer Therapeutics,” filed October 13, 2015.  This provisional application can be used as a priority document for US and internal filings on or before October 13, 2016.  Any patent issued from such filing is expected to expire October 13, 2036 or twenty years from its filing date without any patent term extension or adjustment.

 

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Regulatory Strategy

 

Our overall regulatory strategy is to work with the appropriate government departments which regulate the use and sale of therapeutic drug products. This includes Health Canada in Canada, the Food and Drug Administration in the United States, the European Medicines Agency in Europe, and other local regulatory agencies with oversight of preclinical studies, clinical trials and marketing of therapeutic products. Where possible, we intend to take advantage of opportunities for accelerated development of drugs designed to treat rare and serious or life-threatening diseases. We also intend to pursue priority evaluation of any application for marketing approval filed in Canada, the United States or the European Union and to file additional drug applications in other markets where commercial opportunities exist. We may not be able to pursue these opportunities successfully.

 

Revenues

 

The Company has not earned substantial revenues from its drug candidates and is therefore considered to be in the development stage.

 

Employees

 

As at December 31, 2015, we employed 22 full-time persons and 2 part-time persons in research and drug development and administration activities. 5 of our employees hold Ph.D.’s and numerous others hold degrees and designations such as MSc, BSc, CPA (CA), CPA (California) and MBA. To encourage a focus on achieving long-term performance, employees and members of the Board have the ability to acquire an ownership interest in the Company through Aptose’s share option and alternate compensation plans. See Item 6.B – Compensation.

 

None of our employees are unionized, and we consider our relations with our employees to be good.

 

Office Facilities

 

Our head office, which occupies 5,300 square feet, is located 5955 Airport Road Suite #228, Mississauga, Ontario. The leased premise is office space. Our current lease expires in April, 2020.

 

We have executive offices in San Diego and have entered into a lease agreement for office space, located at 12770 High Bluffs Drive, San Diego, California which occupies approximately 2,204 square feet. This leased premise is used for administrative purposes only. This lease expires January, 2020. We also have administrative offices in San Francisco located at 3 Lagoon Drive, Redwood City, California. The Redwood City premise is for 2,854 square feet and the lease expires in June 2018. Finally, we have leased laboratory space in San Diego at 3550 General Atomics Court. The lease is for 1,386 square feet and the lease expires in February 2017.

 

Competition

 

The biotechnology and pharmaceutical industries are characterized by rapidly evolving technology and intense competition. There are numerous companies in these industries that are focusing their efforts on activities similar to ours. Some of these are companies with established positions in the pharmaceutical industry and may have substantially more financial and technical resources, more extensive research and development capabilities, and greater marketing, distribution, production and human resources than Aptose. In addition, we face competition from other companies for opportunities to enter into partnerships with biotechnology and pharmaceutical companies and academic institutions.

 

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Competition with our potential products may include chemotherapeutic agents, monoclonal antibodies, antisense therapies, small molecules, immunotherapies, vaccines and other biologics with novel mechanisms of action. These drugs may kill cancer cells indiscriminately, or through a targeted approach, and some have the potential to be used in non-cancer indications. We also expect that we will experience competition from established and emerging pharmaceutical and biotechnology companies that have other forms of treatment for the cancers that we target, including drugs currently in development for the treatment of cancer that employ a number of novel approaches for attacking these cancer targets. Cancer is a complex disease with more than 100 indications requiring drugs for treatment. The drugs in competition with our potential drugs have specific targets for attacking the disease, targets which are not necessarily the same as ours. These competitive drugs, however, could potentially also be used together in combination therapies with our drugs to manage the disease. Other factors that could render our potential products less competitive may include the stage of development, where competitors’ products may achieve earlier commercialization, as well as superior patent protection, better safety profiles, or a preferred cost-benefit profile.

 

Government Regulation

 

Overview

 

Regulation(s) by government authorities in Canada, the United States, and the European Union are significant factors in guiding our current research and drug development activities. To clinically test, manufacture and market drug products for therapeutic use, we must be in compliance with guidance and regulations established by the regulatory agencies in the countries in which we currently operate or intend to operate.

 

The laws of most of these countries require the licensing of manufacturing facilities, carefully controlled research and the extensive testing of products. Biotechnology companies must establish the safety and efficacy of their new products in clinical trials; they must establish and comply with current GMP(s) for the manufacturing of the product and control over marketing activities before being allowed to market a product. The safety and efficacy of a new drug must be shown through human clinical trials of the drug carried out in accordance with the guidance and regulations established by local and federal regulatory agencies.

 

The process of completing clinical trials and obtaining regulatory approval for a new drug takes a number of years and requires the expenditure of substantial resources. Once a new drug or product license application is submitted, regulatory agencies may not review the application in a timely manner and may not approve the product. Even after an NDA submission has occurred and or approval has been obtained, further studies, including post-marketing studies, may be required to provide additional data on efficacy and safety necessary to confirm the approved indication or to gain approval for the use of the new drug as a treatment for clinical indications other than those for which the new drug was initially tested. Also, regulatory agencies require post-marketing surveillance programs to monitor a new drug’s side effects, safety and long term effects of the product. A serious safety or effectiveness problem involving an approved new drug, may result in a regulatory agency mandating a withdrawal of the new drug from the market and possible civil action. It is possible that we could encounter such difficulties or excessive costs in our efforts to secure necessary approvals, which could delay or prevent us from manufacturing or marketing our products.

 

In addition to the regulatory product approval framework, biotechnology companies, including Aptose, are subject to regulation under local, provincial, state and federal law, including requirements regarding occupational safety, laboratory practices, environmental protection and hazardous substance control, and may be subject to other present and future local, provincial, state, federal and foreign regulation, including possible future regulation of the biotechnology industry.

 

Regulation in Canada

 

In Canada, the manufacture and sale of new drugs are controlled by Health Canada. New drugs must pass through a number of testing stages, including pre-clinical testing and human clinical trials. Pre-clinical testing involves testing the new drug’s chemistry, pharmacology and toxicology in vitro and in vivo. Successful results (that is, potentially valuable pharmacological activity combined with an acceptable low level of toxicity) enable the developer of the new drug to file a clinical trial application to begin clinical trials involving humans.

 

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To study a drug in Canadian patients, a clinical trial application submission must be filed with Health Canada. The clinical trial application submission must contain specified information, including the results of the pre-clinical tests completed at the time of the submission and any available information regarding use of the drug in humans. In addition, since the method of manufacture may affect the efficacy and safety of a new drug, information on manufacturing methods and standards and the stability of the drug substance and dosage form must be presented. Production methods and quality control procedures must be in place to ensure an acceptably pure product, essentially free of contamination, and to ensure uniformity with respect to all quality aspects.

 

In addition, all federally regulated trials must be approved and monitored by an independent committee of doctors, scientists, advocates and others to ensure safety and ethical standards. These committees are called Institutional Review Boards (“IRBs”) or Ethics Review Boards (“ERBs”). The review boards study and approve all study-related documents before a clinical trial begins and also carefully monitor data to detect benefit or harm, and validity of results.

 

Provided Health Canada does not reject a clinical trial application submission and IRB or ERB approval has been obtained, clinical trials can begin. Clinical trials for product candidates in Canada, as in the U.S. generally are carried out in three phases. Phase I involves studies to evaluate toxicity and ideal dose levels in healthy humans. The new drug is administered to human patients who have met the clinical trial entry criteria to determine pharmacokinetics, human tolerance and prevalence of any adverse side effects. Phases II and III involve therapeutic studies. In Phase II, efficacy, dosage, side effects and safety are established in a small number of patients who have the disease or disorder that the new drug is intended to treat. In Phase III, there are controlled clinical trials in which the new drug is administered to a large number of patients who are likely to receive benefit from the new drug. In Phase III, the effectiveness of the new drug in patients is compared to that of standard accepted methods of treatment in order to provide sufficient data for the statistical proof of safety and efficacy for the new drug.

 

If clinical studies establish that a new drug has value, the manufacturer submits a new drug submission application to Health Canada for marketing approval. The new drug submission contains all information known about the new drug, including the results of pre-clinical testing and clinical trials. Information about a substance contained in new drug submission includes its proper name, its chemical name, and details on its method of manufacturing and purification, and its biological, pharmacological and toxicological properties. The new drug submission also provides information about the dosage form of the new drug, including a quantitative listing of all ingredients used in its formulation, its method of manufacture, manufacturing facility information, packaging and labelling, the results of stability tests, and its diagnostic or therapeutic claims and side effects, as well as details of the clinical trials to support the safety and efficacy of the new drug. Furthermore, for biological products, an on-site evaluation is completed to assess the production process and manufacturing facility. It is required prior to the issuance of a notice of compliance. All aspects of the new drug submission are critically reviewed by Health Canada. If a new drug submission is found satisfactory, a notice of compliance is issued permitting the new drug to be sold for the approved use. In Canada, an establishment license must be obtained prior to marketing the product.

 

Health Canada has a policy of priority evaluation of new drug submissions for all drugs intended for serious or life-threatening diseases for which no drug product has received regulatory approval in Canada and for which there is reasonable scientific evidence to indicate that the proposed new drug is safe and may provide effective treatment.

 

The monitoring of a new drug does not cease once it is on the market. For example, a manufacturer of a new drug must report any new information received concerning serious side effects, as well as the failure of the new drug to produce desired effects. If Health Canada determines it to be in the interest of public health, a notice of compliance for a new drug may be suspended and the new drug may be removed from the market.

 

A post surveillance program involves clinical trials conducted after a drug is marketed (referred to as Phase IV studies in the United States) and is an important source of information on as yet undetected adverse outcomes, especially in populations that may not have been involved in the premarketing trials (e.g., children, the elderly, pregnant women) and the drug’s long-term morbidity and mortality profile. Regulatory authorities may require companies to conduct Phase IV studies as a condition of market approval. Companies often conduct post-marketing studies in the absence of a regulatory mandate.

 

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An exception to the foregoing requirements relating to the manufacture and sale of a new drug is the limited authorization that may be available in respect of the sale of new drugs for emergency treatment. Under the special access program, Health Canada may authorize the sale of a quantity of a new drug for human use to a specific practitioner for the emergency treatment of a patient under the practitioner’s care. Prior to authorization, the practitioner must supply Health Canada with information concerning the medical emergency for which the new drug is required, such data as is in the possession of the practitioner with respect to the use, safety and efficacy of the new drug, the names of the institutions at which the new drug is to be used and such other information as may be requested by Health Canada. In addition, the practitioner must agree to report to both the drug manufacturer and Health Canada the results of the new drug’s use in the medical emergency, including information concerning adverse reactions, and must account to Health Canada for all quantities of the new drug made available.

 

The Canadian regulatory approval requirements for new drugs outlined above are similar to those of other major pharmaceutical markets. While the testing carried out in Canada is often acceptable for the purposes of regulatory submissions in other countries, individual regulatory authorities may request supplementary testing during their assessment of any submission. Therefore, the clinical testing conducted under Health Canada authorization or the approval of regulatory authorities of other countries may not be accepted by regulatory authorities outside Canada or other countries.

 

Regulation in the United States

 

In the United States, the FDA controls and investigates the investigation, manufacturing, and sale of new drugs. New drugs require FDA approval of a New Drug Application prior to commercial sale. In the case of certain biological products, a Biological License Application must be obtained prior to marketing and batch releasing. As in Canada, to obtain marketing approval, data from adequate and well-controlled human clinical trials, demonstrating to the FDA’s satisfaction a new drug’s safety and effectiveness for its intended use, are required. Data are generated in studies conducted pursuant to an IND submission, similar to that required for a clinical trial application in Canada. Clinical trials with human subjects are characterized as Phase I, Phase II and Phase III trials or a combination thereof. In a marketing application, the manufacturer must also demonstrate the identity, potency, quality and purity of the active ingredients of the new drug involved, and the stability of those ingredients. Further, the manufacturing facilities, equipment, processes and quality controls for the new drug must comply with the FDA’s current Good Manufacturing Practice regulations for drugs or biological products both in a pre-licensing inspection before product licensing and in subsequent periodic inspections after licensing. An establishment license grants the sponsor permission to fabricate, package, label, distribute, import, wholesale or test of the newly approved drug.

 

Federally regulated trials must be approved and monitored by an independent committee of doctors, scientists, advocates and others to ensure safety and ethical standards. These committees are called Institutional Review Boards (“IRBs”) or Ethics Review Boards (“ERBs”). The review boards study and approve all study-related documents before a clinical trial begins and also carefully monitor data to detect benefit or harm, and validity of results.

 

The above describes briefly what is necessary for a new drug to be approved for marketing in North America. The European Medicines Agency and Japanese Pharmaceuticals and Medical Devices Agency are also important regulatory authorities in drug development. Together with the FDA, they are the three International Conference on Harmonization parties which oversee the three largest markets for drug sales.

 

C.Organizational structure.

 

Old Lorus was incorporated under the Business Corporations Act (Ontario) on September 5, 1986 under the name RML Medical Laboratories Inc. On October 28, 1991, RML Medical Laboratories Inc. amalgamated with Mint Gold Resources Ltd., resulting in Old Lorus becoming a reporting issuer (as defined under applicable securities law) in Ontario, on such date. On August 25, 1992 Old Lorus changed its name to IMUTEC Corporation. On November 27, 1996, Old Lorus changed its name to Imutec Pharma Inc., and on November 19, 1998, Old Lorus changed its name to Lorus Therapeutics Inc. On October 1, 2005, Old Lorus continued under the Canada Business Corporations Act.

 

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On the Arrangement Date, Old Lorus completed a plan of arrangement and corporate reorganization with, among others, New Lorus, 6707157 Canada Inc. and Pinnacle International Lands, Inc. As a result of the plan of arrangement and reorganization, each Common Share of Old Lorus was exchanged for one Common Share of New Lorus. New Lorus continued the business of Old Lorus after the Arrangement Date with the same officers and employees and continued to be governed by the same board of directors as Old Lorus prior to the Arrangement Date.

 

On August 28, 2014, New Lorus changed its name from Lorus Therapeutics Inc. to Aptose Biosciences Inc. and on October 1, 2014, we consolidated our outstanding Common Shares on the basis of one post-consolidation Common Share for each twelve pre-consolidation Common Shares.

 

The address of the Company’s head and registered office is 5955 Airport Road, Suite #228, Mississauga, Ontario, Canada, L4V 1R9 and our phone number is (647) 479-9828. Our corporate website is www.aptose.com. The contents of the website and items accessible through the website are specifically not incorporated in this Annual Report by reference.

 

Aptose has three subsidiaries: Aptose USA, a company incorporated under the laws of Delaware, USA, Aptose Suisse a company incorporated under the laws of Zug, Switzerland and NuChem, a company incorporated under the laws of Ontario, Canada. Aptose owns 100% of the issued and outstanding voting share capital of Aptose USA and Aptose Suisse and 80% of the issued and outstanding voting share capital of NuChem.

 

Our Common Shares are listed on the TSX under the symbol “APS” and on NASDAQ under the symbol “APTO.”

 

D.Property, plant and equipment.

 

Our head office, which occupies 5,300 square feet, is located 5955 Airport Road Suite #228, Mississauga, Ontario. The leased premise is office space. Our current lease expires in April, 2020.

 

We have executive offices in San Diego and have entered into a lease agreement for office space, located at 12770 High Bluffs Drive, San Diego, California which occupies approximately 2,204 square feet. This leased premise is used for administrative purposes only. This lease expires January, 2020. We also have administrative offices in San Francisco located at 3 Lagoon Drive, Redwood City, California. The Redwood City premise is for 2,854 square feet and the lease expires in June 2018. Finally, we have leased laboratory space in San Diego at 3550 General Atomics Court. The lease is for 1,386 square feet and the lease expires in February 2017.

 

Item 4A. Unresolved Staff Comments

 

Not applicable.

 

Item 5. Operating and Financial Review and Prospects

 

A.Operating results.

 

Please see our Management’s Discussion and Analysis for the fiscal year ended December 31, 2015 in Exhibit 15.1, which is incorporated herein by reference.

 

B.Liquidity and capital resources.

 

Please see our Management’s Discussion and Analysis for the fiscal year ended December 31, 2015 in Exhibit 15.1, which is incorporated herein by reference.

 

C.Research and development, patents and licenses, etc.

 

Certain information concerning research and development and intellectual property is set forth in Item 4, “Information on the Company”.

 

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D.Trend information.

 

We have a history of operating losses and have not been profitable since our inception in 1986. We expect to continue to incur losses for at least the next several years as we and our collaborators and licensees pursue clinical trials and research and development efforts. See “Item 3. Key Information—D. Risk Factors” above.

 

E.Off-balance sheet arrangements.

 

As at December 31, 2015, we had not entered into any off-balance sheet arrangements.

 

F.Tabular disclosure of contractual obligations.

 

As December 31, 2015 

 

(In thousands)  Payments due by period
Contractual Obligations  Total  Less than 1
year
  1-3 years  3-5 years  More than
5 years
Operating lease obligations  $1,813   $587   $907   $319   $nil 

 

The Company has entered into various contracts with service providers with respect to the clinical development of APTO-253. These contracts will result in future payment commitments of up to approximately $4 million over the related service period. Of this amount, $544 thousand has been paid and $574 thousand has been accrued at December 31, 2015. The payments are based on services performed and amounts may be higher or lower based on actual services performed.

 

The Company enters into research, development and license agreements in the ordinary course of business where the Company receives research services and rights to proprietary technologies. Milestone and royalty payments that may become due under various agreements are dependent on, among other factors, clinical trials, regulatory approvals and ultimately the successful development of a new drug, the outcome and timing of which is uncertain. Under the license agreement with the Moffitt Cancer Centre, the Company has future contingent milestones payable totaling US$9 million relating to the first patient dosed in a phase I, II and III clinical trial and regulatory and commercial milestones totalling US$16 million. The Company does not anticipate making any payments under this license agreement in 2016. Under the Laxai-Avanti Life Science agreement the Company has total future contingent milestones payable of US$5.3 million related to certain research achievements as well as upon the first patient dosed in a phase I, II and III clinical trial and regulatory milestones totaling US$5 million. The Company expects to make payments totaling US$300 thousand under this agreement in 2016.

 

G.Safe Harbor

 

Please see “Forward Looking Statements” beginning on page 1 above.

 

Item 6. Directors, Senior Management and Employees

 

A.Directors and senior management.

 

The following table and notes thereto provide the name, province or state and country of residence, positions with the Company and term of office of each person who serves as a director or executive officer of Aptose as at the date hereof.

 

Each director has been elected or appointed to serve until the next annual meeting or until a successor is elected or appointed. We have an Audit Committee, a Corporate Governance and Nominating Committee and a Compensation Committee, the members of each such committee are shown below.

 

As at December 31, 2015, our directors and executive officers, as a group, beneficially owned, directly or indirectly, or exercised control over, approximately 57,699 Common Shares or approximately 0.5% of our outstanding Common Shares.

 

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Name and Province/State and
Country of Residence
  Position   Director or Officer Since
         
Directors:        

Dr. Denis Burger(1)(2) 

Oregon, United States 

  Director   September 2007
         

Dr. Brad Thompson(1)(2)(3) 

Alberta, Canada 

 

Director

 

  June 2013
         

Dr. Mark Vincent(3) 

Ontario, Canada 

  Director   September 2007
         

Warren Whitehead(1) 

Ontario, Canada 

  Director   April 2011
         

Dr. William G. Rice 

California, USA 

  Chairman   October 2013
         

Dr. Erich Platzer(2) 

Switzerland 

  Director   December 2014
         
Officers:        

Dr. William Rice 

California, USA

  President and Chief Executive Officer   October 2013
         

Gregory Chow 

California, USA

  Senior Vice President and Chief Financial Officer   November 2013
         

Avanish Vellanki 

California, USA

  Senior Vice President and Chief Business Officer   November 2013

 

(1) Member of Audit Committee. 

(2) Member of the Compensation Committee. 

(3) Member of the Corporate Governance and Nominating Committee.

 

The principal occupation and employment of each of the foregoing persons for the past five years is set forth below:

 

Dr. Denis Burger: Dr. Burger currently is the Chief Scientific Officer and member of the board of directors of Cytodyn Inc. (a biotechnology company) as well as Chairman of AMES Devices (a medical device company). Dr. Burger co-founded Trinity Biotech plc, based in Dublin, Ireland, in June 1992 and acted as Chairman from 1992 to 1995 and now serves on the board of directors of the company. Dr. Burger was the past Chairman, Chief Executive Officer and a director of AVI Biopharma Inc., an Oregon based biotechnology company, from 1992 to March 2007. Dr. Burger is also a partner in Sovereign Ventures, a healthcare consulting and funding firm based in Portland, Oregon. Dr. Burger received his MSc and Ph.D. in Microbiology and Immunology from the University of Arizona.

 

Dr. Erich Platzer: Dr. Platzer is a board certified physician in internal medicine, hematology and medical oncology. Previously, Dr. Platzer served as the business director of oncology, as well as the global strategic marketing and therapeutic area head of oncology at Roche, Basel. He was also the medical director in oncology and global development project leader and was responsible for various strategic corporate partnerships. Dr. Platzer is a director of Swiss Business Angel Groups, StartAngels and BioBAC, and has served as a pharmaceutical industry expert on the board of directors of multiple biotech companies in both the U.S. and Europe such as Probiodrug, AOT, Léman Micro Devices, Credentis, and Viroblock. Dr. Platzer co-founded HBM Healthcare Investments (formerly HBM BioVentures) a global leader in healthcare investing. He has over 12 years of experience in academic medicine and research and was a key member of the team at MSKCC that purified human G-CSF in 1983 (recombinant form: Neupogen®). He earned his M.D. from the Medical School and the Institute of Clinical Immunology and Rheumatology of the University of Erlangen, where he also received his “Dr. med. habil.” (M.D.,Ph.D.). 

 

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Dr. William G. Rice: Dr. Rice joined Aptose as Chairman and Chief Executive Officer in October 2013. Prior to joining Aptose, Dr. Rice served as the President, Chief Executive Officer and Chairman of the board of Cylene Pharmaceuticals, Inc., a private biotechnology company (“Cylene”). Prior to Cylene, Dr. Rice was the founder, President, Chief Executive Officer and Director of Achillion Pharmaceuticals, Inc. He also served as Senior Scientist and Head of the Drug Mechanism Laboratory at the National Cancer Institute-Frederick Cancer Research and Development Center, and served as a faculty member in the division of Pediatric Hematology and Oncology at Emory University School of Medicine. Dr. Rice received his Ph.D. from Emory University Department of Biochemistry. He continues to serve as the Chairman of the board of Cylene and is a member of the board of directors of Oncolytics Biotech Inc.

 

Dr. Brad Thompson: Dr. Thompson is an experienced biotechnology professional who has held the positions of Chairman of the Board and President and Chief Executive Officer of Oncolytics Biotech Inc. since April 1999. Prior to his role with Oncolytics Dr. Thompson was the Chief Executive Officer of Synsorb Biotech from 1994 to 1999. Dr. Thompson also currently is a board member of Immunovaccine Inc. He received his Ph.D. from the University of Western Ontario in the Department of Microbiology and Immunology.

 

Dr. Mark Vincent: Dr. Mark Vincent is a Professor of Oncology at the University of Western Ontario and a staff medical oncologist at the London Regional Cancer Program, where he has been since 1990. Dr. Vincent is also the co-founder and Chief Executive Officer of Sarissa, Inc. since 2000.

 

Mr. Warren Whitehead: Mr. Whitehead is a CPA (CMA) who has held senior financial management positions in several biotechnology and pharmaceutical companies. Most recently Mr. Whitehead was the Chief Financial Officer of ProMIS Neurosciences Inc. (formerly Amorfix Life Sciences Ltd.). Prior to this, he served as Chief Financial Officer of ARIUS Research Inc., providing financial guidance and leadership during the acquisition of ARIUS by Roche in 2008. Prior to ARIUS, Mr. Whitehead was Chief Financial Officer at Labopharm Inc., where he completed a series of public equity financings and a listing on NASDAQ. He is currently the Chairman of the board of directors of PlantForm Corporation and a member of the board of directors of Telesta Therapeutics Inc.

 

Gregory Chow: Mr. Chow joined Aptose as Chief Financial Officer in December 2013. Previously, Mr. Chow served as Managing Director, Director of Private Placements at Wedbush Securities, where he led the private placement capital activities within the Life Sciences Investment Banking Group. Prior to joining Wedbush, he was a Director in the Private Placements / Equity Capital Markets Group at RBC Capital Markets, where he led life science private capital activities. Previously, he led the Private Capital Group at Wells Fargo Securities and was a Senior Auditor at BDO Seidman, LLP in their Century City, CA office. Mr. Chow is a Certified Public Accountant (inactive) in the State of California.  Mr. Chow received his MBA in Finance from The Wharton School at the University of Pennsylvania, and his BA in Business Economics with an emphasis in Accounting from the University of California, Santa Barbara.

 

Avanish Vellanki: Mr. Vellanki became Aptose’s Chief Business Officer in December 2013, having most recently served as Senior Vice President, Investment Banking at Wedbush Securities focusing on the biotechnology sector. Prior to Wedbush Securities, Mr. Vellanki held the position of Senior Director of Corporate Development at Proteolix, Inc. (acquired by Onyx Pharmaceuticals), a biotechnology company focused on the development of oncology therapeutics. Previously, Mr. Vellanki served as Vice President in the Global Healthcare Investment Banking team at Citigroup’s Global Healthcare Investment Banking, where he focused on large cap global biopharma strategic and financial advisory. Mr. Vellanki began his career at Bear Stearns as an equity research analyst covering the small/mid-cap biotechnology sector, and held the title of Vice President as a publishing analyst. Mr. Vellanki holds a BA from Carleton College, an MBS in Biochemistry from the University of Minnesota and MBA from the Carlson School of Management at the University of Minnesota.

 

There are no family relationships among the persons named above and there are no arrangements or understanding with major shareholders, customers, suppliers or others pursuant to which any person was selected as a director or member of senior management.

 

B.Compensation.

 

35
 

Summary of Executive Compensation

 

The following table details the compensation information for the fiscal year ended December 31, 2015 of the Company, for the Chairman, President and Chief Executive Officer, Senior Vice President and Chief Financial Officer and the Senior Vice President and Chief Business Officer (“Named Executive Officers”). The figures are in Canadian dollars.

 

Name and Principal
Position
  Year ended December  31  Salary
($)(1)
  Share-
based
awards
($)
 

Option-
based
awards(2)

($)

  Non-equity incentive
plan compensation
  Pension
value  
($)
  All other
compensation
($)
  Total
compensation
($)
              

Annual
incentive
plans(3) (1)

($)

  Long-term
incentive
plans
($)
         
Dr. William G. Rice   2015    642,813   N/A   634,464   115,093   N/A   N/A  N/A   1,392,370 
Chairman, President and Chief Executive Officer                                     
                                      
Mr. Gregory K. Chow   2015    409,762   N/A   317,232   66,066   N/A   N/A  N/A   793,060 
Senior Vice President and Chief Financial Officer                                     
                                      
Mr. Avanish Vellanki   2015    409,762   N/A   317,232   66,066   N/A   N/A  N/A   793,060 
Senior Vice President and Chief Business Officer                                     

 

(1)Dr. Rice, Mr. Chow and Mr. Vellanki are paid in US dollars. Amounts are shown in Canadian dollars translated from US dollars based on the exchange rates prevailing on the date of the transaction. The average exchange rate was $1USD = $1.2787CDN.

(2)In determining the fair value of these option-based awards, the Black-Scholes valuation methodology was used with the following assumptions: (i) expected life of five years; (ii) volatility 103.5%; (iii) risk free interest rate of 1.09%; and (iv) no dividend yield. The Company has decided to use the Black-Scholes valuation methodology because it is equivalent to the option value reported in the Company’s consolidated financial statements.

(3)Bonus payments relate to the period from January 1 to May 31, 2015. No bonus payments were rewarded for the period from June 1, 2015 to December 31, 2015.

  

Name and Principal Position  Year ended
December  31
  Salary
($)
  Cash
Bonus
($)
  Other Annual
Compensation  
($)
  Securities Under
Options/SARs
Granted
(#)
  All Other
Compensation
($)
Dr. William G. Rice   2015    642,813    115,093 (1)(2)  Nil   120,000   Nil
Chairman, President and Chief Executive Officer                          
                           
Mr. Gregory K. Chow   2015    409,762    66,066 (1)(2)  Nil   60,000   Nil
Senior Vice President and Chief Financial Officer                          
                           
Mr. Avanish Vellanki   2015    409,762    66,066 (1)(2)  Nil   60,000   Nil
Senior Vice President and Chief Business Officer                          

 

(1)Dr. Rice, Mr. Chow and Mr. Vellanki are paid in US dollars. Amounts are shown in Canadian dollars translated from US dollars based on the exchange rates prevailing on the date of the transaction. The average exchange rate was $1USD = $1.2787CDN.

 

(2)Bonus payments relate to the period from January 1 to May 31, 2015. No bonus payments were rewarded for the period from June 1, 2015 to December 31, 2015.

 

36
 

Directors’ Compensation

 

The following table details the compensation received by each director for the fiscal year ended December 31, 2015:

 

Name 

Fees earned

($)1

  Share-based
awards
($)
  Option-
based
awards
($)
  Non-equity
incentive plan
compensation
($)
  Pension value
($)
  All other
Compensation
($)
  Total
($)
                            
Dr. Denis Burger   97,181   nil   119,330   nil  nil  nil   216,511 
Dr. Bradley Thompson   61,378   nil   119,330   nil  nil  nil   180,708 
Dr. Mark Vincent   49,869   nil   119,330   nil  nil  nil   169,199 
Mr. Warren Whitehead   51,148   nil   119,330   nil  nil  nil   170,478 
Dr. Erich Platzer   46,033   nil   54,241   nil  nil  nil   100,274 

 

(1)Directors are paid in US$. The conversion to Canadian dollars was done using an average rate of $1USD = $1.2787CDN.

 

Dr. Rice did not receive any compensation for his role as a director of the Company.

 

In January 2015, the Board approved certain changes related to the compensation of directors effective for the fiscal year 2015. As of January 1, 2015, directors were entitled to an annual fee of US$30,000 with no per meeting fees. The lead director will be entitled to an additional annual fee of US$30,000. The chair of each committee will be entitled to an annual fee of US$10,000 with each committee member receiving an annual fee of US$6,000 per committee. Upon appointment to the Board a director will be entitled to an option grant of 10,000 options and each year thereafter an additional grant of 6,000 options. Non-executive directors are reimbursed for any out-of pocket travel expenses incurred in order to attend meetings. Executive directors are not entitled to directors’ compensation.

 

In the year ended December 31, 2015, Dr. Platzer was granted 10,000 options for his appointment in December 2014. All other directors received a grant of 22,000 options which represented a grant for fiscal 2015 of 6,000 and 16,000 options for the prior periods when options had not been granted. The options vest 50% after one year, 25% after 2 years and 25% after 3 years.

 

Management Contracts

 

The employment agreements of Dr. Rice, Mr. Chow and Mr. Vellanki provide that if their employment is terminated by the Company other than for cause, each of Dr. Rice, Mr. Chow and Mr. Vellanki shall be entitled to a payment equivalent to 12 months of their respective annual base salaries at the time of termination (Dr. Rice’s current annual base salary represents US$494,400, Mr. Chow’s current annual base salary represents US$324,450 and Mr. Vellanki’s current annual base salary represents US$324,450), plus an amount equal to the average bonus remuneration received from the Company during the last three years of employment completed prior to the termination date, prorated based on the number of days the executive worked during the year of the termination. In addition, the employment agreements of Dr. Rice, Mr. Chow and Mr. Vellanki provide that certain payments related to health benefits will continue to be made for a period of 12 months following termination of their employment.

 

If the employment agreements are terminated by the Company other than for cause, then all unexercised options then held by each are governed by the terms of the share option plan of the Company (“Share Option Plan”).

 

The employment agreements of Dr. Rice, Mr. Chow and Mr. Vellanki provide that, in the event their employment with the Company is terminated within three months immediately preceding or 12 months immediately following the consummation of a change of control, each of Dr. Rice, Mr. Chow and Mr. Vellanki would be eligible, subject to certain conditions, to receive a payment equivalent to 18 months of their annual base salaries at the time of termination, plus an amount equal to 150% of the average bonus remuneration received from the Company during the last three years of employment completed prior to the termination date, prorated based on the number of days the executive worked during the year of the termination, as well as continuation of the payments related to health benefits for a period of 12 months following the termination following a change of control.

 

37
 

The following table sets out the amount that would have been payable to each Named Executive Officer had there been a change of control of the Company on December 31, 2015 and the severance payment that would have been payable to each Named Executive Officer had the Company terminated employment of the Named Executive Officer without cause on December 31, 2015:

 

Name   Termination Without Cause    Change of Control 
Dr. William G. Rice   US$830,000 (1)    US$1,201,000  (2) 
Mr. Gregory K. Chow   US$484,000 (1)    US$711,000 (2) 
Mr. Avanish Vellanki   US$517,000 (1)    US$744,000 (2) 

 

(1)This amount represents 12 months of annual base salary at the time of termination, plus an amount equal to the average bonus remuneration received from the Company during the last three years of employment completed prior to the termination date (assumed at 100%), prorated based on the number of days the executive worked during the year of the termination, as well as continuation of the payments related to health benefits for a period of 12 months following the termination.
(2)This amount represents 18 months of annual base salary at the time of termination, plus an amount equal to 150% of the average bonus remuneration received (assumed at 100%) from the Company during the last three years of employment completed prior to the termination date, prorated based on the number of days the executive worked during the year of the termination, as well as continuation of the payments related to health benefits for a period of 12 months following the termination.

 

Equity Compensation Plans

 

The following table sets forth certain details as at the end of the year ended December 31, 2015 with respect to compensation plans pursuant to which equity securities of the Company are authorized for issuance.

 

   Number of Shares to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
  Weighted-
average
exercise price of
outstanding
options,
warrants and
rights
(b)
  Number of Shares remaining
available for future issuance
under the  equity
compensation plans
(Excluding Shares reflected
in Column (a))
(c)
  Total options, warrants
and rights outstanding
and available for grant
(a) + (c)
Plan Category  Number  % of
Shares
outstanding
     Number  % of Shares
outstanding
  Number  % of Shares
outstanding
Equity compensation plans approved by Shareholders   1,689,042    14.0%  $5.95    419,263    3.5%   2,108,305    17.5%

 

Share Option Plan

 

The Share Option Plan was established to advance the interests of Aptose by:

 

  · providing Eligible Persons (as defined below) with additional incentives;
  · encouraging stock ownership by Eligible Persons;
  · increasing the interest of Eligible Persons in the success of Aptose;
  · encouraging Eligible Persons to remain loyal to Aptose; and
  · attracting new Eligible Persons to Aptose.

 

38
 

The Compensation Committee, as authorized by the Board, administers the Share Option Plan. The maximum total number of Common Shares available for issuance from treasury under the Share Option Plan, together with the Stock Incentive Plan (“SIP”) and any other security based compensation arrangement is 17.5% of the Company’s issued and outstanding Common Shares at any given time. Any exercise of options pursuant to the Share Option Plan will make new option grants available under the Share Option Plan, provided that the maximum number of Common Shares reserved for issuance collectively under the Share Option Plan and the SIP may not exceed 17.5% of the Company’s issued and outstanding Common Shares at any given time.

 

Under the Share Option Plan, options may be granted to any executive officer, employee, subsidiary of an executive officer or employee, or consultant or consultant entity (“Eligible Persons”). The exercise price of options granted under the Share Option Plan is established by the Board and will be equal to the closing market price of the Common Shares on the TSX on the last trading day preceding the date of grant. If there is no trading on that date, the exercise price will be the average of the bid and ask on the TSX on the last trading date preceding the date of grant. If not otherwise determined by the Board, an option granted under the Share Option Plan will vest as to 50% on the first anniversary of the date of grant of the option and 16.66% on the second, third and fourth anniversaries after the date of grant. The Board fixes the term of each option when granted, but such term may not be greater than 10 years from the date of grant. If the date on which an option expires pursuant to an option agreement occurs during, or within 10 days after the last day of, a black out period or other restriction period imposed on the trading of Common Shares by the Company, the expiry date for the option will be the last day of the 10-day period. Options are personal to the participant and a participant may not transfer an option except in accordance with the Share Option Plan.

 

The Board may, in its sole discretion, amend, suspend or terminate the Share Option Plan or any portion of it at any time in accordance with applicable legislation, without obtaining the approval of Shareholders. Any amendment to any provision of the Share Option Plan is subject to any required regulatory or Shareholder approval. The Company is, however, required to obtain the approval of the Shareholders for any amendment related to (i) the maximum number of Common Shares reserved for issuance under the Share Option Plan, and under any other security based compensation arrangements of the Company; (ii) a reduction in the exercise price for options held by insiders of the Company; and (iii) an extension to the term of options held by insiders of the Company.

 

If an option holder is terminated without cause, resigns or retires, each option that has vested will cease to be exercisable three months after the option holder’s termination date. Any portion of an option that has not vested on or prior to the termination date will expire immediately. If an option holder is terminated for cause, each option that has vested will cease to be exercisable immediately upon the Company’s notice of termination. Any portion of an option that has not vested on or prior to the termination date will expire immediately.

 

Stock Incentive Plan

 

The Company adopted the SIP following shareholder approval on June 10, 2015 pursuant to which the Board may grant stock-based awards comprised of restricted stock units (the “Restricted Stock Units”) or dividend equivalents (the “Dividend Equivalents” and collectively with the Restricted Stock Units, the “Awards”) to employees, officers, consultants, independent contractors, advisors and non-employee directors of the Corporation or any affiliate (the “SIP Participants”).

 

The maximum total number of shares available for issuance under the SIP and any other security based compensation arrangement of the Corporation (including the Share Option Plan) is 17.5% of the number of issued and outstanding shares. Any issuance of shares covered by an award or to which an award relates will make new grants available under the SIP. Since the adoption of the SIP, no awards have been granted.

 

Under the SIP, the Board may also grant Dividend Equivalents to SIP Participants under which the Participant shall be entitled to receive payments (in cash, Shares, other securities, other Awards or other property as determined in the discretion of the Committee) equivalent to the amount of cash dividends paid by the company to holders of Shares with respect to a number of shares determined by the Board.

 

The SIP does not limit insider participation and does not provide a maximum number of Shares which may be issued to an individual under the SIP. However, no director of the company who is not also an employee of the company or an affiliate may be granted any awards that exceed in the aggregate $150,000 (such value computed as of the date of grant in accordance with applicable financial accounting principles) in any calendar year.

 

39
 

Subject to the express provisions of the SIP and to applicable law, the Board shall have full power and authority to: (i) designate SIP Participants; (ii) determine the type of Awards to be granted to each SIP Participant under the SIP and the number of Shares to be covered by each Award; (iii) determine the terms and conditions of any Award or Award Agreement, including any terms relating to the forfeiture of any Award and the forfeiture, recapture or disgorgement of any cash, Shares or other amounts payable with respect to any Award; (iv) amend the terms and conditions of any Award or Award Agreement, subject to the limitations under Section 7 of the SIP; and (v) accelerate the exercisability of any Award or the lapse of any restrictions relating to any Award, subject to the limitations in Section 7 of the SIP.

 

The Board may from time to time amend, suspend or terminate the SIP, and the Board may amend or alter any previously granted Award, as applicable, without obtaining the approval of Shareholders in order to: (i) correct any defect, supply any omission or reconcile any inconsistency in the SIP or in any Award or award agreement in the manner and to the extent it shall deem desirable to implement or maintain the effectiveness of the SIP; (ii) amend the eligibility for, and limitations or conditions imposed upon, participation in the SIP; (iii) make changes that are necessary or desirable to comply with applicable laws, rules, regulations and policies of any applicable governmental entity or stock exchange; (iv) amend any terms relating to the administration of the SIP, including the terms of any administrative guidelines or other rules related to the SIP; or (v) make any other amendment, whether fundamental or otherwise, not requiring Shareholders’ approval under TSX Company Manual, the rules or regulations of the United States SEC or any other securities exchange that are applicable to the Corporation.

 

Prior approval of the shareholders shall be required for any amendment to the Plan or an Award that would: (i) require shareholder approval under the TSX Company Manual, the rules or regulations of the SEC or any other securities exchange that are applicable to the Corporation; (ii) increase the maximum number of shares authorized under the SIP; (iii) increase the annual limit on Awards granted to non-employee directors; or (iv) amend the amendment provision of the SIP.

 

Deferred Share Units Plan

 

The Company had a Deferred Share Unit Plan (“DSU Plan”) which was terminated on June 10, 2015.

 

During the period from January 1, 2015 to June 18, 2015, nil deferred share units were outstanding under the DSU Plan. No units have been outstanding under the DSU Plan since April 2014.

 

Employee Share Purchase Plan

 

We have an Employee Share Purchase Plan (“ESPP”), the purpose of which is to assist the Company in retaining the services of its employees, securing and retaining the services of new employees and providing incentives for such persons to exert maximum efforts for the success of the Company. The ESPP provides a means by which employees of the Company and its affiliates may purchase Common Shares on the stock market at a 15% discount through accumulated payroll deductions. Eligible participants in the ESPP include all employees, including executive officers, who work at least 20 hours per week and are customarily employed by the Company or an affiliate of the Company for at least six months per calendar year. Generally, each offering is of three months’ duration with purchases occurring every quarter. Participants may authorize payroll deductions of up to 15% of their base compensation for the purchase of Common Shares under the ESPP.

 

During the year ended December 31, 2015, under the ESPP, Named Executive Officers, as a group, and employees did not purchase any Common Shares pursuant to the ESPP. Since December 31, 2015, there have been no Common Shares purchased pursuant to the ESPP.

 

Option Grants During The Year Ended December 31, 2015

 

The following tables set forth the options granted to and exercised by each of the Named Executive Officers during the year ended December 31, 2015:

 

40
 

Option/SAR Grants During the Most Recently Completed Financial Year

 

Name and Principal
Position
  Securities
Under
Options/SARs
Granted
(#)
  % of Total
Options/SARs
Granted to
Employees in
Financial
Year
(%)
  Exercise or
Base Price  
($/Security)
  Market Value of
Securities
Underlying
Options/SARs
on the Date of
Grant
($/Security)
  Expiration
Date
                
Dr. William G. Rice   120,000    25%  $6.96   $6.96   June 9, 2025
Chairman, President and                       
Chief Executive Officer                       
                        
Mr. Gregory K. Chow   60,000    12.5%  $6.96   $6.96   June 9, 2025
Senior Vice President and                       
Chief Financial Officer                       
                        
Mr. Avanish Vellanki   60,000    12.5%  $6.96   $6.96   June 9, 2025
Senior Vice President and                       
Chief Business Officer                       

   

Incentive Compensation Plans

 

Outstanding Share-Based Awards and Option-Based Awards

 

The following table shows all awards outstanding to each Named Executive Officer as at December 31, 2015:

 

   Option-based Awards  Share-based Awards
Name and Principal
Position
  Number
of
securities
underlying
unexercised
options
(#)
 

Option
exercise
price

($)

  Option
expiration
date
  Value of
unexercised
in-the-
money
options
($) (1)
  Number of
shares or
units of
shares that
have not
vested
(#)
  Market or
payout
value of
share-
based
awards
that have
not vested
($)
  Market or
payout
value of
vested
share-
based
awards
not paid
out or
distributed
($)
Dr. William G. Rice
Chairman, President and Chief Executive Officer
  35,417
65,136
5,281
140,000
396,129
120,000
  3.48
7.32
6.96
6.00
5.70
6.96
  Oct 27, 2023
Dec 10, 2023
Jan 29, 2024
Apr 10, 2024
June 16, 2024
June 9, 2025
  4,250
Nil
Nil
Nil
Nil
Nil
  Nil  Nil  Nil
                      
Mr. Gregory K. Chow
Senior Vice President and Chief Financial Officer
  35,417
35,417
35,417
22,083
64,167
60,000
  9.36
7.32
6.00
5.70
5.22
6.96
  Nov 4, 2023
Dec 10, 2023
Apr 10, 2024
June 16, 2024
July 18, 2024
June 9, 2025
  Nil
Nil
Nil
Nil
Nil
Nil
  Nil  Nil  Nil
                      
Mr. Avanish Vellanki
Senior Vice President and Chief Business Officer
  35,417
35,417
35,417
22,083
64,167
60,000
  9.36
7.32
6.00
5.70
5.22
6.96
  Nov 4, 2023
Dec 10, 2023
Apr 10, 2024
June 16, 2024
July 18, 2024
June 9, 2025
  Nil
Nil
Nil
Nil
Nil
Nil
  Nil  Nil  Nil

 

(1)These amounts are calculated based on the difference between the market value of the securities underlying the options on December 31, 2015 at the end of the fiscal year ($3.60), and the exercise price of the options.

41
 

Aggregated Option/SAR Exercises During the Year Ended December 31, 2015

and Financial Year-End Option/SAR Values

 

Name  Securities
Acquired on
Exercise
(#)
  Aggregate
Value
Realized
($)
  Unexercised
Options/SARs at
December 31, 2015
(#)
Exercisable/Unexercisable
  Value of Unexercised
in-the-Money
Options/SARs at
December 31, 2015
($)
Exercisable/Unexercisable
             
Dr. William G. Rice
Chairman, President and Chief Executive Officer
  nil  nil  354,975/406,988  4,250/0
             
 Mr. Gregory K. Chow
Senior Vice President and Chief Financial Officer
  nil  nil  129,932/122,569  0/0
             
 Mr. Avanish Vellanki
Senior Vice President and Chief Business Officer
  nil  nil  129,932/122,569  0/0

 

C.Board practices.

 

Aptose is authorized to have a board of at least one director and no more than ten. Aptose currently has six directors. Directors are elected for a term of approximately one year, from annual meeting to annual meeting, or until an earlier resignation, death or removal. For the dates our current directors assumed their directorships, see Item 6.A. – “Directors and Senior Management” above.

 

Each officer serves at the discretion of the Board or until an earlier resignation or death. There are no family relationships among any of our directors or officers.

 

Our non-management directors have no service contracts with us or our subsidiaries that provide for benefits upon termination of employment. See “—Management Contracts” above for a summary of key employment agreements.

 

Committees of the Board of Directors

 

The Company has an Audit Committee, a Nominating and Corporate Governance Committee and a Compensation Committee.

 

The members of these committees during the year months ended December 31, 2015, were as follows:

 

Audit Committee Denis Burger, Bradley Thompson, Warren Whitehead
Nominating and Corporate Governance Committee: Bradley Thompson, Mark Vincent
Compensation Committee: Denis Burger, Erich Platzer, Bradley Thompson

 

On January 16, 2015, Bradley Thompson was appointed to the Audit Committee and Erich Platzer was appointed to the Compensation Committee.

 

42
 

Compensation Committee

 

Composition of the Compensation Committee

 

The Board, upon the advice of the Compensation Committee, determines executive compensation. The Compensation Committee is currently comprised of independent Board members Dr. Burger, Dr. Platzer and Dr. Thompson. Dr. Burger is chair of the Compensation Committee. The Compensation Committee met 3 times during the period from January 1, 2015, until December 31, 2015.

 

Members of the Compensation Committee each have direct experience relevant to compensation matters resulting from their respective current and past activities. The members of the Compensation Committee have experience dealing with compensation matters in comparable organizations, including public companies, as well as companies with a strong emphasis on governance in their current and former roles as principal executives.

 

Compensation Objectives and Philosophy

 

The Compensation Committee’s mandate is to review and advise the Board on the recruitment, appointment, performance, compensation, benefits and termination of executive officers. The Compensation Committee also administers and reviews procedures and policies with respect to the Share Option Plan, the SIP, employee benefit programs, pay equity and employment equity and reviews executive compensation disclosure where it is publicly disclosed.

 

Aptose’s executive compensation program is designed to:

 

  · attract and retain qualified, motivated and achievement-oriented individuals by offering compensation that is competitive in the industry and marketplace;
  · align executive interests with the interests of shareholders; and
  · ensure that individuals continue to be compensated in accordance with their personal performance and responsibilities and their contribution to the overall objectives of the Company.

 

These objectives are achieved by offering executives and employees a compensation package that is competitive and rewards the achievement of both short-term and long-term objectives of the Company. As such, our compensation package consists of three key elements:

 

  · base salary and initial share options;
  · short-term compensation incentives to reward corporate and personal performance through potential annual cash bonuses; and
  · long-term compensation incentives related to long-term increase in share value through participation in the Share Option and SIPs.

 

The Compensation Committee reviews each of these items on a stand-alone basis and also reviews compensation as a total package. Adjustments to compensation are made as appropriate following a review of the compensation package as a whole.

 

Base Salary — Initial Share Options

 

In establishing base salaries, the objective of the Compensation Committee is to establish levels that will enable Aptose to attract and retain executive officers that can effectively contribute to the long-term success of the Company. Base salary for each executive officer is determined by the individual’s skills, abilities, experience, past performance and anticipated future contribution to the success of Aptose. The members of the Compensation Committee use their knowledge of the industry and of industry trends as well as independent third party consultants to assist with the determination of an appropriate compensation package for each executive officer. In certain cases, the Compensation Committee may recommend inclusion of automobile allowances, fitness allowances and the payment of certain professional dues as a component of an overall remuneration package for executives.

 

43
 

In certain cases, executive officers may be granted share options on the commencement of employment with Aptose in accordance with the responsibility delegated to each executive officer for achieving corporate objectives and enhancing shareholder value in accordance with those objectives.

 

Short-Term Compensation Incentives

 

The role of short-term compensation incentives at Aptose is to motivate our executive officers to achieve specified performance objectives for 2015 and to reward them for their achievement in the event that those objectives are met. Each year, the Compensation Committee approves the annual corporate objectives encompassing scientific, clinical, regulatory, business and corporate development and financial criteria. The annual cash bonus for the executive officers is based, at least in part, on the level of achievement of these annual objectives, assuming these objectives are still relevant at the time of evaluation.

 

All corporate and executive officer objectives are reviewed by the Compensation Committee and approved by the Board. The Compensation Committee recommends to the Board the awarding of bonuses, payable in cash, stock or share options, to reward extraordinary individual performance.

 

For each executive officer, during the year ended December 31, 2015, the annual cash bonuses ranged from 40% to 50% of base salary when all corporate and individual executive officer objectives were achieved.

 

Cash bonuses are determined as soon as practicable after the end of the fiscal year and, for the Named Executive Officers (as defined hereinafter), are included in the Summary Compensation Table in the year in respect of which they are earned.

 

Long-Term Incentive Plan

 

The role of long-term compensation incentives at Aptose is to reward an executive’s contribution to the attainment of Aptose’s long-term objectives, align an executive’s performance with the long-term performance of Aptose and to provide an additional incentive for an executive to enhance shareholder value. Long-term incentive compensation for directors, officers, employees and consultants is reviewed annually and is accomplished through the grant of share options under our Share Option Plan or SIP.

 

The number of options granted for certain executives of Aptose for the year ended December 31, 2015, was based on achievement of both corporate and executive officer objectives. The Compensation Committee approves the allocation of options and options are priced using the closing market price of the Common Shares on the TSX on the last trading day prior to the date of grant. Options to purchase Common Shares expire ten years from the date of grant and vest over a term determined by the Compensation Committee. The Compensation Committee takes into account previous grants of options when considering new grant of options.

 

The granting of options to Named Executive Officers is included in the Summary Compensation Table in the year in which they are earned.

 

Performance Metrics

 

The performance of the Named Executive Officers for the period ended December 31, 2015 was measured with respect to the following objectives:

 

  1) Site initiation and enrollment goals for APTO-253 Phase Ib Clinical trial;
  2) Analyze corporate structure, implement financing alternatives and consider Board composition;
  3) Expand pipeline;
  4) Other development goals related to APTO-253.

 

44
 

Each of the above objectives is weighted at 50%, 30%, 10% and 10% respectively in relation to assessment of satisfaction of overall corporate objectives and determination of any general corporate bonuses. Due to the clinical hold of the APTO-253 clinical trial it was determined that no bonuses would be paid to the Named Executive Officers for the period from June 1, 2015 to December 31, 2015.

 

Hedge or Offset Instruments

 

Named Executive Officers or directors are not permitted to purchase financial instruments that are designed to hedge or offset a decrease in market value of equity securities granted as compensation or held, directly or indirectly, by Named Executive Officers or directors, including, for greater certainty, prepaid variable forward contracts, equity swaps, collars, or units of exchange funds.

 

Risk Assessment of Compensation

 

The implications of the risks associated with the Company’s compensation practices were not considered by the Board or a committee of the Board.

 

Audit Committee

 

The charter of our Audit Committee is attached as Exhibit 11.2. The current members of the Audit Committee are Bradley Thompson, Denis Burger and Warren Whitehead. Mr. Warren Whitehead is the Chairman of the Audit Committee and has been considered to be the Financial Expert. Pursuant to Canadian securities laws, the Board has determined that Messrs. Thompson, Burger and Whitehead are financially literate as all have experience in reviewing and analyzing the financial reports and ascertaining the financial position of a corporation. Mr. Burger, in his previous position as Chairman and Chief Executive Officer of AVI Biopharma, is educated and experienced in reading and analyzing financial statements. Mr. Burger has also served on the audit committee of three other publicly listed biotechnology companies. Dr. Thompson has experience reading and interpreting financial statements through his role as Chairman and CEO of a publicly listed biotechnology company as well as through his extensive experience serving on various company boards.  Mr. Whitehead is a CPA (CMA) and has served as the Chief Financial Officer of Arius Research Inc. and Labopharm Inc. Additionally, we believe Mr. Thompson, Mr. Whitehead and Mr. Burger qualify as “independent” as that term is defined in the relevant securities laws relating to the composition of the audit committee.

 

Audit Committee Mandate

 

The Audit Committee’s mandate is to assist the Board in fulfilling its oversight responsibilities. In particular, the Audit Committee:

 

  (a) serves as an independent and objective party to monitor the integrity of our financial reporting process and systems of internal controls regarding finance, accounting, and legal compliance, including the review of our consolidated financial statements, MD&A and annual and interim results;
  (b) identifies and monitors the management of the principal risks that could impact our financial reporting;
  (c) monitors the independence and performance of our independent auditors, including the pre-approval of all audit fees and all permitted non-audit services;
  (d) provides an avenue of communication among the independent auditors, management, and the Board and
  (e) encourages continuous improvement of, and foster adherence to, our policies, procedures and practices at all levels.

 

The Audit Committee is also responsible for implementing and overseeing our whistle-blowing procedures.

 

45
 

D.Employees.

 

As at December 31, 2015, we employed 22 full-time persons and 2 part-time persons in research and drug development and administration activities. Our employees 5 hold Ph.D.’s and numerous others hold degrees and designations such as MSc, BSc, CPA (CA), CPA (California) and MBA. To encourage a focus on achieving long-term performance, employees and members of the Board have the ability to acquire an ownership interest in the Company through Aptose’s share option and alternate compensation plans. See Item 6.B – Compensation.

 

Our ability to develop commercial products and to establish and maintain our competitive position in light of technological developments will depend, in part, on our ability to attract and retain qualified personnel. There is a significant level of competition in the marketplace for such personnel. We believe that to date we have been successful in attracting and retaining the highly skilled personnel critical to our business. We have also chosen to outsource activities where skills are in short supply or where it is economically prudent to do so.

 

None of our employees are unionized, and we consider our relations with our employees to be good.

 

E.Share ownership.

 

The following table sets forth information regarding beneficial ownership of our Common Shares as of December 31, 2015 with respect to our Named Executive Officers and also with respect to our executive officers and directors individually and as a group.

 

            Options to Purchase Common Shares
   Number of
Common
Shares
  Total Number
of Common
Shares
Beneficially
Owned
  Percentage of
Common
Shares
Outstanding(+)
  Number of
Underlying
Common
Shares
(#)
  Exercise Price
(Range)
($)
  Expiry
Date
(Range-
Year)
Dr. William Rice   12,000    12,000    0.1%   761,963    $3.48-7.32    2023-2025 
Mr. Gregory Chow   15,000    15,000    0.1%   252,501    $5.28-9.36    2023-2025 
Mr. Avanish Vellanki   4,200    4,200    0.0%   252,501    $5.28-9.36    2023-2025 
Dr. Denis Burger   13,499    13,499    0.1%   35,334    $2.16-6.77    2021-2025 
Dr. Bradley Thompson   -    -    -    25,750    $6.00-6.77    2024-2025 
Dr. Erich Platzer   8,500    8,500    0.1%   10,000    $6.77    2025 
Dr. Mark Vincent   1,500    1,500    0.0%   29,083    $2.16-6.77    2021-2025 
Mr. Warren Whitehead   3,000    3,000    0.1%   27,500    $2.16-6.77    2021-2025 
                               
All directors and executive officers as a group   57,699    57,699    0.5%   1,394,632    $2.16-9.36    2021-2025 

 

(+) calculated on a partially diluted basis excluding options.

 

See Item 6.B for a description of arrangements pursuant to which employees may become involved in the capital of Aptose.

 

Item 7. Major Shareholders and Related Party Transactions

 

A.Major shareholders.

 

To the knowledge of our directors and officers, as of the date hereof, no person or company beneficially owns, directly or indirectly, or exercises control or direction over, 5% or more of the outstanding Common Shares, other than those discussed below.

 

Approximately 60% of our ordinary Common Shares are held in Canada, and there are 288 record holders of our Common Shares in Canada and 84 record holders in the United States. All of our shareholders have equal voting rights.

 

46
 

The following table is based upon information supplied by officers, directors and principal Stockholders and Schedules 13D and 13G filed with the SEC.

 

Name of Beneficial Owner(s)  Amount and Nature
of Beneficial Ownership
  Percent of Class (1)
Franklin Resources Inc.   1,416,666 (3)    11.75%
Cormorant Global Healthcare Master Fund LP   1,081,867 (4)    9.0%
Pinetree Capital   874,300 (2)    7.25%
Herbert Abramson   805,828 (6)    6.68%
Sheldon Inwentash   614,471 (5)    5.1%

 

(1) Based on 12,047,455 Common Shares outstanding as of March 29, 2016.

 

(2) This information is based solely on a Schedule 13G filed with the SEC on February 13, 2015.

 

(3) This information is based solely on a Schedule 13G filed with the SEC on February 6, 2015.

 

(4) This information is based solely on a Schedule 13G filed with the SEC on February 16, 2016.

 

(5) This information is based solely on a Schedule 13G filed with the SEC on March 2, 2015.

 

(6) This information is based solely on a Schedule 13G filed with the SEC on March 29, 2016.

 

B.Related party transactions.

 

In March 2015, the Company entered into an agreement with the 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 will be overseeing the laboratory work. The research services will be provided from April 1, 2015 to March 31, 2016 for an annual fee of US$154,456 to be paid to UCSD in monthly installments.

 

There were no related party transactions in the seven month transition period ended December 31, 2014.

 

Certain related parties participated in the June 2013 private placement described above. Directors and officers, including former president and chief operating officer Dr. Aiping Young, former director Dr. Jim Wright and current director Dr. Mark Vincent, acquired an aggregate of $68,000 of the promissory notes. A company related to Mr. Hebert Abramson, a former director of the Company, acquired $250,000 of the promissory notes and Mr. Inwentash and his joint actors (“Mr. Inwentash”), a former related party of the Company by virtue of having exercised control or direction over more than 10% of the issued and outstanding Common Shares of the Company, acquired $100,000 of the promissory notes. These promissory notes were repaid by the Company in April 2014.

 

In the September 2013 convertible promissory note private placement described above, a company related to Mr. Abramson, a former director of Aptose, acquired $100,000 of the promissory notes; Mr. Inwentash acquired $150,000 of the promissory notes; and Sprott Asset Management, which then held more than 10% of the Common Shares of Aptose and the ability to acquire control of more than 20% of the Common Shares of Aptose, acquired $112,000 of the promissory notes.

 

Mr. Inwentash participated in the December 2013 Common Share public offering described above and acquired an aggregate of 151,667 (pre-consolidation 1,820,000) Common Shares in that offering and an aggregate of 108,333 (pre-consolidation 1,300,000) Common Shares in the April 2014 public offering described above.

 

Executive Contracts

 

On October 25, 2013, the Company entered into an executive employment agreement with William G. Rice, Ph.D., in connection with his appointment as Chief Executive Officer and Chairman of the Board of the Company. On August 19, 2014, the Company entered into an amended executive employment agreement with William G. Rice, Ph.D.

 

47
 

On November 29, 2013, the Company entered into an executive employment agreement with each of Gregory K. Chow and Avanish Vellanki in connection with their appointments as Chief Financial Officer and Chief Business Officer, respectively, of the Company. 

 

The employment agreements for each of Dr. Rice, Mr. Chow and Mr. Vellanki provide that if they are terminated by the Company other than for cause, each of Dr. Rice, Mr. Chow and Mr. Vellanki would be entitled under their respective agreements to a payment equivalent to 12 months of their respective annual base salaries at the time of termination.  Dr. Rice’s current annual base salary represents U.S. $494,400, Mr. Chow’s current annual base salary represents U.S. $324,450, and Mr. Vellanki’s current annual base salary represents U.S. $324,450.  They are each additionally entitled to an amount equal to the average bonus remuneration received from the Company during the last three years of employment completed prior to the termination date, prorated based on the number of days the executive worked during the year of the termination.  In addition, the employment agreements for each of Dr. Rice, Mr. Chow and Mr. Vellanki provide that certain payments related to health benefits continue to be made for a period of 12 months following termination of their employment.

 

The employment agreements of each of Dr. Rice, Mr. Chow and Mr. Vellanki also provide for the grant of options to purchase Common Shares of the Company, at an exercise price equal to the fair market value of the shares on the dates of grant.  In connection with the execution of his executive employment agreement, Dr. Rice received an initial grant of a fully vested option to purchase 35,417 (425,000 pre-consolidation) Common Shares at an exercise price equal to the fair market value of the Common Shares on the date of grant.  Pursuant to the terms of his executive employment agreement, upon satisfaction of the conditions in his agreement, Dr. Rice received additional grants of options to purchase 5,281 (63,367 pre-consolidation), 65,136 (781,633 pre-consolidation) and 140,000 (1,680,000 pre-consolidation) Common Shares on December 10, 2013, January 29, 2014 and April 10, 2014, respectively, at exercise prices equal to the fair market value of the Common Shares on the dates of grant.  The options vest in accordance with the Company’s standard three year vesting term, at a rate of 50% of the shares subject to the option vest on the one-year anniversary of the date of grant and 25% vest on each one-year anniversary thereafter.

 

In addition to the option grants to Mr. Chow and Mr. Vellanki described below, Mr. Chow and Mr. Vellanki each received two additional grants of options to purchase 35,417 (425,000 pre-consolidation) Common Shares pursuant to the terms of their respective executive employment agreements, on December 10, 2013 and April 10, 2014.  Of the 35,417 (425,000 pre-consolidation) options granted on December 10, 2013 to Mr. Chow and Mr. Vellanki, 16,667 (200,000 pre-consolidation) vested immediately and the remaining 18,750 (225,000 pre-consolidation) options vest 50% after one year, 25% after two years and 25% after three years from the date of grant. The options granted in April 10, 2014 vest in equal monthly installments over 36 months from the date of grant.

 

The employment agreements of Dr. Rice, Mr. Chow and Mr. Vellanki also provide that, in the event of a change of control (as defined in the agreements), each of Mr. Chow and Mr. Vellanki would be eligible to receive a payment equivalent to 18 months of their respective annual base salaries at the time of termination, plus an amount equal to 150% of the average bonus remuneration received from the Company during the last three years of employment completed prior to the termination date, prorated based on the number of days the executive worked during the year of the termination, as well as continuation of the payments related to health benefits for a period of 12 months following the termination following a change of control.

 

Prior to the Company entering into the executive employment agreements with Mr. Chow and Mr. Vellanki, Aptose entered into a consulting agreement with each of Mr. Chow and Mr. Vellanki, on November 4, 2013.  Pursuant to the consulting agreements, Mr. Chow provided services to the Company as acting Chief Financial Officer prior to the date of his executive employment agreement and Mr. Vellanki provided services as acting Chief Business Officer prior to the date of his executive employment agreement.  Mr. Chow and Mr. Vellanki each were compensated at the monthly rate of $20,833 for their services and each were granted a fully vested option to purchase 35,417 (425,000 pre-consolidation) Common Shares at an exercise price equal to the fair market value of the shares on the date of grant. 

 

C.Interests of experts and counsel.

 

Not applicable.

 

48
 

Item 8. Financial Information

 

A.Consolidated statements and other financial information.

 

See Item 18 for our consolidated financial statements and other financial information.

 

Dividends on our Common Shares are declared at the discretion of our board of directors. To date, we have not paid any dividends and do not expect to do so in the foreseeable future.

 

B.Significant changes.

 

None.

 

 Item 9. The Offer and Listing

 

Not applicable, except for Item 9.A.4. and Item 9.C.

 

A.Offer and listing details.

 

Price Range of Common Stock and Trading Markets

 

Our Common Shares, without par value, are currently listed on the TSX under the symbol “APS” and NASDAQ under the symbol “APTO.” The following table sets out the price ranges and trading volumes of our Common Shares on the TSX for the periods indicated below.

 

TSX
(CDN$ and adjusted for post-consolidation)
Five most recent full fiscal years:   High    Low    Volume 
Year ended December 31, 2015   8.73    3.06    4,909,034 
Seven months ended December 31, 2014   9.14    4.80    4,856,934 
Year ended May 31, 2014   12.48    2.04    6,125,433 
Year ended May 31, 2013   7.68    2.28    614,114 
Year ended May 31, 2012   8.64    1.92    350,900 
Year ended May 31, 2011   30.60    8.16    217,475 
                
Year ended December 31, 2015   8.73    3.06    4,909,034 
Quarter ended December 31, 2015   8.33    3.06    1,843,402 
Quarter ended September 30, 2015   7.50    5.66    1,142,997 
Quarter ended June 30, 2015   8.32    6.40    905,688 
Quarter ended March 31, 2015   8.73    5.00    1,016,947 
                
7 months ended December 31, 2014   9.14    4.80    4,856,934 
Three months ended December 31, 2014   9.14    5.20    1,715,174 
Four months ended September 30, 2014   6.84    4.80    3,141,710 
                
Year ended May 31, 2014   12.48    2.04    6,125,433 
Quarter ended May 31, 2014   9.24    5.16    2,340,234 
Quarter ended February 28, 2014   10.56    5.88    2,396,513 
Quarter ended November 30, 2013   12.48    2.16    1,324,830 
Quarter ended August 31, 2013   2.88    2.04    63,850 
49
 
Most recent fourteen months:    High      Low      Volume  
March 1, 2016 – March 29, 2016   4.16    2.74    713,659 
February 2016   4.11    3.09    285,511 
January 2016   4.21    2.74    404,851 
December 2015   4.06    3.06    366,327 
November 2015   8.33    3.19    924,636 
 October 2015
   7.66    4.87    552,439 
September 2015   7.19    5.65    440,777 
August 2015   7.50    5.51    557,728 
July 2015   6.40    5.29    144,492 
June 2015   7.60    6.15    255,296 
May 2015   7.80    6.15    265,704 
April 2015   8.32    6.49    383,688 
March 2015   8.73    6.20    581,181 
February 2015   6.52    5.00    272,822 
January 2015   7.20    5.90    162,944 

 

The following table sets out the price ranges and trading volumes of our Common Shares on NASDAQ following the initial listing on October 23, 2014.

 

NASDAQ

(US$ and adjusted for post-consolidation)

 

   High  Low  Volume
Year ended December 31, 2015   6.81    2.17    6,375,129 
Quarter ended December 31, 2015   6.40    2.17    2,282,712 
Quarter ended September 30, 2015   5.72    4.41    944,753 
Quarter ended June 30, 2015   6.63    5.26    1,266,220 
Quarter ended March 31, 2015   6.81    4.01    1,881,444 

 

Most recent six months:  High  Low  Volume
February 2016   3.01    2.24    210,219 
January 2016   3.41    2.01    273,041 
December 2015   3.14    2.17    556,166 
November 2015   6.40    2.50    1,258,777 
 October 2015
   6.00    3.68    467,769 
September 2015    5.47    4.20    250,991 

 

Period  High  Low  Volume
October 23, 2014 to December 31, 2014   8.80    5.60    587,851 

 

B.Plan of distribution.

 

Not applicable.

 

C.Markets.

 

See Item 9.A.

 

D.Selling shareholders.

 

Not applicable.

 

E.Dilution.

 

Not applicable.

 

F.Expense of the issue.

 

Not applicable.

 

50
 

 Item 10. Additional Information

 

A.Share capital.

 

Not applicable.

 

B.Memorandum and articles of association.

 

We are incorporated pursuant to the laws of Canada (Corporation Number: 6650309). Our articles of incorporation (“Articles”) and by-laws provide no restrictions as to the nature of our business operations. Under Canadian law, a director must inform us, at a meeting of the Board, of any interest in a material contract or proposed material contract with us. Directors may not vote in respect of any such contracts made with us or in any such contract in which a director is interested, and such directors shall not be counted for purposes of determining a quorum. However, these provisions do not apply to (i) a contract relating primarily to their remuneration as a director, officer, employee or agent of the Corporation or affiliate, (ii) a contract for their indemnity or insurance as permitted under the Canada Business Corporations Act, or (iii) a contract with an affiliate.

 

We are authorized to issue an unlimited number of Common Shares. Our shareholders have no rights to share in our profits, are subject to no redemption or sinking fund provisions, have no liability for further capital calls and are not subject to any discrimination due to number of Common Shares owned. By not more than 50 days nor less than seven days in advance of a dividend, the Board may establish a record date for the determination of the persons entitled to such dividend.

 

The rights of holders of our Common Shares can be changed at any time in a shareholder meeting where the modifications are approved by 66 2/3% of the Common Shares represented by proxy or in person at a meeting at which a quorum exists.

 

All holders of our Common Shares are entitled to vote at annual or special meetings of shareholders, provided that they were shareholders as of the record date. The record date for shareholder meetings may precede the meeting date by no more than 50 days and not less than 21 days, provided that notice by way of advertisement is given to shareholders at least seven days before such record date. Notice of the time and place of meetings of shareholders may not be less than 21 nor greater than 50 days prior to the date of the meeting. There are no:

 

  · limitations on share ownership;

 

  · provisions of the Articles or by-laws that would have the effect of delaying, deferring or preventing a change of control of our company;

 

  · by-law provisions that govern the ownership threshold above which shareholder ownership must be disclosed; and

 

  · conditions imposed by the Articles or by-laws governing changes in capital, but Canadian corporate law requires any changes to the terms of share capital be approved by 66.66% of the Common Shares represented by proxy or in person at a shareholders’ meeting convened for that purpose at which a quorum exists.

 

Common Shares

 

Each holder of record of Common Shares, without par value, is entitled to one vote for each share held on all matters properly submitted to the shareholders for their vote, except matters which are required to be voted on as a particular class or series of stock. Cumulative voting for directors is not permitted.

 

51
 

Holders of outstanding Common Shares are entitled to those dividends declared by the board of directors out of legally available funds. In the event of liquidation, dissolution or winding up our affairs, holders of Common Shares are entitled to receive, pro rata, our net assets available after provision has been made for the preferential rights of the holders of preferred stock, including any surplus available after such event of liquidation, dissolution or winding up of the affairs of the Company. Holders of outstanding Common Shares have no pre-emptive, conversion or redemption rights. All of the issued and outstanding Common Shares are, and all unissued Common Shares, when offered and sold will be, duly authorized, validly issued, fully paid and non-assessable. To the extent that additional Common Shares may be issued in the future, the relative interests of the then existing shareholders may be diluted. There were 12,047,455 Common Shares issued and outstanding at December 31, 2015.

 

Common Shares Eligible for Future Sale

 

Future sales of substantial amounts of our Common Shares in the public market or even the perception that such sales may occur, could adversely affect the market price for our Common Shares and could impair our future ability to raise capital through an offering of our equity securities.

 

As at March 29, 2016, the Company had 12,046,455 Common Shares issued and outstanding. In addition, as of March 15, 2016 there were 1,681,296 Common Shares issuable upon the exercise of outstanding options to purchase an equal number of Common Shares at a weighted average price per share of $6.31 and 72,605 Common Shares issuable upon the exercise of Common Share purchase warrants priced at $5.40 and expiring in August 2016.

 

Indemnification of Executive Officers and Directors

 

We have agreed to indemnify our executive officers and directors for all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by them in respect of any civil, criminal or administrative action or proceeding to which they are made a party by reason of being or having been a director or officer, if (a) they acted honestly and in good faith with a view to our best interests, and (b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, they had reasonable grounds for believing that their conduct was lawful.

 

C.Material contracts.

 

Other than the agreements described below, we have not, in the two years preceding the date hereof, entered into any material agreements other than contracts in the ordinary course of business.

 

  1. Executive Employment Agreement between the Company and Dr. William G. Rice, dated October 25, 2013 and the Amendment dated August 19, 2014.

 

  2. Underwriting Agreement between the Company and RBC Dominion Securities Inc., Roth Capital Partners, LLC and Cormark Securities Inc. dated March 27, 2014 in connection with the April 2014 public offering.
     
  3. Underwriting Agreement between the Company and Clarus Securities Inc., Canaccord Genuity Corp., Jennings Capital Inc. and D & D Securities Inc. dated November 22, 2013 in Connection with the December 2013 public offering.
     
  4. Sales Agreement between the Company and Cowen and Company, LLC, dated April 2, 2015.

 

Please refer to ““Management Contracts” for further details on item 1 above.

 

D.Exchange controls.

 

There is no law or governmental decree or regulation in Canada that restricts the export or import of capital, or affects the remittance of dividends, interest or other payments to non-resident holders of our voting Common Shares, other than withholding tax requirements.

 

52
 

There is no limitation imposed by Canadian law or by our Articles or our other charter documents on the right of a non-resident to hold or vote voting Common Shares, other than as provided by the Investment Canada Act, the North American Free Trade Agreement Implementation Act (Canada) and the World Trade Organization Agreement Implementation Act.

 

The Investment Canada Act requires notification and, in certain cases, advance review and approval by the government of Canada of the acquisition by a non-Canadian of control of a Canadian business, all as defined in the Investment Canada Act. Generally, the threshold for review will be higher in monetary terms for a member of the World Trade Organization or North American Free Trade Agreement.

 

E.Taxation.

 

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

 

The following discussion is limited to certain material U.S. federal income tax considerations relating to the purchase, ownership and disposition of the Common Shares by U.S. Holders (as defined below). This discussion applies to U.S. Holders that hold Common Shares as capital assets. This summary is for general information purposes only and does not purport to be a complete analysis or listing of all potential U.S. federal income tax considerations that may apply to a U.S. Holder arising from and relating to the acquisition, ownership, and disposition of Common Shares. Accordingly, this summary is not intended to be, and should not be construed as, legal or U.S. federal income tax advice with respect to any U.S. Holder.

 

No legal opinion from U.S. legal counsel or ruling from the Internal Revenue Service (the “IRS”) has been requested, or will be obtained, regarding the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares. This summary is not binding on the IRS, and the IRS is not precluded from taking a position that is different from, and contrary to, the positions taken in this summary. In addition, because the authorities on which this summary is based are subject to various interpretations, the IRS and the U.S. courts could disagree with one or more of the conclusions described in this summary.

 

This discussion is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury regulations promulgated thereunder and administrative and judicial interpretations thereof, all as in effect on the date hereof and all of which are subject to change, possibly with retroactive effect. This summary does not discuss the potential effects, whether adverse or beneficial, of any proposed legislation.

 

This discussion does not address all of the U.S. federal income tax considerations that may be relevant to specific U.S. Holders in light of their particular circumstances or to U.S. Holders subject to special treatment under U.S. federal income tax law (such as certain financial institutions, insurance companies, broker-dealers and traders in securities or other persons that generally mark their securities to market for U.S. federal income tax purposes, tax-exempt entities, retirement plans, regulated investment companies, real estate investment trusts, certain former citizens or residents of the United States, persons who hold Common Shares as part of a “straddle,” “hedge,” “conversion transaction,” “synthetic security” or integrated investment, persons that have a “functional currency” other than the U.S. dollar, persons that own (or are deemed to own) 10% or more (by voting power or value) of our Common Shares, corporations that accumulate earnings to avoid U.S. federal income tax, partnerships and other pass-through entities, and investors in such pass-through entities). This discussion does not address any U.S. state or local or non-U.S. tax considerations or any U.S. federal estate, gift or alternative minimum tax considerations. In addition, except as specifically set forth below, this summary does not discuss applicable tax reporting requirements.

 

As used in this discussion, the term “U.S. Holder” means a beneficial owner of the Common Shares that is, for U.S. federal income tax purposes, (1) an individual who is a citizen or resident of the United States, (2) a corporation (or entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof, or the District of Columbia, (3) an estate the income of which is subject to U.S. federal income tax regardless of its source or (4) a trust (x) with respect to which a court within the United States is able to exercise primary supervision over its administration and one or more United States persons have the authority to control all of its substantial decisions or (y) that has elected under applicable U.S. Treasury regulations to be treated as a domestic trust for U.S. federal income tax purposes.

 

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If an entity treated as a partnership for U.S. federal income tax purposes holds the Common Shares, the U.S. federal income tax considerations relating to an investment in the Common Shares will depend in part upon the status and activities of such entity and the particular partner. Any such entity should consult its own tax advisor regarding the U.S. federal income tax considerations applicable to it and its partners of the purchase, ownership and disposition of the Common Shares.

 

Persons holding Common Shares should consult their own tax advisors as to the particular tax considerations applicable to them relating to the purchase, ownership and disposition of Common Shares, including the applicability of U.S. federal, state and local tax laws and non-U.S. tax laws.

 

Distributions

 

Subject to the discussion below under “Passive Foreign Investment Company Considerations,” a U.S. Holder that receives a distribution with respect to the Common Shares generally will be required to include the gross amount of such distribution (before reduction for any Canadian withholding taxes) in gross income as a dividend when actually or constructively received to the extent of the U.S. Holder’s pro rata share of our current and/or accumulated earnings and profits (as determined under U.S. federal income tax principles). To the extent a distribution received by a U.S. Holder is not a dividend because it exceeds the U.S. Holder’s pro rata share of our current and accumulated earnings and profits, it will be treated first as a tax-free return of capital and reduce (but not below zero) the adjusted tax basis of the U.S. Holder’s Common Shares. To the extent the distribution exceeds the adjusted tax basis of the U.S. Holder’s Common Shares, the remainder will be taxed as capital gain. Because we may not calculate our earnings and profits under U.S. federal income tax principles, U.S. Holders should expect all distributions to be reported to them as dividends.

 

The U.S. dollar value of any distribution on the Common Shares made in Canadian dollars generally should be calculated by reference to the exchange rate between the U.S. dollar and the Canadian dollar in effect on the date of receipt (or deemed receipt) of such distribution by the U.S. Holder regardless of whether the Canadian dollars so received are in fact converted into U.S. dollars at that time. If the Canadian dollars received are converted into U.S. dollars on the date of receipt (or deemed receipt), a U.S. Holder generally should not recognize currency gain or loss on such conversion. If the Canadian dollars received are not converted into U.S. dollars on the date of receipt (or deemed receipt), a U.S. Holder generally will have a basis in such Canadian dollars equal to the U.S. dollar value of such Canadian dollars on the date of receipt (or deemed receipt). Any gain or loss on a subsequent conversion or other disposition of such Canadian dollars by such U.S. Holder generally will be treated as ordinary income or loss and generally will be income or loss from sources within the United States for U.S. foreign tax credit purposes. Different rules apply to U.S. Holders who use the accrual method of tax accounting. Each U.S. Holder should consult its own U.S. tax advisors regarding the U.S. federal income tax consequences of receiving, owning, and disposing of foreign currency.

 

Distributions on the Common Shares that are treated as dividends generally will constitute income from sources outside the United States for foreign tax credit purposes and generally will constitute passive category income. Such dividends will not be eligible for the “dividends received” deduction generally allowed to corporate shareholders with respect to dividends received from U.S. corporations. Dividends paid by a “qualified foreign corporation” are eligible for taxation at a reduced capital gains rate rather than the marginal tax rates generally applicable to ordinary income provided that a holding period requirement (more than 60 days of ownership, without protection from the risk of loss, during the 121-day period beginning 60 days before the ex-dividend date) and certain other requirements are met. However, if we are a PFIC for the taxable year in which the dividend is paid or the preceding taxable year (see discussion below under “—Passive Foreign Investment Company Considerations”), we will not be treated as a qualified foreign corporation, and therefore the reduced capital gains tax rate described above will not apply. Each U.S. Holder is advised to consult its tax advisors regarding the availability of the reduced tax rate on dividends.

 

If a U.S. Holder is subject to Canadian withholding tax on dividends paid on the holder’s Common Shares, the U.S. Holder may be eligible, subject to a number of complex limitations, to claim a credit against its U.S. federal income tax for the Canadian withholding tax imposed on the dividends. A U.S. Holder may claim a deduction for the Canadian withholding tax in lieu of a credit, but only for a year in which the U.S. Holder elects to do so for all creditable foreign income taxes. The rules governing the foreign tax credit are complex. Each U.S. Holder is advised to consult its own tax advisor regarding the availability of the foreign tax credit under its particular circumstances.

 

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Sale, Exchange or Other Disposition of Common Shares

 

Subject to the discussion below under “Passive Foreign Investment Company Considerations,” a U.S. Holder generally will recognize capital gain or loss for U.S. federal income tax purposes upon the sale, exchange or other disposition of Common Shares. The amount of gain recognized will equal the excess of the amount realized (i.e., the amount of cash plus the fair market value of any property received) over the U.S. Holder’s adjusted tax basis in the Common Shares sold or exchanged. The amount of loss recognized will equal the excess of the U.S. Holder’s adjusted tax basis in the Common Shares sold or exchanged over the amount realized. Such capital gain or loss generally will be long-term capital gain or loss if, on the date of sale, exchange or other disposition, the Common Shares were held by the U.S. Holder for more than one year. Net long-term capital gain derived by a non-corporate U.S. Holder currently is subject to tax at reduced rates. The deductibility of a capital loss is subject to limitations. Any gain or loss recognized from the sale, exchange or other disposition of Common Shares will generally be gain or loss from sources within the United States for U.S. foreign tax credit purposes, except as otherwise provided in an applicable income tax treaty and if an election is properly made under the Code.

 

Passive Foreign Investment Company Considerations

 

In general, a corporation organized outside the United States will be treated as a PFIC in any taxable year in which either (1) at least 75% of its gross income is “passive income” or (2) at least 50% of the average quarterly value of its assets is attributable to assets that produce passive income or are held for the production of passive income. Passive income for this purpose generally includes, among other things, dividends, interest, royalties, rents, and gains from commodities transactions and from the sale or exchange of property that gives rise to passive income. In determining whether a foreign corporation is a PFIC, a proportionate share of the items of gross income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value) are taken into account.

 

We believe we were a PFIC for our taxable year ended December 31, 2015. Based on the nature of our business, the projected composition of our gross income and the projected composition and estimated fair market values of our assets, we expect to be a PFIC for our taxable year ending December 31, 2016 and may be a PFIC in subsequent tax years. No opinion of legal counsel or ruling from the IRS concerning our status as a PFIC has been obtained or is currently planned to be requested. However, the determination of our PFIC status is made annually after the close of each taxable year and it is difficult to predict before such determination whether we will be a PFIC for any given taxable year. Even if we determine that we are not a PFIC after the close of a taxable year, there can be no assurance that the Internal Revenue Service (the “IRS”) will agree with our conclusion. No assurance can be provided regarded our PFIC status, and neither we nor our United States counsel expresses any opinion with respect to our PFIC status for the taxable year ended December 31, 2015 or for any other taxable year.

 

If we are a PFIC at any time when a U.S. Holder owns Common Shares, such U.S. Holder will generally be subject to federal tax under the excess distribution regime on (1) distributions paid during a taxable year that are greater than 125% of the average annual distributions paid in the three preceding taxable years, or, if shorter, the U.S. Holder’s holding period for the Common Shares, and (2) any gain recognized on a sale, exchange or other disposition (which would include a pledge) of Common Shares. Under the excess distribution regime, the U.S. Holder’s tax liability will be determined by allocating such distribution or gain ratably to each day in the U.S. Holder’s holding period for the Common Shares. The amount allocated to the current taxable year (i.e., the year in which the distribution occurs or the gain is recognized) and any year prior to the first taxable year in which we were a PFIC in the holding period will be taxed as ordinary income earned in the current taxable year. The amount allocated to other taxable years will be taxed at the highest marginal rate in effect (for individuals or corporations as applicable) for ordinary income in each such taxable year, and an interest charge, generally that applicable to the underpayment of tax, will be added to the tax. Once we are a PFIC with respect to a particular U.S. Holder, we generally will remain a PFIC with respect to the U.S. Holder, unless we cease to meet the gross income and asset tests described above and the U.S. Holder makes a “deemed sale” election with respect to all of the U.S. Holder’s Common Shares. If such election is made, the U.S. Holder will be deemed to have sold the Common Shares held at their fair market value on the last day of the last taxable year in which we qualified as a PFIC, and any gain from such deemed sale would be taxed under the excess distribution regime described above. After the deemed sale election, the U.S. Holder’s Common Shares would not be treated as Common Shares of a PFIC unless we subsequently became a PFIC.

 

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If we are a PFIC for any taxable year during which a U.S. Holder holds the Common Shares and one of our non-United States subsidiaries is also a PFIC (i.e., a lower-tier PFIC), the U.S. Holder will be treated as owning a proportionate amount (by value) of the Common Shares of the lower-tier PFIC and will be subject to the rules described above on certain distributions by the lower-tier PFIC and a disposition (or deemed disposition) of Common Shares of the lower-tier PFIC, even though the U.S. Holder would not receive the distributions or the proceeds from the disposition of the Common Shares of the lower-tier PFIC. Each U.S. Holder is advised to consult its tax advisors regarding the application of the PFIC rules to any of our subsidiaries.

 

The tax considerations that would apply if we were a PFIC would be different from those described above if a U.S. Holder were able to make a valid “qualified electing fund,” or “QEF election.” We do not intend to provide U.S. Holders with the information required to permit them to make a QEF election and, accordingly, prospective investors should assume that a QEF election will not be available.

 

A U.S. Holder may avoid taxation under the excess distribution regime if the holder makes a valid “mark-to-market” election. An electing U.S. Holder generally would take into account as ordinary income each year, the excess of the fair market value of the Common Shares held at the end of the taxable year over the adjusted tax basis of such Common Shares. The U.S. Holder would also take into account, as an ordinary loss each year, the excess of the adjusted tax basis of such Common Shares over their fair market value at the end of the taxable year, but only to the extent of the excess of amounts previously included in income over ordinary losses deducted as a result of the mark-to-market election. The U.S. Holder’s tax basis in the Common Shares would be adjusted to reflect any income or loss recognized as a result of the mark-to-market election. Any gain from a sale, exchange or other disposition of the Common Shares in any taxable year in which we are a PFIC, (i.e., when we meet the gross income test or asset test described above) would be treated as ordinary income and any loss from a sale, exchange or other disposition would be treated first as an ordinary loss (to the extent of any net mark-to-market gains previously included in income) and thereafter as a capital loss. If we cease to be a PFIC, any gain or loss recognized by a U.S. Holder on the sale or exchange of the Common Shares would be classified as a capital gain or loss.

 

A mark-to-market election is available to a U.S. Holder only for “marketable stock.” Generally, stock will be considered marketable stock if it is “regularly traded” on a “qualified exchange” within the meaning of applicable U.S. Treasury regulations. A class of stock is regularly traded during any calendar year during which such class of stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. The Common Shares should be marketable stock as long as they are listed on the TSX and are regularly traded. A mark-to-market election will not apply to the Common Shares for any taxable year during which we are not a PFIC, but will remain in effect with respect to any subsequent taxable year in which we again become a PFIC. Such election will not apply to any subsidiary that we own. Accordingly, a U.S. Holder may continue to be subject to the PFIC rules with respect to any lower-tier PFICs notwithstanding the U.S. Holder’s mark-to-market election.

 

Each U.S. person who is a shareholder of a PFIC generally must file an annual report with the IRS containing certain information, and the failure to file such report could result in the imposition of penalties on such U.S. person and in the extension of the statute of limitations with respect to federal income tax returns filed by such U.S. person.

 

The U.S. federal income tax rules relating to PFICs are very complex. U.S. Holders are urged to consult their own tax advisers with respect to the purchase, ownership and disposition of Common Shares, the consequences to them of an investment in a PFIC, any elections available with respect to the Common Shares and the IRS information reporting obligations with respect to the purchase, ownership and disposition of Common Shares in the event we are considered a PFIC.

 

Additional Tax on Passive Income

 

Certain U.S. Holders that are individuals, estates or trusts (other than trusts that are exempt from tax) will be subject to a 3.8% tax on all or a portion of their “net investment income,” which includes dividends on the Common Shares, and net gains from the disposition of the Common Shares. Further, excess distributions treated as dividends, gains treated as excess distributions, and mark-to-market inclusions and deductions are all included in the calculation of net investment income.

 

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Treasury regulations provide, subject to the election described in the following paragraph, that solely for purposes of this additional tax, that distributions of previously taxed income will be treated as dividends and included in net investment income subject to the additional 3.8% tax. Additionally, to determine the amount of any capital gain from the sale or other taxable disposition of Common Shares that will be subject to the additional tax on net investment income, a U.S. Holder who has made a QEF election will be required to recalculate its basis in the Common Shares excluding QEF election basis adjustments.

 

Alternatively, a U.S. Holder may make an election which will be effective with respect to all interests in controlled foreign corporations and QEF election held in that year or acquired in future years. Under this election, a U.S. Holder pays the additional 3.8% tax on QEF election income inclusions and on gains calculated after giving effect to related tax basis adjustments. U.S. Holders that are individuals, estates or trusts should consult their own tax advisors regarding the applicability of this tax to any of their income or gains in respect of the Common Shares.

 

Information Reporting with Respect to Foreign Financial Assets

 

U.S. individuals that own “specified foreign financial assets” with an aggregate fair market value exceeding certain threshold amounts generally are required to file an information report on IRS Form 8938 with respect to such assets with their tax returns. Significant penalties may apply to persons who fail to comply with these rules. Specified foreign financial assets include not only financial accounts maintained in foreign financial institutions, but also, unless held in accounts maintained by a financial institution, any stock or security issued by a non-U.S. person. Upon the issuance of future U.S. Treasury regulations, these information reporting requirements may apply to certain U.S. entities that own specified foreign financial assets. The failure to report information required under the current regulations could result in substantial penalties and in the extension of the statute of limitations with respect to federal income tax returns filed by a U.S. Holder. U.S. Holders should consult their own tax advisors regarding the possible implications of these U.S. Treasury regulations for an investment in our Common Shares.

 

Special Reporting Requirements for Transfers to Foreign Corporations

 

A U.S. Holder that acquires Common Shares generally will be required to file Form 926 with the IRS if (1) immediately after the acquisition such U.S. Holder, directly or indirectly, owns at least 10% of the Common Shares, or (2) the amount of cash transferred in exchange for Common Shares during the 12-month period ending on the date of the acquisition exceeds US$100,000. Significant penalties may apply for failing to satisfy these filing requirements. U.S. Holders are urged to contact their tax advisors regarding these filing requirements.

 

Information Reporting and Backup Withholding

 

Dividends on and proceeds from the sale or other disposition of Common Shares may be reported to the IRS unless the U.S. Holder establishes a basis for exemption. Backup withholding may apply to amounts subject to reporting if (1) the holder fails to provide an accurate taxpayer identification number or otherwise establish a basis for exemption, or (2) is described in certain other categories of persons.

 

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules generally will be allowed as a refund or a credit against a U.S. Holder’s U.S. federal income tax liability if the required information is furnished by the U.S. Holder on a timely basis to the IRS.

 

THE DISCUSSION ABOVE IS A GENERAL SUMMARY. IT DOES NOT COVER ALL TAX MATTERS THAT MAY BE OF IMPORTANCE TO A US HOLDER. EACH US HOLDER IS URGED TO CONSULT ITS OWN TAX ADVISOR ABOUT THE TAX CONSEQUENCES TO IT OF AN INVESTMENT IN COMMON SHARES IN LIGHT OF THE INVESTOR’S OWN CIRCUMSTANCES.

 

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CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS

 

The following is, as of the date hereof, a summary of the principal Canadian federal income tax considerations under the Income Tax Act (Canada) (the “Tax Act”) generally applicable to a holder of Common Shares of the Company who, for purposes of the Tax Act and at all relevant times, is neither resident in Canada nor deemed to be resident in Canada for purposes of the Tax Act and any applicable income tax treaty or convention, and who does not use or hold (and is not deemed to use or hold) Common Shares in carrying on a business in Canada, deals at arm’s length with and is not affiliated with the Company and holds Common Shares as capital property (a “Holder”). Generally, Common Shares will be considered to be capital property to a Holder thereof provided that the Holder does not hold Common Shares in the course of carrying on a business of buying and selling securities and such Holder has not acquired them in one or more transactions considered to be an adventure or concern in the nature of trade.

 

This summary does not apply to a Holder (i) that is a “financial institution” for purposes of the mark-to-market rules contained in the Tax Act; (ii) that is a “specified financial institution” as defined in the Tax Act; (iii) an interest in which is a “tax shelter investment” as defined in the Tax Act; or (iv) that has elected to report its tax results in a functional currency other than Canadian currency. Special rules, which are not discussed in this summary, may apply to a Holder that is an “authorized foreign bank” within the meaning of the Tax Act or an insurer carrying on business in Canada and elsewhere. Such Holders should consult their own tax advisors.

 

This summary is based upon the provisions of the Tax Act (including the regulations (“Regulations”) thereunder) in force as of the date hereof and our understanding of the current administrative policies and assessing practices of the Canada Revenue Agency (the “CRA”) published in writing by the CRA prior to the date hereof. This summary takes into account all specific proposals to amend the Tax Act (and the Regulations) publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof (the “Tax Proposals”) and assumes that the Tax Proposals will be enacted in the form proposed, although no assurance can be given that the Tax Proposals will be enacted in their current form or at all. This summary does not otherwise take into account any changes in law or in the administrative policies or assessing practices of the CRA, whether by legislative, governmental or judicial decision or action. This summary is not exhaustive of all possible Canadian federal income tax considerations, and does not take into account other federal or any provincial, territorial or foreign income tax legislation or considerations, which may differ materially from those described in this summary.

 

This summary is of a general nature only and is not, and is not intended to be, and should not be construed to be, legal or tax advice to any particular Holder, and no representations concerning the tax consequences to any particular Holder are made. Holders should consult their own tax advisors regarding the income tax considerations applicable to them having regard to their particular circumstances.

 

Dividends

 

Dividends paid or credited (or deemed to be paid or credited) to a Holder by the Company are subject to Canadian withholding tax at the rate of 25% unless reduced by the terms of an applicable tax treaty. For example, under the Canada-United States Income Tax Convention (1980) (the “US Treaty”), as amended, the dividend withholding tax rate is generally reduced to 15% in respect of a dividend paid or credited to a Holder beneficially entitled to the dividend who is resident in the U.S. for purposes of the US Treaty and whose entitlement to the benefits of the US Treaty is not limited by the limitation of benefits provisions of the US Treaty. Holders are urged to consult their own tax advisors to determine their entitlement to relief under the US Treaty or any other applicable tax treaty as well as their ability to claim foreign tax credits with respect to any Canadian withholding tax, based on their particular circumstances.

 

Disposition of Common Shares

 

A Holder generally will not be subject to tax under the Tax Act in respect of a capital gain realized on the disposition or deemed disposition of a Common Share, unless the Common Share constitutes or is deemed to constitute “taxable Canadian property” to the Holder thereof for purposes of the Tax Act, and the gain is not exempt from tax pursuant to the terms of an applicable tax treaty or convention.

 

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In general, provided the Common Shares are listed on a “designated stock exchange” (which currently includes the TSX) at the date of the disposition, the Common Shares will only constitute “taxable Canadian property” of a Holder if, at any time within the 60-month period preceding the disposition: (i) such Holder, persons with whom the Holder did not deal at arm's length, partnerships in which the Holder or a person with whom the Holder did not deal at arm’s length holds a membership interest directly or indirectly through one or more partnerships, or any combination thereof, owned 25% or more of the issued shares of any class or series of the Company’s capital stock, and (ii) more than 50% of the fair market value of the Common Shares was derived directly or indirectly from one or any combination of (A) real or immovable property situated in Canada, (B) Canadian resource properties, (C) timber resource properties, and (D) options in respect of, or interests in, or for civil law rights in, property described in any of subparagraphs (ii)(A) to (C), whether or not the property exists. However, and despite the foregoing, in certain circumstances the Common Shares may be deemed to be “taxable Canadian property” under the Tax Act.

 

Holders whose Common Shares may be “taxable Canadian property” should consult their own tax advisers.

 

F.Dividends and paying agents.

 

The transfer agent and registrar for our common shares is Computershare Investor Services Inc. at its principal office in the City of Toronto.

 

G.Statement by experts.

 

Not applicable.

 

H.Documents on display.

 

We are subject to the information and reporting requirements of the Exchange Act, and file periodic reports and other information with the SEC. However, as a foreign private issuer, we are exempt from the rules and regulations under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. Our reports and other information filed with the SEC may be inspected at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. Copies of these materials may be obtained at prescribed rates from the SEC at that address. Our reports and other information can also be inspected at no charge on the SEC’s website at www.sec.gov.

 

We are also subject to the information and reporting requirements of the Securities Act (Ontario) and the Canada Business Corporations Act. Such reports and information can be inspected at no charge on the website www.sedar.com.

 

If you are a shareholder, you may request a copy of these filings at no cost by contacting us at:

 

Vice President of Finance
Aptose Biosciences Inc.
5955 Airport Road, Suite #228
Mississauga, Ontario L4V 1R9
Canada
Phone (647) 479-9828
Fax (905) 234-2120

 

I.Subsidiary information.

 

Aptose has three subsidiaries: NuChem, a company incorporated under the laws of Ontario, Canada, Aptose USA, a company incorporated under the laws of Delaware, USA and Aptose Suisse GmbH a company incorporated under the laws of Zug, Switzerland. Aptose owns 80% of the issued and outstanding voting share capital of NuChem and 100% of the issued and outstanding voting share capital of Aptose USA and Aptose Suisse.

 

 Item 11. Qualitative and Quantitative Disclosures About Market Risk

 

Refer to notes 4 and 8 to the consolidated financial statements contained in Item 18.

 

We are exposed to significant market risks as outlined below.

 

We do not utilize derivative financial instruments to hedge our interest rate or foreign currency rate risks.

 

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Interest Rate Risk

 

The Company invests its cash resources in liquid government and corporate debt instruments. We do not believe that the results of operations or cash flows would be affected to any significant degree by a sudden change in market interest rates relative to interest rates on our investments, owing to the relative short-term nature of the investments.

 

Credit Risk

 

Financial instruments potentially exposing the Company to a concentration of credit risk consist principally of cash and cash equivalents and marketable securities. The Company manages this credit risk by maintaining bank accounts with Schedule I banks and investing only in highly rated Canadian securities that are traded on active markets and are capable of prompt liquidation.

 

Exchange Rate Sensitivity

 

The functional currency of the Company is the Canadian dollar. We are exposed to currency risk from employee costs as well as the purchase of goods and services primarily in the United States and on cash balances held in foreign currencies. Fluctuations in the US dollar exchange rate could have a significant impact on our results. Assuming all other variables remain constant, a 10% depreciation or appreciation of the Canadian dollar against the US dollar would result in an increase or decrease in loss for the year and comprehensive loss of $576 thousand (December 31, 2014- $50 thousand, May 31, 2014 - $18 thousand). Balances in foreign currencies are as follows:

 

   US$ Balances
   December 31,  December 31,  May 31,
(in thousands)  2015  2014  2014
Cash and cash equivalents  $5,000   $66    594 
Accounts payable and accrued liabilities   (838)   (565)   (769)
Balance, end of period  $4,162   $(499)  $(175)

 

We do not have any forward exchange contracts to hedge this risk.

 

Limitations

 

The above discussion includes only those exposures that exist as of December 31, 2015, and as a result, does not consider exposures or positions that could arise after that date. The Company’s ultimate realized gain or loss with respect to interest rate and exchange rate fluctuations would depend on the exposures that arise during the period.

 

Risk Factors

 

See Item 3.D.

 

Item 12. Description of Securities Other Than Equity Securities

 

Not applicable.

 

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PART II

 

Item 13. Defaults, Dividends Arrearages and Delinquencies

 

Not applicable.

 

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

 

Not applicable.

 

Item 15. Controls and Procedures

 

  (a) Disclosure controls and procedures.

 

As of the end of the year ended December 31, 2015, 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 Exchange Act), was carried out by our management under the supervision of and with the participation of the principal executive officer and principal financial officer. Based upon on that evaluation, our principal executive officer and principal financial officer have concluded that as of the end of that period, our disclosure controls and procedures were 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 SEC rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

 

It should be noted that while our principal executive officer and principal financial officer believe that our disclosure controls and procedures are effective and provide a reasonable level of assurance, they do not expect that the disclosure controls and procedures or internal control over financial reporting will prevent all errors and 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.

 

  (b) Management’s annual report on internal control over financial reporting.

 

Management is responsible for establishing and maintaining adequate internal control over our financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control system was designed to provide reasonable assurance that all transactions are accurately recorded, that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with IFRS as issued by the IASB, and that our assets are safeguarded.

 

Management has assessed the effectiveness of our internal control over financial reporting as at December 31, 2015. In management’s opinion, our internal control over financial reporting is effective as at December 31, 2015. In making its assessment, management used the Committee of Sponsoring Organizations of the Treadway Commission framework in Internal Control – Integrated Framework of 2003 to evaluate the effectiveness of our internal control over financial reporting.

 

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

  (c) Attestation report of the independent registered public accounting firm.

 

Because we are a non-accelerated filer and an “emerging growth company” under the rules of the SEC, this Annual Report is not required to include, and does not include, an attestation report of our independent registered public accounting firm with respect to our internal control over financial reporting.

 

61
 

  (d) Changes in internal control over financial reporting.

 

There has been no change in our internal control over financial reporting during the period covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 16. [Reserved]

 

Item 16A. Audit Committee Financial Expert

 

Our board of directors has determined that Mr. Warren Whitehead, a director of the Company and the chairman of the Audit Committee, possesses the attributes required of an “audit committee financial expert,” and is “independent,” within the meaning of applicable NASDAQ rules.

 

Item 16B. Code of Ethics

 

We have adopted a code of ethics, as such term is defined in Form 20-F, which applies to all of our officers, directors, employees and consultants. A copy of the code of ethics is available on our website at www.aptose.com or, without charge, upon written request from our Vice President of Finance at our offices located at 5955 Airport Road, Suite #228, Mississauga, Ontario L4V 1R9, Canada. There were no waivers granted under our code of ethics during the twelve months ended December 31, 2015.

 

Item 16C. Principal Accountant Fees and Services

 

KPMG LLP has served as our principal independent external auditor since October 1994. The total fees billed to us for professional services provided by KPMG LLP for the twelve months ended December 31, 2015 and seven months ended December 31, 2014 are as follows:

 

   Twelve Months
Ended
December 31, 2015
  Seven Months
Ended
December 31, 2014
Audit Fees  $274,800   $157,440 
Audit-Related Fees  $-   $- 
Tax Fees  $180,789   $36,015 
All Other Fees  $-   $- 
Total  $455,589   $193,455 

 

Audit fees consist of the fees paid with respect to the audit of our consolidated annual financial statements, quarterly reviews and 20-F filing with the SEC and for any other professional services that are normally provided by KPMG LLP in connection with statutory and regulatory filings or engagements. Tax fees related to tax planning advice provided with respect to intellectual property and US operations.

 

Pre-Approval Policies and Procedures

 

The Audit Committee of our board of directors has, pursuant to the Audit Committee charter, adopted specific responsibilities and duties regarding the provision of services by our external auditor, currently KPMG LLP. Our charter requires Audit Committee pre-approval of all permitted audit, audit-related and tax services.

 

Subject to the charter, the Audit Committee may establish fee thresholds for a group of pre-approved services. The Audit Committee then recommends to the board of directors approval of the fees and other significant compensation to be paid to the independent auditors.

 

No services were provided by KPMG LLP under a de minimus exemption for the year ended December 31, 2015.

 

Item 16D. Exemptions from the Listing Standards for Audit Committees

 

Not applicable.

 

62
 

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

Not applicable.

 

Item 16F. Change in Registrant’s Certifying Accountant

 

Not applicable.

 

Item 16G. Corporate Governance

 

On October 23, 2014, we listed our Common Shares for trading on NASDAQ.  Section 5615(a)(3) of the NASDAQ Marketplace Rules permits NASDAQ to grant exemptions to a foreign private issuer for the provisions of the Rule 5600 series and Rule 5250 (d).  We are organized under the laws of Canada and our Common Shares are listed for trading on the TSX.  We comply with the laws of Canada and rules and regulations of the TSX, including rules related to corporate governance practices.  A description of the significant ways in which our governance practices differ from those followed by domestic companies pursuant to the NASDAQ Marketplace Rules is as follows:

 

Shareholder Meeting Quorum Requirement: The NASDAQ minimum quorum requirement for a shareholder meeting under Section 5620(c) of the NASDAQ Marketplace Rules is one-third of the outstanding shares of common stock.  In addition, a company listed on NASDAQ is required to state a quorum requirement in its bylaws.  Our quorum requirement is set forth in our corporate bylaws.  A quorum for our shareholder meeting is not less than 25% of the outstanding shares of the Corporation entitled to be voted at such meeting present or by means of a telephonic, electronic or other communication facility that permits all participants to communicate adequately with each other during the meeting and each entitled to vote at the meeting.

 

Compensation Committee Mandate: NASDAQ will require compliance with the revised Rule 5605(d) for all companies following the company's first annual meeting occurring after January 15, 2014, or October 31, 2014, whichever is earlier. In our case this was following our August 19, 2014 annual general and special meeting. The changes to the rule include requiring the mandate of the Compensation Committee to include accountability to external advisors. The Compensation Committee Mandate does not currently include such requirements.

 

The foregoing is consistent with the laws, customs and practices in Canada and the rules of the TSX.

 

Item 16H. Mine Safety Disclosure

 

Not applicable.

 

63
 

PART III

 

Item 17. Financial Statements

 

We have responded to Item 18 in lieu of responding to this Item.

 

Item 18. Financial Statements

 

The consolidated financial statements of Aptose Biosciences Inc. are attached as follows:

 

    Page
     
Independent Auditors’ Report of Registered Public Accounting Firm   F-1
     
Consolidated Statements of Financial Position as at December 31, 2015 and 2014   F-2
     
Consolidated Statements of Loss and Comprehensive Loss for the year ended December 31, 2015, seven months ended December 31, 2014 and year ended May 31, 2014   F-3
     
Consolidated Statement of Changes in Shareholders’ Equity for the year ended December 31, 2015, seven months ended December 31, 2014 and year ended May 31, 2014   F-4
     
Consolidated Statements of Cash Flows for the twelve months ended December 31, 2015, seven months ended December 31, 2014 and twelve months ended May 31, 2014   F-5
     
Notes to Consolidated Financial Statements for the year ended December 31, 2015, seven months ended December 31, 2014 and year ended May 31, 2014   F-6

 

Item 19. Exhibits.

 

See the Exhibit Index hereto.

 

 

64
 

SIGNATURES

 

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.

 

    APTOSE BIOSCIENCES INC.
     
  By: /s/ William G. Rice
    Name: William G. Rice, PhD
    Title: Chairman and Chief Executive Officer
     
    Date: March 29, 2016

 

  By: /s/ Gregory K. Chow
    Name: Gregory K. Chow
    Title: Chief Financial Officer
     
    Date: March 29, 2016

 

65
 

EXHIBIT INDEX

 

Exhibit Number   Description
1.1   Articles of Incorporation, Arrangement and Amendment (incorporated herein by reference to Exhibit 99.3 to the Registrant’s Current Report on Form 6-K filed with the SEC on June 12, 2015)
1.2   By-law #2 of the Company  (incorporated herein by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 6-K filed with the SEC on June 12, 2015)
2.1   Indemnification Agreement dated July 10, 2007 between Old Lorus and the Company (incorporated herein by reference to Exhibit 99.10 to the Registrant’s Current Report on Form 6-K filed with the SEC on September 4, 2007)
2.2   Form of Promissory note and Warrant issued June 19, 2013 (incorporated herein by reference to Exhibit 2.25 to the Registrant’s Annual Report on Form 20-F filed with the SEC on May 16, 2014)
2.3   Form of Convertible Promissory note issued September 26, 2013 (incorporated herein by reference to Exhibit 2.26 to the Registrant’s Annual Report on Form 20-F filed with the SEC on May 16, 2014)
2.4   Underwriting Agreement dated November 22, 2013 in connection with the December 2013 public offering (incorporated herein by reference to Exhibit 2.27 to the Registrant’s Annual Report on Form 20-F filed with the SEC on May 16, 2014)
2.5   Underwriting Agreement dated March 27, 2014 in connection with the April 2014 public offering (incorporated herein by reference to Exhibit 2.28 to the Registrant’s Annual Report on Form 20-F filed with the SEC on May 16, 2014)
4.1   Share Option Plan as amended May 5, 2015 (incorporated herein by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 6-K filed with the SEC on June 12, 2015)
4.2   Stock Incentive Plan as adopted May 5, 2015 (incorporated herein by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 6-K filed with the SEC on June 12, 2015)
4.2   Form of Officer and Director Indemnity Agreement (incorporated herein by reference to Exhibit 4.2 to the Registrant’s Annual Report on Form 20-F filed with the SEC on November 21, 2006)
4.3   Amalgamation Agreement dated August 23, 1991, among the Company, Mint Gold Resources Ltd., Harry J. Hodge and Wayne Beach (incorporated herein by reference from the Registration Statement on Form 20-FR filed with the SEC on March 4, 1992)

4.4

 

Executive Employment Agreement between the Company and Dr. William G. Rice, dated October 25, 2013 (incorporated herein by reference to Exhibit 4.9 to the Registrant’s Annual Report on Form 20-F filed with the SEC on May 16, 2014)

4.5   Amendment to the Employment agreement between the Company and Dr. William G. Rice dated August 19, 2014 (incorporated herein by reference to Exhibit 4.9A to the Registrant’s Annual Report on Form 20-F filed with the SEC on March 4, 2015)
4.6   Executive Employment Agreement between the Company and Gregory K. Chow, dated November 29, 2013 (incorporated herein by reference to Exhibit 4.9.1 to the Registrant’s Annual Report on Form 20-F filed with the SEC on May 16, 2014)
4.7   Executive Employment Agreement between the Company and Avanish Vellanki, dated November 29, 2013 (incorporated herein by reference to Exhibit 4.9.2 to the Registrant’s Annual Report on Form 20-F filed with the SEC on May 16, 2014)
4.8   Sales Agreement between the Company and Cowen and Company, LLC, dated April 2, 2015 (incorporated herein by reference to Exhibit 1.1 to the Registrant’s Current Report on Form 6-K filed with the SEC on April 6, 2015)
8.1   List of subsidiaries

11.1

 

Code of Business Conduct and Ethics (incorporated herein by reference to Exhibit 11.1 to the Registrant’s Annual Report on Form 20-F filed with the SEC on March 4, 2015)

11.2   Audit Committee Charter (incorporated herein by reference to Exhibit 11.2 to the Registrant’s Annual Report on Form 20-F filed with the SEC on March 4, 2015)
12.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
12.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
13.1   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
13.2   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
15.1   Management Discussion and Analysis for the twelve months ended December 31, 2015

 

 

 

 

Consolidated Financial Statements of

 

aptose biosciences INC.

 

Year ending December 31, 2015, Seven month period ending

December 31, 2014, Year ending May 31, 2014

 

 

 

 

 

 
 

  KPMG LLP  
 

Bay Adelaide Centre

Telephone (416) 777-8500
  333 Bay Street Suite 4600 Fax (416) 777-8818
  Toronto ON M5H 2S5 Internet www.kpmg.ca
  Canada  

 

INDEPENDENT auditors’ REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors of Aptose Biosciences Inc.

 

We have audited the accompanying consolidated financial statements of Aptose Biosciences Inc., which comprise the consolidated statements of financial position as of December 31, 2015 and December 31, 2014, the consolidated statements of loss and comprehensive loss, changes in shareholders’ equity and cash flows for the year ended December 31, 2015, the seven-month period ended December 31, 2014 and the year ended May 31, 2014, and notes, comprising a summary of significant accounting policies and other explanatory information.

 

Management’s Responsibility for the Consolidated Financial Statements

 

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors’ Responsibility

 

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aptose Biosciences Inc. as at December 31, 2015 and December 31, 2014, and its consolidated financial performance and its consolidated cash flows for the year ended December 31, 2015, the seven-month period ended December 31, 2014 and the year ended May 31, 2014 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

 

Chartered Professional Accountants, Licensed Public Accountants

March 29, 2016

Toronto, Canada

 

  KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
KPMG Canada provides services to KPMG LLP.
 

 

 

F-1
 

Aptose biosciences Inc.

Consolidated Statements of Financial Position

(Expressed in thousands of Canadian dollars)

 

   December 31,   December 31, 
   2015   2014 
Assets          
           
Current assets:          
Cash and cash equivalents (note 4(a))  $11,503   $14,365 
Investments (note 4(b))   8,245    16,180 
Prepaid expenses and other assets   1,067    855 
Total current assets   20,815    31,400 
           
Non-current assets:          
Equipment and intangibles (note 5)   434    200 
Total non-current assets   434    200 
           
Total assets  $21,249   $31,600 
           
Liabilities and Shareholders' Equity          
           
Current liabilities:          
Accounts payable  $522   $256 
Accrued liabilities   1,834    1,662 
Convertible promissory notes (note 7)   -    410 
Total current liabilities   2,356    2,328 
           
Shareholders' equity:          
Share capital (note 9):          
Common shares   223,425    221,259 
Equity portion of convertible          
promissory notes (note 7)   -    64 
Stock options (notes 9(e) and 10)   6,256    4,078 
Contributed surplus (note 9(d))   22,037    21,653 
Warrants (note 9(c))   84    501 
Deficit   (232,909)   (218,283)
Total shareholders' equity   18,893    29,272 
           
Total liabilities and shareholders' equity  $21,249   $31,600 

 

See accompanying notes to consolidated financial statements.

 

Commitments, contingencies and guarantees (Note 15)

 

On behalf of the Board:

 

“Warren Whitehead”                           Director

“Bradley Thompson”                           Director

 

F-2
 

APTOSE Biosciences Inc.

Consolidated Statements of Loss and Comprehensive Loss

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

 

Year ended December 31, 2015, 7 month period ended December 31, 2014 and

Year ended May 31, 2014

 

   12 months ended   7 months ended   12 months ended 
   December 31,   December 31,   May 31, 
   2015   2014   2014 
       (note 17)   (note 17) 
Revenue  $   $   $ 
Expenses:               
Research and development (notes 11)   6,254    2,404    3,015 
General and administrative (note 12)   9,845    5,542    7,317 
Operating expenses   16,099    7,946    10,332 
                
Finance expense (note 13)   43    104    297 
Finance income (note 13)   (1,516)   (279)   (76)
Net finance (income) expense   (1,473)   (175)   221 
                
Net loss and total comprehensive loss for the period  $(14,626)  $(7,771)  $(10,553)
                
Basic and diluted loss per common share  $(1.23)  $(0.67)  $(2.02)
                
Weighted average number of common shares outstanding
used in the calculation of (in thousands) (note 9(f)):
               
Basic and diluted loss per common share   11,906    11,605    5,216 

 

See accompanying notes to consolidated financial statements.

 

F-3
 

Aptose biosciences inc.

Consolidated Statements of Changes in Shareholders' Equity

(Expressed in thousands of Canadian dollars)

 

Year ended December 31, 2015, 7 month period ended December 31, 2014 and Year ended May 31, 2014

 

   Share   Stock       Contributed   Equity
portion
         
   capital   options   Warrants   surplus   of debt   Deficit   Total 
                             
Balance, December 31, 2014  $221,259   $4,078   $501   $21,653   $64   $(218,283)  $29,272 
Exercise of warrants (note 9(c))   503        (155)               348 
Exercise of stock options   1,215    (566)                   649 
Conversion of promissory notes (note 7)   438            54    (64)       428 
Common shares issued under the ATM (note 9(b)(i))   10                        10 
Expiry of warrants           (262)   262             
Stock-based compensation (note 10)       2,812                    2,812 
Expiry of stock options       (68)       68             
Net loss for the period                       (14,626)   (14,626)
Balance, December 31, 2015  $223,425   $6,256   $84   $22,037   $   $(232,909)  $18,893 
                                    
Balance, May 31, 2014  $212,938   $2,658   $1,857   $21,410   $88   $(210,512)  $28,439 
Exercise of warrants (note 9(c))   7,814        (1,166)               6,648 
Exercise of stock options   345    (162)                   183 
Conversion of promissory notes (note 7)   162            8    (24)       146 
Expiry of warrants           (190)   190             
Stock-based compensation (note 10)       1,627                    1,627 
Expiry of stock options       (45)        45              
Net loss for the seven month period                       (7,771)   (7,771)
Balance, December 31, 2014  $221,259   $4,078   $501   $21,653   $64   $(218,283)  $29,272 
                                    
Balance, June 1, 2013  $174,522   $1,018   $2,421   $21,217   $   $(199,959)  $(781)
Issuance of common shares (note 9(b)(ii))   6,927        350                7,277 
Issuance of common shares (note 9(b)(i))   25,584                        25,584 
Issuance of warrants (note 9(b)(iii))           75                75 
Issuance of convertible notes (note 7)                   88        88 
Exercise of warrants (note 9(c))   5,422        (964)               4,458 
Exercise of options and DSU’s (note 9(g))   483    (18)                   465 
Expiry of warrants           (25)   25             
Stock-based compensation (note 10)       1,826                    1,826 
Cancellation and forfeiture of stock options       (168)       168             
Net loss for the year                       (10,553)   (10,553)
Balance, May 31, 2014  $212,938   $2,658   $1,857   $21,410   $88   $(210,512)  $28,439 

 

See accompanying notes to consolidated financial statements.

 

F-4
 

Aptose biosciences inc.

Consolidated Statements of Cash Flows

(Expressed in thousands of Canadian dollars)

 

   12 months ended   7 months ended   12 months ended 
   December 31,   December 31,   May 31, 
   2015   2014   2014 
Cash flows from operating activities:               
Net loss for the year  $(14,626)  $(7,771)  $(10,553)
Items not involving cash:               
Stock-based compensation   2,812    1,627    1,826 
Depreciation and amortisation   96    22    21 
Interest income   (286)   (279)   (76)
Unrealized foreign exchange gain   (929)        
Interest and accretion expense   43    58    259 
Other           1 
Change in non-cash operating               
working capital (note 6)   226    (374)   (14)
Cash used in operating activities   (12,664)   (6,717)   (8,536)
                
Cash flows from financing activities:               
Issuance of common shares and warrants,
net of issuance costs (note 9(b)(i) and (ii))
   10        32,861 
Exercise of warrants, options and DSU’s (note 9)   997    6,831    4,923 
Issuance of convertible notes           600 
Debt issuance costs           (40)
Issuance of promissory notes and loans           1,068 
Repayment of promissory notes and loans           (1,068)
Interest paid on notes and loans   (25)   (30)   (129)
Cash provided by financing activities   982    6,801    38,215 
                
Cash flows from investing activities:               
Maturity (acquisition) of investments   7,935    (5,161)   (11,019)
Purchase of equipment   (330)   (204)   (22)
Interest received   286    279    76 
Cash provided by (used in) investing activities   7,891    (5,086)   (10,965)
                
Effect of exchange rate fluctuations on cash               
and cash equivalents held   929         
                
Increase (decrease) in cash and cash equivalents   (2,862)   (5,002)   18,714 
                
Cash and cash equivalents, beginning of year   14,365    19,367    653 
                
Cash and cash equivalents, end of year  $11,503   $14,365   $19,367 

 

Supplemental cash flow information (note 6)

 

See accompanying notes to consolidated financial statements.

 

F-5
 

aptose biosciences inc.

Notes to Consolidated Financial Statements (continued)

(Tabular amounts in thousands of Canadian dollars, except per share amounts)

 

Year ended December 31, 2015, Seven Months ended December 31, 2014 and

Year ended May 31, 2014

 

 

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. Aptose is a publicly listed company incorporated under the laws of Canada. The Company's shares are listed on the Nasdaq Capital Markets and the Toronto Stock Exchange. The head office, principal address and records of the Company are located at 5955 Airport Road, Mississauga, Ontario, Canada, L4V 1R9.

 

Aptose changed its name from Lorus Therapeutics Inc. effective August 28, 2014.

 

Effective July 17, 2014, the Company changed its fiscal year end from May 31 to December 31. As a result of that change, the current reporting fiscal period is for the twelve months ended December 31, 2015, while the prior year comparative periods are for the seven months ended December 31, 2014 and the twelve months ended May 31, 2014, and therefore are not directly comparable to the current twelve month period.

 

2.Basis of presentation:

 

(a)Statement of compliance:

 

These consolidated financial statements of the Company and its subsidiaries are prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). The consolidated financial statements of the Company were approved and authorized for issue by the Board of Directors on March 29, 2016.

 

(b)Functional and presentation currency:

 

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

 

(c)Significant accounting judgments, estimates and assumptions:

 

The preparation of these consolidated financial statements in accordance with IFRS 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 consolidated financial statements include estimates, which, by their nature, are uncertain.

 

F-6
 

aptose biosciences inc.

Notes to Consolidated Financial Statements (continued)

(Tabular amounts in thousands of Canadian dollars, except per share amounts)

 

Year ended December 31, 2015, Seven Months ended December 31, 2014 and

Year ended May 31, 2014

 

 

2.Basis of presentation (continued):

 

The impacts of such estimates are pervasive throughout the consolidated 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.

 

The key assumptions concerning the future and other key sources of estimation uncertainty as of the date of the statement of financial position that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next fiscal year include:

 

(i)Valuation of contingent liabilities:

 

The Company utilizes considerable judgment in the measurement and recognition of provisions and the Company's exposure to contingent liabilities. Judgment is required to assess and determine the likelihood that any potential or pending litigation or any and all potential claims against the Company may be successful. The Company must estimate if an obligation is probable as well as quantify the possible economic cost of any claim or contingent liability. Such judgments and assumptions are inherently uncertain. The increase or decrease of one of these assumptions could materially increase or decrease the fair value of the liability and the associated expense.

 

(ii)Valuation of tax accounts:

 

Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. Currently, the Company has deductible temporary differences which would create a deferred tax asset. Deferred tax assets are recognized for all deductible temporary differences to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences can be utilized. Management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits together with future tax planning strategies. To date, the Company has determined that none of its deferred tax assets should be recognized. The Company's deferred tax assets are mainly comprised of its net operating losses from prior years and prior year research and development expenses not yet deducted for income tax purposes. These tax pools relate to entities that have a history of losses, have varying expiry dates, and may not be used to offset taxable income. As well, there are no taxable temporary differences or any tax planning opportunities available that could partly support the recognition of these losses as deferred tax assets. The generation of future taxable income could result in the recognition of some portion or all of the remaining benefits , which could result in an improvement in the Company's results of operations through the recovery of future income taxes.

 

F-7
 

aptose biosciences inc.

Notes to Consolidated Financial Statements (continued)

(Tabular amounts in thousands of Canadian dollars, except per share amounts)

 

Year ended December 31, 2015, Seven Months ended December 31, 2014 and

Year ended May 31, 2014

 

 

2.Basis of presentation (continued):

 

(iii)Valuation of share-based compensation and share purchase warrants:

 

Management measures the costs for share-based payments and share purchase warrants using market-based option valuation techniques. Assumptions are made and judgment is used in applying valuation techniques. These assumptions and judgments include estimating the future volatility of the share price, expected dividend yield, and employee turnover rates. Such judgments and assumptions are inherently uncertain. The increase or decrease of one of these assumptions could materially increase or decrease the fair value of share-based payments and share purchase warrants issued and the associated expense.

 

3.Significant accounting policies:

 

(a)Basis of consolidation:

 

The consolidated financial statements include the accounts of the Company its 80% owned subsidiary, NuChem Pharmaceuticals Inc. (“NuChem”), its 100% owned subsidiaries Aptose Biosciences Inc. USA (“Aptose USA”) and Aptose Suisse GmbH (“Aptose Suisse”). A subsidiary is an entity over which the Company has control, being the power to govern the financial and operating policies of the investee entity so as to obtain benefits from its activities. Accounting policies of the subsidiaries are consistent with the Company's accounting policies. All intra-group transactions, balances, revenue and expenses are eliminated on consolidation.

 

(b)Foreign currency translation:

 

Foreign currency transactions are translated into Canadian dollars at rates prevailing on the transaction dates. At the end of each reporting period, monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the rates in effect at that date. Gains or losses resulting from the translation to Canadian dollars are presented in the statement of loss and comprehensive loss for the period within finance income or expense.

 

(c)Derecognition of financial assets and liabilities:

 

A financial asset is derecognized when the right to receive cash flows from the asset have expired or when the Company has transferred its rights to receive cash flows from the asset.

 

A financial liability is derecognized when its contractual obligations are discharged, cancelled or expire.

 

F-8
 

aptose biosciences inc.

Notes to Consolidated Financial Statements (continued)

(Tabular amounts in thousands of Canadian dollars, except per share amounts)

 

Year ended December 31, 2015, Seven Months ended December 31, 2014 and

Year ended May 31, 2014

 

 

3.Significant accounting policies (continued):

 

(d)Financial assets and liabilities:

 

Financial assets within the scope of IAS 39, Financial Instruments - Recognition and Measurement ("IAS 39"), are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments or available-for-sale financial assets, as appropriate. When financial assets are recognized initially, they are measured at fair value, plus, in the case of financial assets not at fair value through profit or loss, directly attributable transaction costs. The Company determines the classification of its financial assets at initial recognition and, where allowed and appropriate, re-evaluates this designation at each financial year end.

 

The Company's financial instruments are comprised of the following:

 

Financial assets  Classification  Measurement
       
 Cash and cash equivalents  Loans and receivables  Amortized cost
Investments  Loans and receivables  Amortized cost
       
Financial liabilities  Classification  Measurement
       
Accounts payable, accrued liabilities
and convertible promissory notes payable
  Other liabilities  Amortized cost

 

The Company considers unrestricted cash on hand and guaranteed investment certificates held by Canadian Schedule A banks with original maturities of three months or less as cash and cash equivalents.

 

Fair value:

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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

 

F-9
 

aptose biosciences inc.

Notes to Consolidated Financial Statements (continued)

(Tabular amounts in thousands of Canadian dollars, except per share amounts)

 

Year ended December 31, 2015, Seven Months ended December 31, 2014 and

Year ended May 31, 2014

 

 

3.Significant accounting policies (continued):

 

·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.

 

(e)Equipment:

 

Equipment is measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. The Company records depreciation at rates that charge operations with the cost of the assets over their estimated useful lives on a straight-line basis as follows:

 

Furniture   3 years 
Laboratory Equipment   5 years 
Computer hardware   3 years 
Leasehold improvements   Life of lease 

 

The assets' residual value, useful life and methods of depreciation are reviewed at each reporting period and adjusted prospectively if appropriate.

 

(f)Intangible assets:

 

Intangible assets are recorded at cost less accumulated amortization and accumulated impairment losses. The Company's intangible assets consist of computer application software that is not an integral part of related hardware. Subsequent expenditures that increase application software functionality are recognized in the carrying amount of intangible assets if they embody future economic benefit to the Company. All other costs including the costs of day-to-day servicing of intangible assets are expensed as incurred. Amortization is recognized in expense on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the assets.

 

(g)Research and development:

 

Expenditures on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, are recognized in profit or loss as incurred.

 

Development activities involve a plan or design for the production of new or substantially improved products or processes. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic

 

F-10
 

aptose biosciences inc.

Notes to Consolidated Financial Statements (continued)

(Tabular amounts in thousands of Canadian dollars, except per share amounts)

 

Year ended December 31, 2015, Seven Months ended December 31, 2014 and

Year ended May 31, 2014

 

 

3.Significant accounting policies (continued):

 

benefits are probable, and the Company intends to and has sufficient resources to complete development and to use or sell the asset. The expenditures capitalized would include the cost of materials, direct labour, overhead costs that are directly attributable to preparing the asset for its intended use, and borrowing costs on qualifying assets. Other development expenditures which do not meet the criteria for capitalization are recognized in profit or loss as incurred.

 

Capitalized development costs are recognized at cost less accumulated amortization and accumulated impairment losses.

 

The Company has not capitalized any development costs to date.

 

(h)Investment tax credits:

 

Research and development investment tax credits, which are earned as a result of incurring qualifying research and development expenditures, are recorded as a reduction of the related expense or cost of the asset acquired when there is reasonable assurance that they will be realized.

 

The Company's claim for scientific research and experimental development ("SR&ED") deductions and related investment tax credits for income tax purposes are based on management's interpretation of the applicable legislation in the Income Tax Act (Canada). These amounts are subject to review and acceptance by the Canada Revenue Agency prior to collection.

 

(i)Employee benefits:

 

(i)Short-term employee benefits:

 

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.

 

A liability is recognized for the amount expected to be paid in short-term cash bonuses if the Company expects to pay these amounts as approved by the Board of Directors as a result of past services provided by the employee and the obligation can be estimated reliably.

 

(ii)Stock-based compensation:

 

The Company has a stock-based compensation plan (the "Plan") available to officers, directors, employees and consultants with grants under the Plan approved by the Company's Board of Directors. Under the Plan, the exercise price of each option equals the closing trading price of the

 

F-11
 

aptose biosciences inc.

Notes to Consolidated Financial Statements (continued)

(Tabular amounts in thousands of Canadian dollars, except per share amounts)

 

Year ended December 31, 2015, Seven Months ended December 31, 2014 and

Year ended May 31, 2014

 

 

3.Significant accounting policies (continued):

 

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. Vesting is provided for at the discretion of the Board of Directors and the expiration of options is to be no greater than 10 years from the date of grant.

 

Details regarding the determination of the fair value of equity settled share-based transactions are set out in note 10.

 

The Company uses the fair value based method of accounting for employee awards granted under the Plan. The Company calculates the fair value of each stock option grant using the Black-Scholes option pricing model at the grant date. The stock-based compensation cost of the options is recognized as stock-based compensation expense over the relevant vesting period of the stock options using an estimate of the number of options that will eventually vest.

 

Stock options awarded to non-employees are accounted for at the fair value of the goods received or the services rendered. The fair value is measured at the date the Company obtains the goods or the date the counterparty renders the service. If the fair value of the goods or services cannot be reliably measured, the fair value of the options granted will be used.

 

The Company has a stock incentive plan pursuant to which the Board may grant stock-based awards comprised of restricted stock units or dividend equivalents to employees, officers, consultants, independent contractors, advisors and non-employee directors of the Corporation or any affiliate. No units have been issued under this plan to date.

 

(j)Loss per share:

 

Basic loss per share is computed by dividing the net loss available to common shareholders by the weighted average number of shares outstanding during the year. Diluted loss per share is computed similarly to basic loss per share except that the weighted average shares outstanding is increased to include additional shares for the assumed exercise of stock options and warrants, if dilutive. The number of additional shares is calculated by assuming that outstanding stock options and warrants were exercised and that the proceeds from such exercises were used to acquire common stock at the average market price during the year. The inclusion of the Company's stock options and warrants in the computation of diluted loss per share has an anti-dilutive effect on the loss per share and, therefore, they have been excluded from the calculation of diluted loss per share.

 

F-12
 

aptose biosciences inc.

Notes to Consolidated Financial Statements (continued)

(Tabular amounts in thousands of Canadian dollars, except per share amounts)

 

Year ended December 31, 2015, Seven Months ended December 31, 2014 and

Year ended May 31, 2014

 

 

3.Significant accounting policies (continued):

 

(k)Income taxes:

 

Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

 

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity.

 

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized.

 

(l)Provisions:

 

A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as a finance cost.

 

(m)Finance income and finance costs:

 

Finance income comprises interest income on funds invested. Interest income is recognized as it accrues in profit or loss using the effective interest method.

 

Finance costs comprise interest expense on borrowings and are recognized in profit or loss using the effective interest method.

 

(n)Standards and Interpretations Adopted in the Twelve Months Ended December 31, 2015:

 

No new accounting policies were adopted in the twelve months ended December 31, 2015.

 

F-13
 

aptose biosciences inc.

Notes to Consolidated Financial Statements (continued)

(Tabular amounts in thousands of Canadian dollars, except per share amounts)

 

Year ended December 31, 2015, Seven Months ended December 31, 2014 and

Year ended May 31, 2014

 

 

3.Significant accounting policies (continued):

 

(o) Recent accounting pronouncements:

 

(i)IFRS 9, Financial Instruments ("IFRS 9"):

 

IFRS 9 (2014) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2014), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. The standard introduces additional changes relating to financial liabilities and also amends the impairment model by introducing a new ‘expected credit loss’ model for calculating impairment. IFRS 9 (2014) also includes a new general hedge accounting standard which aligns hedge accounting more closely with risk management. The Company intends to adopt IFRS 9 (2014) in its consolidated financial statements for the annual period beginning on January 1, 2018. The extent of the impact of adoption of the standard has not yet been determined.

 

(ii)Amendments to IAS 1

 

On December 18, 2014 the IASB issued amendments to IAS 1 Presentation of Financial Statements as part of its major initiative to improve presentation and disclosure in financial reports. The amendments are effective for annual periods beginning on or after 1 January 2016. Early adoption is permitted. The Company intends to adopt these amendments in its consolidated financial statements for the annual period beginning on January 1, 2016. The impact of adoption of the amendments is not expected to have a material impact on the financial statements.

 

(ii) IFRS 16, Leases (“IFRS 16”)

 

On January 13, 2016, the IASB issued IFRS 16 Leases. The new standard is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted for entities that apply IFRS 15 Revenue from Contracts with Customers at or before the date of initial adoption of IFRS 16. IFRS 16 will replace IAS 17 Leases. This standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. The extent of the impact of adoption of the standard has not yet been determined.

 

4.Capital disclosures:

 

The Company's objectives when managing capital are to:

 

·Maintain its ability to continue as a going concern;

 

·Maintain a flexible capital structure which optimizes the cost of capital at acceptable risk; and

 

F-14
 

aptose biosciences inc.

Notes to Consolidated Financial Statements (continued)

(Tabular amounts in thousands of Canadian dollars, except per share amounts)

 

Year ended December 31, 2015, Seven Months ended December 31, 2014 and

Year ended May 31, 2014

 

 

4.Capital disclosures (continued):

 

·Ensure sufficient cash resources to fund its research and development activity, to pursue partnership and collaboration opportunities and to maintain ongoing operations.

 

The capital structure of the Company consists of equity comprised of share capital, share purchase warrants, stock options, contributed surplus and deficit. The Company manages its capital structure and makes adjustments to it in light of economic conditions. The Company, upon approval from its Board of Directors, will balance its overall capital structure through new share issuances, acquiring or disposing of assets, adjusting the amount of cash balances or by undertaking other activities as deemed appropriate under the specific circumstances.

 

In December 2014, Aptose filed a short form base shelf prospectus (the “Base Shelf”) that qualifies for the distribution of up to US$100,000,000 of common shares, warrants, or units comprising any combination of common shares and warrants (“Securities”). The distribution of Securities may be effected from time to time in one or more transactions at a fixed price or prices, which may be changed, at market prices prevailing at the time of sale, or at prices related to such prevailing market prices to be negotiated with purchasers and as set forth in an accompanying prospectus supplement, including transactions that are deemed to be “at-the-market” distributions. The Base Shelf provides the Company with additional flexibility when managing cash resources as, under certain circumstances, it shortens the time period required to close a financing and is expected to increase the number of potential investors that may be prepared to invest in our Company. Funds received from a Prospectus Supplement will be used in line with our Board approved budget and multi-year plan. The Base Shelf expires in December, 2017. The Base Shelf allowed the Company to enter into an “At-The-Market” Facility (“ATM”) equity distribution agreement (see Note 9). Aptose intends to use this equity arrangement as an additional option to assist in achieving the Company’s capital objectives. The ATM provides the Company with the opportunity to regularly raise capital on the Nasdaq Capital Market, at prevailing market prices, at its sole discretion providing the ability to better manage cash resources.

 

The Company is not subject to externally imposed capital requirements, and the Company's overall strategy with respect to capital risk management remains unchanged from the year ended December 31, 2014.

 

(a)Cash and cash equivalents:

 

Cash and cash equivalents consists of cash of $761 thousand (December 31, 2014 - $293 thousand) and funds deposited into high interest savings accounts totalling $10.742 million (December 31, 2014 - $14.072 million). The current interest rate earned on these deposits is between 0.2% and 0.75% (December 31, 2014 – 1.2-1.25%).

 

F-15
 

aptose biosciences inc.

Notes to Consolidated Financial Statements (continued)

(Tabular amounts in thousands of Canadian dollars, except per share amounts)

 

Year ended December 31, 2015, Seven Months ended December 31, 2014 and

Year ended May 31, 2014

 

 

4.Capital disclosures (continued):

 

(b) Investments:

 

As at December 31, 2015 and 2014, investments consist of guaranteed investment certificates with Canadian financial institutions having high credit ratings. Investments include six investments (December 31, 2014 – twelve investments) with maturity dates from April 22, 2016 to June 19, 2016 (December 31, 2014 – April 22, 2015 to June 19, 2016), bearing an interest rate from 1.80% to 2.10% (December 31, 2014 – 1.50% to 2.10%) per annum.

 

5.Equipment and intangible assets:

 

Equipment:               
         Accumulated    

Net book

 
December 31, 2015   Cost    depreciation    value 
                
Equipment  $229   $34   $195 
Computer hardware   49    20    29 
Office furniture   61    9    52 
Leasehold improvements   110    18    92 
   $449   $81   $368 

 

         

Accumulated

    

Net book

 
December 31, 2014   Cost    depreciation    value 
                
Equipment  $545   $481   $64 
Computer hardware   36    14    22 
Office furniture   38    37    1 
Leasehold improvements   25    1    24 
   $644   $533   $111 

 

During the year ended December 31, 2015, the Company disposed of $476 thousand in fully depreciated equipment, $12 thousand in fully depreciated computer hardware and $37 thousand in fully depreciated furniture no longer in use.

 

During the seven months ended December 31, 2014, the Company disposed of $1.5 million in fully depreciated equipment, $437 thousand in fully depreciated computer hardware and $147 in fully depreciated office furniture no longer in use.

 

Intangible assets:               
         

Accumulated

    

Net book

 
December 31, 2015   Cost    amortization    value 
                
Computer software  $105   $39   $66 
    $105   $39   $66 

 

F-16
 

aptose biosciences inc.

Notes to Consolidated Financial Statements (continued)

(Tabular amounts in thousands of Canadian dollars, except per share amounts)

 

Year ended December 31, 2015, Seven Months ended December 31, 2014 and

Year ended May 31, 2014

 

 

5.Equipment and intangible assets (continued):

 

         

Accumulated

    

Net book

 
December 31, 2014   Cost    amortization    value 
                
Computer software  $105   $16   $89 
   $105   $16   $89 

 

During the seven months ended December 31, 2014, the Company disposed of $325 thousand in fully amortized computer software.

 

6.Additional cash flow disclosures:

 

Net change in non-cash operating working capital is summarized as follows:

 

    12 months    7 months     12 months 
    

ended

    

ended

    

ended

 
(in thousands)   Dec 31, 2015    Dec 31, 2014    May 31,2014 
                
Prepaid expenses and other assets  $(212)  $(360)  $(130)
Accounts payable   266    (393)   (64)
Accrued liabilities   172    379    180 
Balance, end of period  $226   $(374)  $(14)

 

During the year ended December 31, 2015, the Company incurred and paid interest on the convertible promissory notes described in note 7 of $25 thousand. In addition the Company recorded accretion expense of $18 thousand as described in note 7. The notes were all converted by September 30, 2015.

 

During the seven months ended December 31, 2014, the Company incurred interest on the convertible promissory notes described in note 7 of $30 thousand of which $3 thousand was accrued and unpaid at December 31, 2014. The interest accrues at a rate of 10% per annum and is paid quarterly. In addition the Company recorded accretion expense of $28 thousand as described in note 7.

 

During the year ended May 31, 2014, the Company paid $75 thousand in interest expense on $918 thousand in promissory notes and recorded accretion expense of $100 thousand related to the same promissory notes. These notes and all unpaid interest were repaid in April 2014. The interest accrued at a rate of 10% per annum. In addition the Company incurred interest in the year ended May 31, 2014 on certain loan agreements and convertible promissory notes described in note 7 of $51 thousand of which $14 thousand was accrued and unpaid at May 31, 2014. The Company also recorded $33 thousand of accretion expense related to the convertible promissory notes. Interest accrued at a rate of 10% per annum and was paid quarterly. The loan agreements and all interest accrued thereon were repaid in April 2014. The Company also paid interest of $3 thousand at a rate of 10% per annum to the withheld pay of employees. All amounts withheld from employees had been repaid by December 2013.

 

F-17
 

aptose biosciences inc.

Notes to Consolidated Financial Statements (continued)

(Tabular amounts in thousands of Canadian dollars, except per share amounts)

 

Year ended December 31, 2015, Seven Months ended December 31, 2014 and

Year ended May 31, 2014

 

 

7.Convertible promissory notes payable:

 

In September 2013, the Company completed a private placement of convertible promissory notes for aggregate gross proceeds of $600 thousand. Each convertible promissory note consisted of a $1 thousand principal amount of unsecured promissory note convertible into common shares of the Company at a price per share of $3.60. The promissory notes bore interest at a rate of 10% per annum, payable quarterly and were due September 26, 2015.

 

The promissory notes were a compound financial instrument containing a liability component and an equity component represented by the conversion feature. The fair value of the liability component upon issuance was estimated by discounting the future cash flows associated with the debt at a discounted rate of approximately 19% which represented the estimated borrowing cost to the Company for similar promissory notes with no conversion feature. The residual value of $88 thousand was allocated to the conversion feature.

 

Subsequent to initial recognition, the promissory notes were accounted for at amortized cost using the effective interest rate method. The Company incurred costs associated with the financing of $17 thousand. These costs along with the adjustment for the conversion feature were being accreted using the effective interest rate method over the 24 month life of the notes.

 

During the year ended December 31, 2015, all of the outstanding promissory notes were converted into common shares of the Company.

 

8.Financial instruments:

 

(a)Financial instruments:

 

The Company has classified its financial instruments as follows:

 

    December 31,
    2015    2014 
           
Financial assets:          
Cash and cash equivalents, consisting of high interest savings account, measured at amortized cost  $11,503   $14,365 
Investments, consisting of guaranteed investment certificates, measured at amortized cost   8,245    16,180 
           
Financial liabilities:          
Accounts payable, measured at amortized cost   522    256 
Accrued liabilities, measured at amortized cost   1,834    1,662 
Convertible promissory notes, measured at amortized cost   -    410 

 

At December 31, 2015, there are no significant differences between the carrying values of these amounts and their estimated market values due to their short-term nature.

 

F-18
 

aptose biosciences inc.

Notes to Consolidated Financial Statements (continued)

(Tabular amounts in thousands of Canadian dollars, except per share amounts)

 

Year ended December 31, 2015, Seven Months ended December 31, 2014 and

Year ended May 31, 2014

 

 

8. Financial instruments (continued):

 

(b)Financial risk management:

 

The Company has exposure to credit risk, liquidity risk, foreign currency risk and market risk. The Company's Board of Directors has the overall responsibility for the oversight of these risks and reviews the Company's policies on an ongoing basis to ensure that these risks are appropriately managed.

 

(i)Credit risk:

 

Credit risk is the risk of financial loss to the Company if a customer, partner or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's cash and cash equivalents. The carrying amount of the financial assets represents the maximum credit exposure.

 

The Company manages credit risk associated with its cash and cash equivalents 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.

 

(ii)Liquidity risk:

 

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. To the extent that the Company does not believe it has sufficient liquidity to meet its current obligations, management and the Board consider securing additional funds through equity, debt or partnering transactions. The Company manages its liquidity risk by continuously monitoring forecasts and actual cash flows. All of the Company's financial liabilities are due within the current operating period.

 

(iii)Market risk:

 

Market risk is the risk that changes in market prices, such as interest rates, foreign exchange rates and equity prices will affect the Company's income or the value of its financial instruments.

 

The Company is subject to interest rate risk on its cash and cash equivalents and investments. The Company does not believe that the results of operations or cash flows would be affected to any significant degree by a sudden change in market interest rates relative to interest rates on the investments, owing to the relative short-term nature of the investments. The Company does not have any interest bearing liabilities subject to interest rate fluctuations.

 

F-19
 

aptose biosciences inc.

Notes to Consolidated Financial Statements (continued)

(Tabular amounts in thousands of Canadian dollars, except per share amounts)

 

Year ended December 31, 2015, Seven Months ended December 31, 2014 and

Year ended May 31, 2014

 

 

8. Financial instruments (continued):

 

Currency risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. We are exposed to currency risk from employee costs as well as the purchase of goods and services primarily in the United States and the cash balances held in foreign currencies. Fluctuations in the US dollar exchange rate could have a significant impact on the Company’s results. Assuming all other variables remain constant, a 10% depreciation or appreciation of the Canadian dollar against the US dollar would result in an increase or decrease in loss for the year and comprehensive loss of $576 thousand (December 31, 2014- $50 thousand, May 31, 2014 - $18 thousand). Balances in foreign currencies are as follows:

 

    

US$ Balances

     December 31,    

May 31,

 
(in thousands)   2015    2014    2014 
                
Cash and cash equivalents   $5,000   $66    594 
Accounts payable and accrued liabilities    (838)   (565)   (769) 
Balance, end of period   $4,162   $(499)   $(175)

 

The Company does not have any forward exchange contracts to hedge this risk.

 

The Company does not invest in equity instruments of other corporations.

 

9. Share capital:

 

Share consolidation:

In accordance with the authority granted by shareholders at the Company's annual and special meeting on August 19, 2014 to permit it to implement a consolidation of the Company's outstanding common shares in a ratio of between 1-for-5 and 1-for-15, the Company's Board of Directors approved a 1-for-12 share consolidation which became effective October 1, 2014. The share consolidation affected all of the Company's common shares, stock options and warrants outstanding at the effective time. Fractional shares were not issued. Prior to consolidation the Company had approximately 139 million shares outstanding. Following the share consolidation, the Company has approximately 11.6 million common shares outstanding. Similarly, prior to consolidation, the Company had approximately 17.1 million stock options and 2.6 million warrants to purchase common shares outstanding. Following the share consolidation, the Company had approximately 1.4 million stock options and 218 thousand warrants to purchase common shares outstanding. In these consolidated financial statements, all references to number of shares, stock options and warrants in the current and past periods have been adjusted to reflect the impact of the share consolidation. All amounts based on the number of shares, stock options or warrants, unless otherwise specified, such as earnings (loss) per share and weighted average issuance price in the case of stock options have been adjusted to reflect the impact of 1-for-12 share consolidation.

 

F-20
 

aptose biosciences inc.

Notes to Consolidated Financial Statements (continued)

(Tabular amounts in thousands of Canadian dollars, except per share amounts)

 

Year ended December 31, 2015, Seven Months ended December 31, 2014 and

Year ended May 31, 2014

 

 

9.Share capital (continued):

 

(a)Continuity of common shares and warrants:

 

    

Common shares

    

Warrants

 
    Number    Amount    Number    Amount 
    

(In thousands)

         

(In thousands)

      
Balance, May 31, 2013   3,521   $174,522    2,262   $2,421 
Expiry of broker warrants   -    -    (16)   (25)
Issuance of warrants (b)(iv)   -    -    76    75 
Warrant exercises   868    5,422    (868)   (964)
Finders warrants   -    -    103    - 
Option exercises   6    39    -    - 
December equity offering and                    
overallotment (b)(iii)   1,220    6,927    73    350 
April equity offering and                    
overallotment (b)(ii)   4,708    25,584    -    - 
DSU exercise    65    444    -    - 
Balance, May 31, 2014   10,388   $212,938    1,630   $1,857 
Warrant exercises   1,231    7,814    (1,231)   (1,166)
Warrant expiry   -    -    (190)   (190)
Option exercises   36    345    -    - 
Promissory note conversion    45    162    -    - 
Balance, December 31, 2014   11,700   $221,259    209   $501 
Warrant exercises   81    503    (81)   (155)
Warrant expiry   -    -    (55)   (262)
Option exercises   143    1,215    -    - 
Common shares under the ATM(b)(i)   2    10    -    - 
Promissory note conversion   122    438    -    - 
Balance, December 31, 2015   12,048   $223,425    73   $84 

 

(b)Equity issuances:

 

(i) At-The-Market (“ATM”) Facility

 

On April 2, 2015, we entered into an ATM equity facility with Cowen and Company, LLC, acting as sole agent. Under the terms of this facility, we may, from time to time, sell shares of our common stock having an aggregate offering value of up to US$20 million through Cowen and Company, LLC on the Nasdaq Capital Market. We determine, at our sole discretion, the timing and number of shares to be sold under this ATM facility. During the twelve months ended December 31, 2015, the Company issued 1,504 common shares under the ATM at a price of US$5.20 per share for gross proceeds of approximately Cdn $10 thousand.

 

(ii) April 2014 Public Equity Offering and Overallotment

 

In April 2014, the Company completed a public offering of common shares. The Company issued 4,166,667 (pre-consolidation 50,000,000) common shares at a purchase price of $6.00 ($0.50 pre-consolidation) per common share and an additional 541,667 (pre consolidation 6,500,000) common shares upon the partial exercise of the over-allotment option for aggregate gross proceeds of $28.3

 

F-21
 

aptose biosciences inc.

Notes to Consolidated Financial Statements (continued)

(Tabular amounts in thousands of Canadian dollars, except per share amounts)

 

Year ended December 31, 2015, Seven Months ended December 31, 2014 and

Year ended May 31, 2014

 

 

9.Share capital (continued):

 

million. The total costs associated with the transaction were approximately $2.7 million which includes a cash commission of $2.0 million based on 7% of the gross proceeds received as part of the offering.

 

(iii) December 2013 Public Equity Offering and Overallotment

 

In December 2013, Aptose completed a public offering of common shares. Aptose issued 1,060,833 (pre-consolidation 12,730,000) common shares at a price of $6.60 (pre-consolidation $0.55) per common share and an additional 159,125 (pre-consolidation 1,909,500) common shares upon the exercise of the overallotment option for aggregate gross proceeds of $8.1 million.

 

The total costs associated with the transaction were approximately $1.1 million which include a cash commission of $483 thousand based on 6% of the gross proceeds received as part of the offering, and the issuance of 73,198 (pre-consolidation 878,370) broker warrants with an estimated fair value of $350 thousand. The fair value of these warrants was determined using the Black Scholes model with a 24 month time to maturity, an assumed volatility of 130% and a risk free interest rate of 1.5%. E