Lorus
Therapeutics Inc.
|
|||||||
Consolidated
Balance Sheets
|
|||||||
As
at
|
|
As
at
|
|
||||
|
|
February
28, 2006
|
|
May
31, 2005
|
|
||
(amounts
in 000's of Canadian Dollars)
|
|
(Unaudited)
|
|
(Audited)
|
|||
ASSETS
|
|||||||
Current
|
|||||||
Cash
and cash equivalents
|
$
|
8,188
|
$
|
2,776
|
|||
Short-term
investments
|
2,072
|
18,683
|
|||||
Prepaid
expenses and other assets
|
376
|
1,126
|
|||||
10,636
|
22,585
|
||||||
Long-term
|
|||||||
Fixed
assets
|
1,265
|
1,581
|
|||||
Deferred
financing charges
|
506
|
568
|
|||||
Goodwill
|
606
|
606
|
|||||
Acquired
patents and licenses
|
1,048
|
2,226
|
|||||
3,425
|
4,981
|
||||||
$
|
14,061
|
$
|
27,566
|
||||
LIABILITIES
|
|||||||
Current
|
|||||||
Accounts
payable
|
$
|
663
|
$
|
1,069
|
|||
Accrued
liabilities (note 3)
|
2,555
|
3,019
|
|||||
3,218
|
4,088
|
||||||
Long-term
|
|||||||
Secured
convertible debentures (note 4)
|
10,780
|
10,212
|
|||||
SHAREHOLDERS'
EQUITY
|
|||||||
Share
capital
|
|||||||
Common
shares (note 5)
|
144,750
|
144,119
|
|||||
Equity
portion of secured convertible debentures
|
3,814
|
3,814
|
|||||
Stock
options (note 6 (c))
|
4,958
|
4,252
|
|||||
Contributed
surplus (note 5 (d))
|
7,132
|
6,733
|
|||||
Warrants
|
991
|
991
|
|||||
Deficit
accumulated during development stage
|
(161,582
|
)
|
(146,643
|
)
|
|||
63
|
13,266
|
||||||
$
|
14,061
|
$
|
27,566
|
||||
See
accompanying notes to the unaudited consolidated interim financial
statements
|
|||||||
Basis
of Presentation - Future Operations Note 1
|
Lorus
Therapeutics Inc.
|
||||||||||||||||
Consolidated
Statements of Loss and Deficit (unaudited)
|
||||||||||||||||
Period
from
|
||||||||||||||||
Three
months ended February 28,
|
Nine
months ended February 28,
|
September
5,
|
||||||||||||||
1986
to
|
||||||||||||||||
(amounts
in 000's of Canadian Dollars)
|
2006
|
2005
|
2006
|
2005
|
February
28, 2006
|
|||||||||||
REVENUE
|
$
|
5
|
$
|
3
|
$
|
12
|
$
|
6
|
$
|
692
|
||||||
5
|
3
|
|||||||||||||||
EXPENSES
|
||||||||||||||||
Cost
of sales
|
1
|
-
|
2
|
1
|
86
|
|||||||||||
Research
and development (note 3)
|
2,296
|
3,175
|
8,884
|
12,062
|
109,122
|
|||||||||||
General
and administrative (note 3)
|
909
|
1,484
|
3,604
|
3,842
|
46,745
|
|||||||||||
Stock-based
compensation (note 6)
|
400
|
341
|
1,105
|
1,202
|
6,650
|
|||||||||||
Depreciation
and amortization
|
130
|
128
|
390
|
379
|
8,442
|
|||||||||||
Operating
expenses
|
3,736
|
5,128
|
13,985
|
17,486
|
171,045
|
|||||||||||
Interest
expense on convertible debentures (note 5)
|
224
|
96
|
631
|
135
|
931
|
|||||||||||
Accretion
in carrying value of convertible debentures
|
202
|
137
|
568
|
195
|
994
|
|||||||||||
Amortization
of deferred financing charges
|
23
|
32
|
62
|
51
|
146
|
|||||||||||
Interest
income
|
(85
|
)
|
(116
|
)
|
(295
|
)
|
(397
|
)
|
(10,842
|
)
|
||||||
Loss
for the period
|
4,095
|
5,274
|
14,939
|
17,464
|
161,582
|
|||||||||||
Deficit,
beginning of period
|
157,487
|
136,771
|
146,643
|
124,581
|
-
|
|||||||||||
Deficit,
end of period
|
$
|
161,582
|
$
|
142,045
|
$
|
161,582
|
$
|
142,045
|
$
|
161,582
|
||||||
Basic
and diluted loss per common share
|
$
|
0.02
|
$
|
0.03
|
$
|
0.09
|
$
|
0.10
|
||||||||
Weighted
average number of common shares
|
||||||||||||||||
outstanding used in the calculation of
|
||||||||||||||||
basic and diluted loss per share
|
173,810
|
172,208
|
172,911
|
172,003
|
||||||||||||
See
accompanying notes to the unaudited interim consolidated financial
statements
|
Lorus
Therapeutics Inc.
|
||||||||||||||||
Consolidated
Statements of Cash Flows (unaudited)
|
||||||||||||||||
Period
from
|
||||||||||||||||
Three
months ended February 28,
|
Nine
months ended February 28,
|
September
5,
|
||||||||||||||
1986
to
|
||||||||||||||||
(amounts
in 000's of Canadian Dollars)
|
2006
|
2005
|
2006
|
2005
|
February
28, 2006
|
|||||||||||
OPERATING
ACTIVITIES
|
||||||||||||||||
Loss
for the period
|
$
|
(4,095
|
)
|
$
|
(5,274
|
)
|
$
|
(14,939
|
)
|
$
|
(17,464
|
)
|
$
|
(161,582
|
)
|
|
Add
items not requiring a current outlay of cash:
|
||||||||||||||||
Stock-based
compensation
|
400
|
341
|
1,105
|
1,202
|
6,650
|
|||||||||||
Interest
expense on convertible debentures
|
224
|
96
|
631
|
135
|
931
|
|||||||||||
Accretion
in carrying value of convertible debentures
|
202
|
137
|
568
|
195
|
994
|
|||||||||||
Amortization
of deferred financing charges
|
23
|
32
|
62
|
51
|
146
|
|||||||||||
Depreciation,
amortization and write-down of fixed assets
|
523
|
557
|
1,568
|
1,682
|
19,955
|
|||||||||||
Other
|
-
|
-
|
-
|
-
|
706
|
|||||||||||
Net
change in non-cash working capital
|
||||||||||||||||
balances
related to operations
|
(1,233
|
)
|
5
|
(120
|
)
|
(733
|
)
|
1,935
|
||||||||
Cash
used in operating activities
|
(3,956
|
)
|
(4,106
|
)
|
(11,125
|
)
|
(14,932
|
)
|
(130,265
|
)
|
||||||
INVESTING
ACTIVITIES
|
||||||||||||||||
Maturity
(purchase) of short-term investments, net
|
1,623
|
(4,314
|
)
|
16,611
|
7,213
|
(2,072
|
)
|
|||||||||
Business
acquisition, net of cash received
|
-
|
-
|
-
|
-
|
(539
|
)
|
||||||||||
Acquired
patents and licenses
|
-
|
-
|
-
|
-
|
(715
|
)
|
||||||||||
Additions
to fixed assets
|
(1
|
)
|
(186
|
)
|
(74
|
)
|
(562
|
)
|
(6,048
|
)
|
||||||
Cash
proceeds on sale of fixed assets
|
-
|
-
|
-
|
-
|
348
|
|||||||||||
Cash
provided by (used in)
|
||||||||||||||||
investing
activities
|
1,622
|
(4,500
|
)
|
16,537
|
6,651
|
(9,026
|
)
|
|||||||||
FINANCING
ACTIVITIES
|
||||||||||||||||
Issuance
of debentures, net proceeds
|
-
|
5,000
|
-
|
9,400
|
12,948
|
|||||||||||
Issuance
of warrants
|
-
|
-
|
-
|
-
|
37,405
|
|||||||||||
Issuance
of common shares
|
-
|
-
|
-
|
111
|
97,371
|
|||||||||||
Additions
to deferred financing charges
|
-
|
(7
|
)
|
-
|
(457
|
)
|
(245
|
)
|
||||||||
Cash
provided by financing activities
|
-
|
4,993
|
-
|
9,054
|
147,479
|
|||||||||||
(Decrease)
increase in cash and cash
|
||||||||||||||||
equivalents
during the period
|
(2,334
|
)
|
(3,613
|
)
|
5,412
|
773
|
8,188
|
|||||||||
Cash
and cash equivalents,
|
||||||||||||||||
beginning
of period
|
10,522
|
5,457
|
2,776
|
1,071
|
-
|
|||||||||||
Cash
and cash equivalents,
|
||||||||||||||||
end
of period
|
$
|
8,188
|
$
|
1,844
|
$
|
8,188
|
$
|
1,844
|
$
|
8,188
|
||||||
See
accompanying notes to the unaudited consolidated interim financial
statements
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three and nine months ended February 28, 2006 and 2005
1.
Basis of presentation
These unaudited consolidated interim financial statements of Lorus Therapeutics Inc. (the Company) have been prepared by the Company in accordance with Canadian generally accepted accounting principles for interim financial statements and do not include all the information required for complete financial statements. The unaudited interim financial statements follow the same accounting policies and methods of application as the audited annual financial statements for the year ended May 31, 2005 and as set out in Note 2. These statements should be read in conjunction with the audited consolidated financial statements for the year ended May 31, 2005.
The information furnished as at and for the three and nine months ended February 28, 2006 and February 28, 2005 reflect, in the opinion of management, all adjustments consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. Interim results are not necessarily indicative of results for a full year.
Future Operations
The Company has not earned substantial revenues from its drug candidates and is therefore considered to be in the development stage.
In October 2005 the Company announced results from the Virulizin® Phase III clinical trial indicating that the trial did not reach statistical significance in terms of median overall survival times. As a result in November 2005, the Company underwent corporate changes which reduced the workforce to 35 full time employees in order to conserve cash and facilitate the implementation of a new strategic direction. The Company believes that this restructuring results in a working capital position that is sufficient to fund the Company for the next twelve months including support of the six Phase II GTI-2040 ongoing clinical trials sponsored by the NCI, the Phase II GTI-2501 clinical trial supported by Lorus as well as the active development of our small molecule program.
The Company has not yet earned substantial revenues from its drug candidates and until such time (if ever) the Company has a product available for sale, Lorus will continue to finance operations through a variety of sources. Substantial additional funds are required to continue the clinical development of the Companys pipeline products and technologies into Phase I, Phase II or Phase III clinical registration trials. In addition, the Company will need to repay or refinance the secured convertible debentures on their maturity should the holder not chose to convert the debentures in to common shares. The Company will seek to obtain additional funds for these purposes through a variety of sources including public and private equity and debt financing, collaborative arrangements with pharmaceutical companies and government grants. There can be no assurance that additional funding will be available at all or on acceptable terms to permit further clinical development of the Companys products or to repay the convertible debentures on maturity. If the Company is not able to raise additional funds, it may not be able to continue as a going concern and realize its assets and pay its liabilities as they fall due. The financial statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate. If the going concern basis was not appropriate for these financial statements, then adjustments would be necessary in the carrying value of the assets and liabilities, the reported revenues and expenses and the balance sheet classifications used.
2. Changes in accounting policies
Variable interest entities
Effective June 1, 2005, the Company adopted the recommendations of CICA Handbook
Accounting Guideline 15 (AcG-15), Consolidation of Variable Interest Entities, effective for fiscal years beginning on or after November 1, 2004. Variable interest entities
(VIEs) refer to those entities that are subject to control on a basis other than ownership of voting interests. AcG-15 provides guidance for identifying VIEs and criteria for determining which entity, if any, should consolidate them.
The adoption of AcG-15 did not have an effect on the financial position, results of operations or cash flows in the current period or the prior period presented.
Financial instruments - disclosure and presentation
Effective June 1, 2005, the Company adopted the amended recommendations of CICA
Handbook Section 3860, Financial Instruments - Disclosure and Presentation, effective for fiscal years beginning on or after November 1, 2004. Section 3860 requires that certain obligations that may be settled at the issuers option in cash or the equivalent value by a variable number of the issuers own equity instruments be presented as a liability.
The Company has determined that there is no impact on the financial statements resulting from the adoption of the amendments to Section 3860 either in the current period or the prior period presented.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three and nine months ended February 28, 2006 and 2005
Accounting for Convertible Debt Instruments
On October 17, 2005 the CICA issued EIC 158, Accounting for Convertible Debt Instruments applicable to convertible debt instruments issued subsequent to the date of the EIC. EIC 158 discusses the accounting treatment of convertible debentures in which upon conversion, the issuer is either required or has the option to satisfy all or part of the obligation in cash. The EIC discusses various accounting issues related to this type of convertible debt.
The Company has determined that there is no impact on the financial statements resulting from the adoption of EIC 158 either in the current period or the prior period presented.
3.
Corporate changes
In November 2005, as a means to conserve cash and refocus operations, the Company scaled back some activities related to the Virulizin® technology and implemented a workforce reduction of approximately 39% or 22 employees.
In accordance with EIC 134 Accounting for Severance and Termination Benefits, during the period ended November 30, 2005 the Company recorded severance compensation expense for former employees of $557,000. Of this expense, $468,000 is presented in the income statement as general and administrative expense and $89,000 as research and development expense. Accounts payable and accrued liabilities at February 28, 2006 include severance and compensation expense liabilities relating to the Companys November 2005 corporate changes of $270,000 that are expected to be paid by December 2006.
4. Secured convertible debentures
The terms of the secured convertible debentures are described in note 11 to the Company's annual consolidated financial for the year ended May 31, 2005. The debentures are due on October 6, 2009 and may be convertible at the holder's option at any time in to common shares of the Company at a conversion price of $1.00 per share. The lender has the option to demand repayment in the event of default, including the failure to maintain certain subjective covenants, representations and warranties.
Management assesses on a quarterly basis whether or not events during the quarter could be considered an event of default. This assessment was performed and management believes that there has not been an event of default and that, at February 28, 2006, the term of the debt remains unchanged.
At the end of the second quarter of fiscal 2006, subject to the completion of a tax assisted financing transaction and based on mutually agreed upon terms with the holder, it had been the Company's intent to repay the debentures by October 1, 2006. However, during the third quarter of fiscal 2006, the conditions precedent of the proposed tax assisted financing were not met and as such the transaction did not close and the Companys agreement with the debenture holder to repay the debentures was terminated. As such the debentures have been recorded as a long-term liability with the original due date of October 6, 2009. The investor paid Lorus $100,000 to help cover the costs incurred as part of the transaction. This $100,000 has been reclassified as a reduction in professional fee expense.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three and nine months ended February 28, 2006 and 2005
5. Share capital
(a) Continuity of common shares and warrants
(amounts and units in 000's) |
Common Shares |
Warrants | |||||||
|
Number |
Amount |
Number |
Amount | |||||
Balance at May 31, 2004 | 171,794 | $143,670 | 13,110 | $ 4,325 | |||||
Exercise of stock options | 11 | 6 | | | Balance at August 31, 2004 | 171,805 | 143,676 | 13,110 | 4,325 |
Exercise of stock options | 265 | 106 | | | |||||
Interest payment (b) | 53 | 39 | | | |||||
Convertible debenture | | | 1,000 | 323 | |||||
Balance at November 30, 2004 | 172,123 | 143,821 | 14,110 | 4,648 | |||||
Interest payment (b) | 137 | 96 | | | |||||
Convertible debenture | | | 1,000 | 339 | |||||
Warrant expiry | | | (13,110) | (4,325) | |||||
Balance at February 28, 2005 | 172,260 | $143,917 | 2,000 | $ 662 | |||||
Interest payment (b) | 231 | 165 | | | |||||
Issuance under ACP | 50 | 37 | | | |||||
Convertible debenture | | | 1,000 | 329 | |||||
Balance at May 31, 2005 | 172,541 | $144,119 | 3,000 | $ 991 | |||||
Interest payments (b) | 265 | 198 | | | Balance at August 31, 2005 | 172,806 | $144,317 | 3,000 | $ 991 |
Interest payments (b) | 537 | 209 | | | Balance at November 30, 2005 | 173,343 | $144,526 | 3,000 | $ 991 |
Interest payments (b) | 672 | 224 | | | Balance at February 28, 2006 | 174,015 | $144,750 | 3,000 | $ 991 |
(b) Interest payments
Interest payments relate to interest payable on the $15.0 million convertible debentures payable at a rate of prime +1% until such time as the Companys share price reaches $1.75 for 60 consecutive trading days, at which time, interest will no longer be charged. Common shares issued in payment of interest were issued at a price equal to the weighted average trading price of such shares for the ten trading days immediately preceding their issue in respect of each interest payment.
(c) Loss per share
The Company has excluded from the calculation of diluted loss per share all common shares potentially issuable upon the exercise of stock options, warrants and the convertible debenture that could dilute basic loss per share, because to do so would be anti-dilutive.
(d) Continuity of contributed surplus
(amounts in 000's) | 2006 | 2005 | ||
Balance at beginning of the year | $ 6,733 | $ 1,003 | ||
Forfeiture of vested options | 399 | | ||
Balance at end of the period | $ 7,132 | $ 1,003 |
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three and nine months ended February 28, 2006 and 2005
6.
Stock-Based Compensation
(a) Continuity of stock options
Nine months ended Feb 28, 2006 (000s) (000s) | Weighted average exercise price six months ended Feb 28, 2006 | Year ended May 31, 2005 (000’s) | Weighted average exercise price year ended May 31, 2005 | ||
Outstanding at beginning of period |
8,035 |
$ 0.96 |
6,372 |
$ 1.05 | |
Granted | 6,521 | $ 0.59 | 3,173 | $ 0.77 | |
Exercised | ― | ― | (276) | $ 0.40 | |
Forfeited | (2,770) | $ 0.84 | (1,234) | $ 1.05 | |
Outstanding at end of period | 11,786 | $ 0.81 | 8,035 | $ 0.96 |
For the three and nine month periods ended February 28, 2006 stock compensation expense of $400,000 (2005 - $341,000) and $1,105,000 (2005 - $1,200,000) respectively, was recognized, representing the amortization applicable to the current period of the estimated fair value of options granted since June 1, 2002.
During the quarter, employees of the Company (excluding Directors and Officers) were given the opportunity to choose between keeping 100% of their existing options at the existing exercise price and forfeiting 50% of the options held in exchange for having the remaining 50% of the exercise price of the options re-priced to $0.30 per share. Employees holding 2,290,000 stock options opted for re-pricing their options, resulting in the amendment of the exercise price of 1,145,000 stock options and the forfeiture of 1,145,000 stock options during the quarter ended February 28, 2006. This re-pricing resulted in additional compensation expense of $84,000 representing the incremental value conveyed to holders of the options as a result of reducing the exercise price, of which $45,000 has been included in the stock compensation expense during the three and nine-months ended February 28, 2006. The balance additional compensation expense of $39,000 will be recognized as the amended options vest. This increased expense is offset by $85,000 representing amounts previously expensed on unvested stock options due to the forfeiture of 1,145,000 stock options, which was reversed from the stock compensation expense for the three and nine months ended February 28, 2006.
(b) Fair value assumptions
The following assumptions were used in the Black-Scholes option-pricing model to determine the fair value of stock options granted during the period:
The amounts estimated according to the Black-Scholes option pricing model may not be indicative of the actual values realized upon the exercise of these options by the holders.
(c) Continuity of stock options
(amounts in 000's) | 2006 | 2005 | ||
Balance at beginning of the year | $ 4,252 | $ 2,777 | ||
Stock option expense | 291 | 211 | ||
Balance at August 31 | $ 4,543 | $ 2,988 | ||
Stock option expense | 414 | 650 | ||
Forfeiture of stock options | (16) | | ||
Balance at November 30, | $ 4,941 | $ 3,638 | ||
Stock option expense | 400 | 341 | ||
Forfeiture of stock options |
(383) | | ||
Balance at February 28, | $ 4,958 | $ 3,979 |
13