Exhibit
99.2
Management's
discussion and analysis
August
7, 2007
PLAN
OF ARRANGEMENT AND CORPORATION REORGANIZATION
On
July
10, 2007 (the “Arrangement Date”), the Company completed a plan of arrangement
and corporate reorganization with, among others, 4325231 Canada Inc. (formerly
Lorus Therapeutics Inc.) (“Old Lorus”), 6707157 Canada Inc. and Pinnacle
International Lands, Inc. 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 of the Company and the assets (excluding certain future
tax
attributes and related valuation allowance) and liabilities of Old Lorus
(including all of the shares of its subsidiaries held by it) were transferred,
directly or indirectly, to the Company and/or its subsidiaries. The
Company 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. Therefore, the Company’s
operations have been accounted for on a continuity of interest basis and
accordingly, the consolidated financial statement information below reflect
that
of the Company as if it had always carried on the business formerly carried
on
by Old Lorus. References in this MD&A to the Company, Lorus, “we”, “our”,
“us” and similar expressions, unless otherwise stated, are references to Old
Lorus prior to the Arrangement Date and the Company after the Arrangement
Date.
The
following discussion should be read in conjunction with the audited financial
statements for the year ended May 31, 2007 and the accompanying notes for
6650309 Canada Inc. (subsequently renamed Lorus Therapeutics Inc), (“New Lorus”)
and the financial statements of Lorus Therapeutics Inc. (subsequently
renamed 4325231 Canada Inc.) (“Old Lorus”) presented in the Supplemental
Financial Information (collectively the "Financial Statements") set forth
elsewhere in this report. The Financial Statements, and all financial
information discussed below, have been prepared in accordance with Canadian
generally accepted accounting principles ("GAAP"). All amounts are expressed
in
Canadian dollars unless otherwise noted.
OVERVIEW
Lorus
Therapeutics Inc. is a life sciences company focused on the discovery, research
and development of effective anticancer therapies with a high safety profile.
Lorus has worked to establish a diverse, marketable anticancer product pipeline,
with products in various stages of development ranging from preclinical to
multiple Phase II clinical trials. A growing intellectual property portfolio
supports our diverse product pipeline.
Our
success is dependent upon several factors, including establishing the efficacy
and safety of our products in clinical trials, securing strategic partnerships,
obtaining the necessary regulatory approvals to market our products and
maintaining sufficient levels of funding through public and/or private
financing.
We
believe that the future of cancer treatment and management lies in drugs that
are effective, safe and have minimal side effects, and therefore improve a
patient's quality of life. Many of the cancer drugs currently approved for
the
treatment and management of cancer are toxic with severe side effects, and
we
therefore believe that a product development plan based on effective and safe
drugs could have broad applications in cancer treatment. Lorus'
strategy is to continue the development of our product pipeline using several
therapeutic approaches. Each therapeutic approach is dependent on different
technologies, which we believe mitigates the development risks associated with
a
single technology platform. We evaluate the merits of each product throughout
the clinical trial process and consider commercialization as appropriate. The
most advanced anticancer drugs in our pipeline, each of which flow from
different platform technologies, are antisense, small molecules and
immunotherapeutics.
Our
net
loss for 2007 decreased 46% to $9.6 million ($0.05 per share) compared to a
net
loss of $17.9 million ($0.10 per share) in 2006. Research and development
expenses in 2007 decreased to $3.4 million from $10.2 million in 2006. The
close
of the Virulizin® Phase III
clinical
trial in 2006 as well as staff reductions resulting from the November 2005
corporate changes (described below) continue to contribute to the decrease
in
net loss over 2006. We utilized cash of $6.3 million in our operating activities
in 2007 compared with $13.1 million in 2006; the lower utilization is consistent
with lower research and development activities and lower general and
administrative expenses. At the end of 2007 we had cash and cash equivalents
and
marketable securities of $12.4 million compared to $8.3 million at the end
of
2006. As a result of the Arrangement, the Company expects that, subject to
the
post closing adjustments, it will receive net proceeds of approximately $7
million inclusive of an amount held in escrow.
Revenues
for the year increased to $107 thousand compared with 2006 revenue of $26
thousand and $6 thousand in 2005. The increase in revenue in 2007 is
related to increased laboratory services work performed by Lorus personnel
on
behalf of other companies.
Research
and development expenses totalled $3.4 million in 2007 compared to $10.2 million
in 2006 and $14.4 million in 2005. The decrease in spending compared with 2006
and 2005 is due to the close of our Virulizin® Phase III
clinical
trial for the treatment of advanced pancreatic cancer in 2006 as well as a
reduction in headcount in November 2005. The ongoing research and
development costs relate to the GTI-2040 and GTI-2501 clinical development
programs ongoing as well as our small molecule preclinical program. A
significant portion of the Company’s GTI-2040 Phase II testing costs are covered
by the US NCI with Lorus continuing to be responsible for any additional
GTI-2040 manufacturing costs, thus reducing our overall research and development
costs.
General
and Administrative
General
and administrative expenses totalled $3.8 million in 2007 compared to $4.3
million in 2006 and $5.3 million in 2005. The decrease in general and
administrative costs is the result of staff reductions, and a continued focus
on
lowering costs in all areas of the business. The cost savings realized during
the current year is partially offset by charges incurred under the mutual
separation agreement entered into with Dr. Jim Wright discussed under “Corporate
Changes” below.
Stock-Based
Compensation
Stock-
based compensation expense totalled $503 thousand in 2007 compared with $1.2
million in 2006 and $1.5 million in 2005. The decrease in stock-based
compensation expense in 2007 is the result of reduced fair values on the stock
options issued, due to a decline in our stock price, as well as a significant
number of unvested options that were forfeited during the year, reducing the
overall expense.
During
2006, employees of the Company (excluding directors and officers) were given
the
opportunity to choose between keeping 100% of the options they held at the
existing exercise prices or forfeiting 50% of the options held in exchange
for
having the remaining 50% of the exercise prices 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. The 2005 expense represents the
amortization of the estimated fair value of stock options granted since June
1,
2002 applicable to the current service period as well as a charge of $208
thousand recorded in the second quarter of 2005 representing the increase in
value attributed to the shareholder approved amendment to the stock option
plan
to extend the contractual life of all options outstanding from five years to
ten
years.
Depreciation
and Amortization
Depreciation
and amortization expenses decreased to $403 thousand in 2007 as compared to
$771
thousand in 2006 and $564 thousand in 2005. The decrease in
depreciation and amortization expense is the result of reduced capital asset
purchases during fiscal 2007 and 2006. In 2006, the Company took a write-down
of
$250 thousand on certain furniture and equipment whose carrying value was deemed
to be unrecoverable and in excess of the fair value of the underlying
assets.
Interest
Expense
Non-cash
interest expense was $1.0 million in 2007 compared with $882 thousand in 2006
and $300 thousand in 2005. These amounts represent interest at a rate
of prime plus 1% on the $15.0 million convertible debentures. The
increase in interest expense in 2007 compared with 2006 is a function of higher
interest rates due to increases in the prime rate in late 2006. In
2005, the interest accrued based on the cash advanced beginning October 6,
2004
when the first tranche of $5 million was advanced through to May 31, 2005 when
the entire $15.0 million had been advanced. All interest accrued on the
debentures to date has been paid in common shares of the Company.
Accretion
in Carrying Value of Secured Convertible Debentures
Accretion
in the carrying value of the Company’s secured convertible debentures amounted
to $935 thousand in 2007 compared with $790 thousand in 2006 and $426 thousand
in 2005. The accretion charges arise as under GAAP the Company has
allocated the proceeds from each tranche of the debentures to the debt and
equity instruments issued on a relative fair value basis resulting in the $15.0
million debentures having an initial cumulative carrying value of $9.8 million
as of their dates of issuance. Each reporting period, the Company is
required to accrete the carrying value of the convertible debentures such that
at maturity on October 6, 2009, the carrying value of the debentures will be
the
face value of $15.0 million. The increase in expense in 2007 compared
with 2006 is due to higher effective rate of interest.
Amortization
of Deferred Financing Charges
Amortization
of deferred financing charges totalled $110 thousand in 2007 compared with
$87
thousand in 2006 and $84 thousand in 2005. The deferred financing charges relate
to the convertible debenture transaction and will be amortized using the
effective interest rate method over the five-year life of the debt commencing
October 6, 2004.
During
the year, the Company incurred approximately $1.3 million in deferred
arrangement costs associated with negotiating the arrangement agreement outlined
below (see Subsequent Events). The agreements were completed and
signed in July, 2007. These costs will be netted against proceeds
from the arrangement in the first quarter of fiscal 2008.
Interest
and Other Income
Interest
income totalled $503 thousand in 2007 compared to $374 thousand in 2006 and
$524
thousand in 2005. The increase from 2006 to 2007 is due to a higher average
cash
and marketable securities balances in 2007 and by higher interest rates during
2007. Higher average cash and marketable securities balances were
primarily a function of the funds received as part to of the August 2006 private
placements.
Loss
for the Year
Net
loss for the year decreased to $9.6 million or $0.05 per share in 2007 compared
to $17.9 million or $0.10 per share in 2006 and $22.1 million or $0.13 per
share
in 2005. The decrease in net loss in 2007 compared with 2006 is due
to lower research and development costs resulting from the close of our
Virulizin® Phase
III clinical trial as well as staff reductions due to corporate changes, lower
general and administrative costs due to staff reductions and lower legal,
consulting and investor relations charges, depreciation and amortization and
higher interest income and offset by higher accretion costs. The
decrease in net loss in 2006 compared with 2005 is primarily due to lower
research and development costs resulting from the wind down of the Phase III
Virulizin®
clinical trial.
Corporate
Changes
Dr.
Jim
Wright resigned as the President and Chief Executive Officer effective September
21, 2006. The Company accrued a liability based on a mutual
separation agreement executed during the year. As a result, we
recorded severance compensation expense of $500 thousand recorded in general
and
administrative expense. All amounts payable under the mutual
separation agreement were paid during the third quarter of fiscal
2007.
In
November 2005, as a means to conserve cash and refocus operations, Lorus scaled
back some activities related to the Virulizin® technology
and
implemented a workforce reduction of approximately 39% or 22
employees. As a result, the Company recorded severance compensation
expense for former employees of $557 thousand. Of this expense, $468
thousand is presented in the income statement as general and administrative
expense and $89 thousand as research and development
expense. Accounts payable and accrued liabilities at May 31, 2006
includes severance and compensation expense liabilities relating to the
Company’s November 2005 corporate changes of $154 thousand that were paid out by
December 2006.
LIQUIDITY
AND CAPITAL RESOURCES
Since
its inception, Lorus has financed its operations and technology acquisitions
primarily from equity and debt financing, the exercise of warrants and stock
options, and interest income on funds held for future investment. We continue
to
leverage the ongoing costs of the six GTI-2040 Phase II clinical trials through
work being done by the US NCI at its cost. These trials are currently
in the late stages of completion; Lorus intends to continue an expanded GTI-2040
trial at its own cost. The Company has sufficient GTI-2040 drug to
support ongoing trials. The Company is currently in the assessment
phase of results from its GTI-2501 Phase II clinical trial and is not incurring
significant costs thereon. We will continue the development of our
small molecule program from internal resources until their anticipated
completion.
We
have
not earned substantial revenues from our drug candidates and are therefore
considered to be in the development stage. The continuation of our research
and
development activities and the commercialization of the targeted therapeutic
products are dependent upon our ability to successfully finance and complete
our
research and development programs through a combination of equity financing
and
payments from strategic partners. We have no current sources of
payments from strategic partners. In addition, we will need to repay
or refinance the secured convertible debentures on their maturity should the
holder not choose to convert the debentures into common shares. There
can be no assurance that additional funding will be available at all or on
acceptable terms to permit further clinical development of our products or
to
repay the convertible debentures on maturity. If we are not able to
raise additional funds, we may not be able to continue as a going concern and
realize our assets and pay our 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
were not appropriate for our 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.
We
believe our current level of cash and marketable securities and the additional
funds available upon the successful reorganization (described below) are
sufficient to execute our current planned expenditures for the next twelve
months.
Operating
Cash Requirements
Lorus
utilized cash in operating activities of $6.3 million in 2007 compared with
$13.1 million in 2006 and $18.7 million in 2005. The decrease in cash
used in operating activities in 2007 is due to lower research and development
and general and administrative expenses, as described above and higher interest
income. The significant decrease in cash used in operating activities
in 2006 compared with 2005 is due to lower research and development expenses,
offset by lower interest income.
At
May
31, 2007, Lorus had cash and cash equivalents and marketable securities totaling
$12.4 million compared to $8.3 million at the end of 2006. The Company invests
in highly rated and liquid debt instruments. Investment decisions are made
in
accordance with an established investment policy administered by senior
management and overseen by the board of directors. Working capital (representing
primarily cash and cash equivalents and marketable securities having maturities
of less than one year) at May 31, 2007 was $6.2 million as compared to $5.8
million at May 31, 2006. As discussed below, subsequent to year end,
the Company completed a reorganization by way of an arrangement agreement that
resulted in approximately $8.5 million in additional cash for Lorus, subject
to
a $600,000 holdback and post closing adjustments, not including the
costs. Also as a condition of the transaction, the holder of Lorus’
$15.0 million secured convertible debenture agreed to vote in favour of the
transaction subject to the repurchase by Lorus of its outstanding three million
common share purchase warrants at a purchase price of $252,000 upon closing
of
the Arrangement.
We
do
not expect to generate positive cash flow from operations in the next several
years due to additional research and development costs, including costs related
to drug discovery, preclinical testing, clinical trials, manufacturing costs
and
operating expenses associated with supporting these activities. Negative cash
flow will continue until such time, if ever, that we receive regulatory approval
to commercialize any of our products under development and revenue from any
such
products exceeds expenses.
We
may
seek to access the public or private equity markets from time to time, even
if
we do not have an immediate need for additional capital at that time. We intend
to use our resources to fund our existing drug development programs and develop
new programs from our portfolio of preclinical research technologies. The
amounts actually expended for research and drug development activities and
the
timing of such expenditures will depend on many factors, including the progress
of the Company's research and drug development programs, the results of
preclinical and clinical trials, the timing of regulatory submissions and
approvals, the impact of any internally developed, licensed or acquired
technologies, our ability to find suitable partnership agreements to assist
financially with future development, the impact from technological advances,
determinations as to the commercial potential of the Company's compounds and
the
timing and development status of competitive products.
On
July
10, 2007, the Company completed the Arrangement that had the effect of providing
the Company with non-dilutive financing of $8.5 million in additional cash
for
New Lorus, subject to a $600,000 holdback, a post closing adjustment and not
including the costs of the transaction. As a result, the Company
expects that, subject to the post closing adjustments, net proceeds of the
transaction will be approximately $7 million inclusive of the amount held in
escrow to be received in July 2008. See “Subsequent Events”, below.
On
July 13, 2006
the Company entered into an agreement with High Tech Beteiligungen GmbH &
Co. KG (High Tech) to issue 28.8 million common shares at $0.36 per share for
gross proceeds of $10.4 million. The subscription price represented a premium
of
7.5% over the closing price of the common shares on the Toronto Stock Exchange
on July 13, 2007. The transaction closed on August 31, 2006. In
connection with the transaction, High Tech received demand registration rights
that will enable High Tech to request the registration or qualification of
the
common shares for resale in the United States and Canada, subject to certain
restrictions. These demand registration rights expire on June 30, 2012. In
addition, High Tech received the right to nominate one nominee to the board
of
directors of Lorus or, if it does not have a nominee, it will have the right
to
appoint an observer to the board. Upon completion of the transaction, High
Tech
held approximately 14% of the issued and outstanding common shares of Lorus
Therapeutics Inc.
On
July
24, 2006 Lorus entered into an agreement with Technifund Inc. to issue on a
private placement basis, 5.0 million common shares at $0.36 per share for gross
proceeds of $1.8 million. The transaction closed on September 1,
2006.
In
2007, Lorus issued common shares on the exercise of stock options for proceeds
of $22 thousand (2006, nil, 2005 $112 thousand).
On
October 6, 2004, we entered into an agreement to raise aggregate net proceeds
of
$13.9 million through the issuance of secured convertible debentures and
warrants. The debentures are secured by a first charge over all of the assets
of
the Company. We received $4.4 million on October 6, 2004 (representing a $5.0
million debenture less an investor fee representing 4% of the $15.0 million
to
be received under the agreement), and $5.0 million on each of January 14 and
April 15, 2005. All debentures issued under this agreement are due on October
6,
2009 and are subject to interest payable monthly at a rate of prime plus1%
until
such time as the Company's share price reaches $1.75 for 60 consecutive trading
days, at which time, interest will no longer be charged. Interest is payable
in
common shares of Lorus until Lorus' shares trade at a price of $1.00 or more
after which interest will be payable in cash or common shares at the option
of
the debenture holder. Common shares issued in payment of interest will be 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. For the year ended May 31, 2007, the Company has issued 3,726,000
in
settlement of $1.0 million in interest compared with 2,153,000 common shares
in
settlement of $882 thousand in interest in the previous year.
The
$15.0 million principal amount of debentures is convertible at the holder's
option at any time into common shares of the Company with a conversion price
per
share of $1.00.
The
Company issued to the debt holder 3,000,000 warrants expiring October 6, 2009
to
buy common shares of the Company at a price per share equal to
$1.00. These warrants were repurchased by the Company subsequent to
the year end as part of the Arrangement.
Use
of Proceeds
In
our
prospectus dated August 11, 2006 related to the subscription of shares by High
Tech, the Company indicated that proceeds from the financing would be used
as
follows: $8.6 million to fund the development of our product candidates, and
the
balance for working capital and general corporate purposes. Since the date
of
receipt of funds, the Company has incurred $1.2 million in research and
development expenses on our immunotherapy and small molecule programs and $1.1
million on preliminary and discovery programs.
CONTRACTUAL
OBLIGATIONS
At
May
31, 2007, we had contractual obligations requiring annual payments as
follows:
(Amounts
in 000’s)
| |
|
Less
than
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
1
year
|
|
|
1-3
years
|
|
|
4-5
years
|
|
|
5+
years
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases
|
|
|
118
|
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
126
|
|
|
Convertible
Debenture1
|
|
|
-
|
|
|
|
15,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,000
|
|
|
Total
|
|
|
118
|
|
|
|
15,008
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,126
|
|
1
The
convertible
debentures as described above may be converted into common shares of Lorus
at a
conversion price of $1.00. In the event that the holder does not
convert the debentures, Lorus has an obligation to repay the $15.0 million
in
cash. The amounts above excludes interest expense which is payable
monthly by issuance of commons shares which is calculated at a rate of prime
plus 1% on the outstanding balance.
OFF-BALANCE
SHEET ARRANGEMENTS
As
at
May 31, 2007, we have not entered into any off- balance sheet
arrangements.
TRANSACTIONS
WITH RELATED PARTIES
In
2007, we did not enter into any transactions with related parties. In order
to
effectively execute our business strategy, we expect to continue outsourcing
various functions to the expertise of third-parties such as contract
manufacturing organizations, contract research organizations, and other research
organizations. These relationships are with non-related third-parties and occur
at arm's length and on normal commercial terms.
SUBSEQUENT
EVENTS
On
July
10, 2007 Old Lorus and the Company completed a plan of arrangement and corporate
reorganization with, among others, 6707157 Canada Inc. (“Investor”) and Pinnacle
International Lands, Inc. (the “Arrangement”).
As
part
of the Arrangement, all of the assets and liabilities of Old Lorus (including
all of the shares of the subsidiaries held by it), with the exception of certain
future tax assets were transferred, directly or indirectly, from Old Lorus
directly or indirectly, to the Company. Securityholders in Old Lorus
exchanged their securities in Old Lorus for equivalent securities in New Lorus
on a one-for-one basis (the “Exchange”) and the board of directors and
management of Old Lorus continued as the board of directors and management
of
Company. Lorus obtained substitutional listings of its common shares
on both the Toronto Stock Exchange (TSX) and the American Stock Exchange (AMEX),
and continues to specialize in the discovery, research and development of
pharmaceutical products and technologies that were previously being performed
by
Old Lorus.
In
connection with the Arrangement and after the Exchange, the share capital of
Old
Lorus was reorganized into voting common shares and non-voting common shares
and
the Investor acquired from Lorus and Selling Shareholders (as defined below)
approximately 41% of the voting common shares and all of the non-voting common
shares by making an aggregatye cash payment to New Lorus and the Selling
Shareholders equal to approximately $8.5 million on closing of the transaction
less, in the case of Lorus, an escrowed amount of $600,000, subject to certain
post-closing adjustments and before transaction costs. The remaining
59% of the voting common shares of Old Lorus was distributed to the shareholders
of Lorus who were not residents of the United States on a pro-rata basis, and
shareholders of Lorus who were residents of the United States received a nominal
cash paymentin lieu of their pro-rata share of voting common shares of Old
Lorus. After completion of the Arrangement, Lorus was not related to
Old Lorus, which was subsequently renamed as 4325231 Canada Inc.
As
a
condition of the agreement, High Tech Beteiligungen GmbH & Co. KG and
certain other shareholders of Old Lorus (the “Selling Shareholders”) agreed to
sell to the Investor the voting common shares to be received by them under
the
Arrangement at the same price per share as was paid to shareholders who are
residents of the United States. The proceeds received by the Selling
Shareholders was nominal.
Also
as
a condition of the Arrangement, the holder of Old Lorus’ secured convertible
debenture agreed to vote in favour of the transaction subject to the repurchase
by Lorus of its outstanding three million common share purchase warrants at
a
purchase price of $252,000 upon closing of the Arrangement.
Following
theArrangement, the Company has approximately $7.0 million in unrecognized
future tax benefits resulting from non-capital losses carried forward, and
scientific research and experimental development expenditures. In light of
the
uncertainty regarding our future ability to generate taxable income, management
is of the opinion that it is not more likely than not that these tax assets
will
be realized in the foreseeable future and hence, a full valuation allowance
has
been recorded against these income tax assets. Consequently, no future income
tax assets or liabilities are recorded on the balance sheets.
In
addition, under the Arrangement, Lorus and its subsidiaries indemnified Old
Lorus and its directors, officers and employees against any and all liabilities,
losses, costs, expenses, claims and damages, other than for certain tax
liabilities related to the operations carried out by Old Lorus prior to and
by
the Company subsequent to the transfer of assets, liabilities and operations
to
the Company.
RISK
FACTORS
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 into this report. The risks
set out below are not the only risks we face. If any of the following risks
occur, our business, financial condition, prospects or results of operations
would likely suffer. 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.
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
$9.6
million; $17.9 million and $22.1 million for the years ended May 31, 2007,
2006
and 2005, respectively. As of May 31, 2007, we had an accumulated deficit of
$174.2 million.
To
date
we have only generated nominal revenues from the sale of Virulizin® in Mexico
and we stopped selling Virulizin® in Mexico in July 2005. We have not generated
any other revenue from product sales to date and it is possible that we will
never have sufficient product sales revenue to achieve profitability. We expect
to continue to incur losses for at least the next several years as we or our
collaborators and licensees pursue clinical trials and research and development
efforts. To become profitable, we, either alone or with our collaborators and
licensees, must successfully develop, manufacture and market our current product
candidates, GTI-2040, 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 significant 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.
Our
current and anticipated operations, particularly our product development
requires substantial capital. We expect that our existing cash and cash
equivalents, along with the funds available to us through the reorganization
agreement described above, will sufficiently fund our current and planned
operations through at least the next twelve months. However, our future capital
needs will depend on many factors, including the extent to which we enter into
collaboration agreements with respect to any of our proprietary product
candidates, receive royalty and milestone payments from our possible
collaborators and make progress in our internally funded research and
development activities.
Our
capital requirements will also depend on the magnitude and scope of these
activities, our ability to maintain existing and establish new collaborations,
the terms of those collaborations, the success of our collaborators in
developing and marketing products under their respective collaborations with
us,
the success of our contract manufacturers in producing clinical and commercial
supplies of our product candidates on a timely basis and in sufficient
quantities to meet our requirements, competing technological and market
developments, the time and cost of obtaining regulatory approvals, the extent
to
which we choose to commercialize our future products through our own sales
and
marketing capabilities, the cost of preparing, filing, prosecuting, maintaining
and enforcing patent and other rights and our success in acquiring and
integrating complementary products, technologies or companies. We do not have
committed external sources of funding and we cannot assure you that we will
be
able to obtain additional funds on acceptable terms, if at all. If adequate
funds are not available, we may be required to:
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engage
in equity financings that would be dilutive to current
shareholders;
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delay,
reduce the scope of or eliminate one or more of our development programs;
or
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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.
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Our
cash flow may not be sufficient to cover interest payments on our secured
convertible debentures or to repay the debentures at
maturity.
Our
ability to make interest payments, if required to be paid in cash, and to repay
at maturity or refinance our prime plus 1% convertible debentures due in
approximately 14 months (October 2009) will depend on our ability to generate
or
raise sufficient cash or refinance them. We have never generated positive annual
cash flow from our operating activities, and we may not generate or sustain
positive cash flows from operations in the future. Our ability to generate
sufficient cash flow will depend on our ability, or the ability of our strategic
partners, to successfully develop and obtain regulatory approval for new
products and to successfully market these products, as well as the results
of
our research and development efforts and other factors, including general
economic, financial, competitive, legislative and regulatory conditions, many
of
which are outside of our control.
We
may violate one or more of the operational covenants related to our convertible
debentures that could result in an event of default and the requirement for
early payment of our convertible debentures.
Our
convertible debentures are subject to certain operational
covenants. In the event that one of those covenants is breached by
us, an event of default could be declared requiring the immediate payment of
the
face value of the debentures. This could result in our inability to
pay and insolvency of the Company, a dilutive equity financing in attempt to
raise funds to repay the debentures, or a significant reduction in cash
available for us to use towards the development of our product
candidates.
We
may be unable to obtain partnerships for one or more of our product candidates
which could curtail future development and negatively impact our share
price.
Our
product candidates require significant funding to reach regulatory approval
upon
positive clinical results. Such funding, in particular for
Virulizin®, will be very difficult, or impossible to raise in the public
markets. If such partnerships are not attainable, the development of
these product candidates maybe significantly delayed or stopped
altogether. The announcement of such delay or discontinuation of
development may have a negative impact on our share price.
In
addition, our strategy for the research, development and commercialization
of
our products requires entering into various arrangements with corporate
collaborators, licensers, 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. We cannot assure
you that such parties will perform their obligations as expected. We also cannot
assure you that our collaborators will 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, or that our current or future collaborative arrangements
will be successful.
If
we
cannot negotiate collaboration, licence or partnering agreements, we may never
achieve profitability.
Clinical
trials are long, expensive and uncertain processes and Health Canada or the
FDA
may ultimately not approve any of our product candidates. We may never develop
any commercial drugs or other products that generate
revenues.
None
of
our products 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. In
general, significant research and development and clinical studies are required
to demonstrate the safety and effectiveness of our products 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 Health Canada or the FDA may not
ultimately approve our product candidates for commercial sale. Further, 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. Drugs in late stages of clinical
development may fail to show the desired safety and efficacy traits despite
having progressed through initial clinical testing. For example, positive
results in early Phase I or Phase II clinical trials may not be repeated in
larger Phase II or Phase III clinical trials. The results of our
Phase III clinical trial of Virulizinâ did not
meet the
primary endpoint of the study despite promising preclinical and early stage
clinical data. All of our potential drug candidates are prone to the
risks of failure inherent in drug development.
Preparing,
submitting and advancing applications for regulatory approval is complex,
expensive and time intensive and entails significant uncertainty. The results
of
our completed preclinical studies and clinical trials may not be indicative
of
future clinical trial results. A commitment of substantial resources to conduct
time-consuming research, preclinical studies and clinical trials will be
required if we are to complete development of our products. Clinical trials
of
our products require that we identify and enrol a large number of patients
with
the illness under investigation. We may not be able to enrol a sufficient number
of appropriate patients to complete our clinical trials in a timely manner
particularly in smaller indications such as Acute Myeloid
Leukemia. 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 that could affect the price of our common shares. Delays in planned
patient enrolment or lower than anticipated event rates in our current clinical
trials or future clinical trials 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
products are successfully developed and approved for marketing, during
commercial use of any approved products. The appearance of any such 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.
The
clinical trials of any of our drug candidates could be unsuccessful, which
would
prevent us from advancing, commercializing or partnering the drug.
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 never achieve
profitability.
As
a result of intense competition and technological change in the pharmaceutical
industry, 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
these fields. Many of our competitors have substantially greater financial
and
management resources, stronger intellectual property positions and greater
manufacturing, marketing and sales capabilities, areas in which we have limited
or no experience. In addition, many of our competitors have 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 Health Canada,
FDA 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. Existing and future products, therapies and technological
approaches will compete directly with the products we seek to develop. Current
and prospective competing products 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 product
candidates may not gain market acceptance among physicians, patients, healthcare
payers and the medical community. 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.
If
we fail to attract and retain key employees, the development and
commercialization of our products may be adversely
affected.
We
depend heavily on the principal members of our scientific and management staff.
If we lose any of these persons, our ability to develop products and become
profitable could suffer. The risk of being unable to retain key personnel may
be
increased by the fact that we have not executed long term employment contracts
with our employees, except for our senior executives. Our future success will
also depend in large part on our ability to attract and retain other highly
qualified scientific and management personnel. We face competition for personnel
from other companies, academic institutions, government entities and other
organizations.
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 (“U.S.”) Patent
and Trademark Office and many other patent offices in the world have not
established a consistent policy regarding the breadth of claims that it will
allow in biotechnology patents. Further, 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 U.S. 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. In addition, 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. Until recently, patent applications in the U.S.
were
maintained in secrecy until the patents issued, and publication of discoveries
in scientific or patent literature often lags behind actual discoveries. Patent
applications filed in the United States after November 2000 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
cannot assure you that, even if published, we will be aware of all 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.
Enforcement
of intellectual property rights
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. In addition, we cannot assure you that others
will not design around our patented technology. Moreover, we may have to
participate in interference proceedings declared by the U.S. 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.
We
cannot assure you that our pending patent applications, if issued, would be
held
valid or enforceable. Additionally, many of our foreign patent applications
have
been published as part of the patent prosecution process in such
countries.
Trademark
protection
Protection
of the rights revealed in published patent applications can be complex, costly
and uncertain. In order to protect goodwill associated with our Company and
product names, we rely on trademark protection for our marks. For example,
we
have registered the Virulizin® trademark with the U.S. Patent and Trademark
Office. A third-party may assert a claim that the Virulizin® mark is confusingly
similar to its mark and such claims or the failure to timely register the
Virulizin® mark or objections by the FDA could force us to select a new name for
Virulizin®, which could cause us to incur additional expense.
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 against these people or obtain adequate compensation for the damages
caused by their unauthorized disclosure or use. Our trade secrets or those
of
our collaborators may become known or may be independently discovered by
others.
Our
products and product candidates may infringe the intellectual property rights
of
others, 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 at least
some
of our product candidates, including Virulizin®, GTI-2040, GTI-2501 and small
molecules. In addition, third-parties may assert infringement or other
intellectual property claims against us based on our patents or other
intellectual property rights. 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 such technology, we cannot assure
you that a license under such patents and patent applications will 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.
If
product liability claims are brought against us or we are unable to obtain
or
maintain product 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 claims. 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. Further, liability insurance coverage is becoming
increasingly expensive and we might not be able to obtain or maintain product
liability insurance in the future on acceptable terms or in sufficient amounts
to protect us against 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.
We
have no manufacturing capabilities. We depend on third-parties, including a
number of sole suppliers, for manufacturing and storage of our product
candidates used in our clinical trials. Product introductions may be delayed
or
suspended if the manufacture of our products is interupted or
discontinued.
We
do
not have manufacturing facilities to produce supplies of Virulizin®, GTI-2040,
GTI-2501, small molecule or any of our other product candidates to support
clinical trials or commercial launch of these products, if they are approved.
We
are dependent on third-parties for manufacturing and storage of our product
candidates. If we are unable to contract for a sufficient supply of our product
candidates on acceptable terms, or if we encounter delays or difficulties in
the
manufacturing process or our relationships with our manufacturers, we may not
have sufficient product to conduct or complete our clinical trials or support
preparations for the commercial launch of our product candidates, if
approved.
Dependence
on contract manufacturers for commercial production involves a number of risks,
many of which are outside our control. These risks include potential delays
in
transferring technology, and the inability of our contract manufacturer to
scale
production on a timely basis, to manufacture commercial quantities at reasonable
costs, to comply with cGMP and to implement procedures that result in the
production of drugs that meet our specifications and regulatory
requirements.
Our
reliance on contract manufacturers exposes us to additional risks,
including
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there
may be delays in scale-up to quantities needed for clinical trials
and
commercial launch or failure to manufacture such quantities to our
specifications, or to deliver such quantities on the dates we
require;
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our
current and future manufacturers are subject to ongoing, periodic,
unannounced inspection by the FDA and corresponding Canadian and
international regulatory authorities for compliance with strictly
enforced
cGMP regulations and similar standards, and we do not have control
over
our contract manufacturers’ compliance with these regulations and
standards;
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our
current and future manufacturers may not be able to comply with applicable
regulatory requirements, which would prohibit them from manufacturing
products for us;
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if
we need to change to other commercial manufacturing contractors,
the FDA
and comparable foreign regulators must approve these contractors
prior to
our use, which would require new testing and compliance inspections,
and
the new manufacturers would have to be educated in, or themselves
develop
substantially equivalent processes necessary for the production or
our
products; and
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our
manufacturers might not be able to fulfill our commercial needs,
which
would require us to seek new manufacturing arrangements and may result
in
substantial delays in meeting market
demand.
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Any
of
these factors could cause us to delay or suspend clinical trials, regulatory
submission, required approvals or commercialization of our products under
development, entail higher costs and result in our being unable to effectively
commercialize our products. We do not currently intend to manufacture any of
our
product candidates, although we may choose to do so in the future. If we decide
to manufacture our products, we would be subject to the regulatory risks and
requirements described above. We would also be subject to similar risks
regarding delays or difficulties encountered in manufacturing our pharmaceutical
products and we would require additional facilities and substantial additional
capital. We cannot assure you that we would be able to manufacture any of our
products successfully in accordance with regulatory requirements and in a cost
effective manner.
Our
operations involve hazardous materials and we must comply with environmental
laws and regulations, which can he expensive and restrict how we do
business.
Our
research and development activities involve the controlled use of hazardous
materials, radioactive compounds and other potentially dangerous chemicals
and
biological agents. Although we believe our safety procedures for these materials
comply with governmental standards, we cannot entirely eliminate the risk of
accidental contamination or injury from these materials. We currently have
insurance, in amounts and on terms typical for companies in businesses that
are
similarly situated, that could coverall or a portion of a damage claim arising
from our use of hazardous and other materials. However, if an accident or
environmental discharge occurs, and we are held liable for any resulting
damages, the associated liability could exceed our insurance coverage and our
financial resources.
We
have limited sales, marketing and distribution
experience.
We
have
very limited experience in the sales, marketing and distribution of
pharmaceutical products. There can be no assurance that we will be able to
establish sales, marketing, and distribution capabilities or make arrangements
with our collaborators, licensees or others to perform such activities or that
such efforts will be successful. If we decide to market any of our products
directly, we must either acquire or internally develop a marketing and sales
force with technical expertise and with supporting distribution capabilities.
The acquisition or development of a sales and distribution infrastructure would
require substantial resources, which may divert the attention of our management
and key personnel and have a negative impact on our product development efforts.
If we contract with third-parties for the sales and marketing of our products,
our revenues will be dependent on the efforts of these third-parties, whose
efforts may not be successful. If we fail to establish successful marketing
and
sales capabilities or to make arrangements with third-parties, our business,
financial condition and results of operations will be materially adversely
affected.
Our
interest income is subject to fluctuations of interest rates in our investment
portfolio.
Our
investments are held to maturity and have staggered maturities to minimize
interest rate risk. There can be no assurance that interest income fluctuations
will not have an adverse impact on our financial condition. We maintain all
our
accounts in Canadian dollars, but a portion of our expenditures are in foreign
currencies. We do not currently engage in hedging our foreign currency
requirements to reduce exchange rate risk.
Because
of the uncertainty of pharmaceutical pricing, reimbursement and healthcare
reform measures, if any of our product candidates are approved for sale to
the
public, we may be unable to sell our products
profitably.
The
availability of reimbursement by governmental and other third-party payers
affects the market for any pharmaceutical product. These third-party payers
continually attempt to contain or reduce the costs of healthcare. There have
been a number of legislative and regulatory proposals to change the healthcare
system and further proposals are likely. Significant uncertainty exists with
respect to the reimbursement status of newly approved healthcare products.
In
addition, third-party payers are increasingly challenging the price and cost
effectiveness of medical products and services. We might not be able to sell
our
products profitably or recoup the value of our investment in product development
if reimbursement is unavailable or limited in scope.
RISKS
RELATED TO OUR COMMON SHARES
Our
share price has been and may 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. We receive only limited attention by securities analysts
and
frequently experience an imbalance between supply and demand for our common
shares. The market price of our common shares has been highly volatile and
is
likely to continue to be volatile. Factors affecting our common share price
include:
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the
progress of our and our collaborators’ clinical trials, including our and
our collaborators’ ability to produce clinical supplies of our product
candidates on a timely basis and in sufficient quantities to meet
our
clinical trial requirements;
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announcements
of technological innovations or new product candidates by us, our
collaborators or our competitors;
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fluctuations
in our operating results;
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published
reports by securities analysts;
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developments
in patent or other intellectual property
rights;
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publicity
concerning discovery and development activities by our
licensees;
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the
cash and short term investments held us and our ability to secure
future
financing;
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public
concern as to the safety and efficacy of drugs that we and our competitors
develop;
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governmental
regulation and changes in medical and pharmaceutical product reimbursement
policies; and
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general
market conditions.
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Future
sales of our common shares by us or by our existing shareholders could cause
our
share price to fall.
Additional
equity financings or other share issuances by us could adversely affect the
market price of our common shares. Sales by existing shareholders of a large
number of shares of our common shares in the public market and the sale 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 drop.
Conversion
of our secured convertible debentures will dilute the ownership interest of
existing shareholders.
The
conversion of some or all of the convertible debentures will dilute the
ownership interests of existing shareholders. Any sales in the public market
of
the common shares issuable upon such conversion could adversely affect
prevailing market prices of our common shares. In addition, the existence of
the
secured convertible debentures may encourage short selling by market
participants.
CRITICAL
ACCOUNTING POLICIES
The
Company periodically reviews its financial reporting and disclosure practices
and accounting policies to ensure that they provide accurate and transparent
information relative to the current economic and business environment. As part
of this process, the Company has reviewed its selection, application and
communication of critical accounting policies and financial disclosures.
Management has discussed the development and selection of the critical
accounting policies with the Audit Committee of the Board of Directors and
the
Audit Committee has reviewed the disclosure relating to critical accounting
policies in this Management's Discussion and Analysis. Other important
accounting polices are described in note 2 of the Financial
Statements.
Drug
Development Costs
We
incur costs related to the research and development of pharmaceutical products
and technologies for the management of cancer. These costs include internal
and
external costs for preclinical research and clinical trials, drug costs,
regulatory compliance costs and patent application costs. All research costs
are
expensed as incurred as required under GAAP.
Development
costs, including the cost of drugs for use in clinical trials, are expensed
as
incurred unless they meet the criteria under GAAP for deferral and amortization.
The Company continually assesses its activities to determine when, if ever,
development costs may qualify for capitalization. By expensing the research
and
development costs as required under GAAP, the value of the product portfolio
is
not reflected on the Company's Financial Statements.
Stock-Based
Compensation
We
have
applied the fair value based method to expense stock options awarded since
June
1, 2002 using the Black-Scholes option-pricing model as allowed under CICA
Handbook Section 3870. The model estimates the fair value of fully transferable
options, without vesting restrictions, which significantly differs from the
stock option awards issued by Lorus. The model also requires four highly
subjective assumptions including future stock price volatility and expected
time
until exercise, which greatly affect the calculated values. The increase or
decrease of one of these assumptions could materially increase or decrease
the
fair value of stock options issued and the associated expense.
Valuation
Allowance for Future Tax Assets
We
have
a net tax benefit resulting from non-capital losses carried forward, and
scientific research and experimental development expenditures. In light of
the
recent net losses and uncertainty regarding our future ability to generate
taxable income, management is of the opinion that it is not more likely than
not
that these tax assets will be realized in the foreseeable future and hence,
a
full valuation allowance has been recorded against these income tax assets.
Consequently, no future income tax assets or liabilities are recorded on the
balance sheets.
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 our results of operations through the recovery of future income
taxes.
In
light of the fact that the Company believed that it could not fully utilize
a
significant portion of its future tax assets prior to their expiry, subsequent
to the year-end, it underwent a reorganization that resulted in certain tax
attributes not being carried forward to the successor entity. As a
result, the Company will not have available to it approximately $39.8 million
of
its future tax assets.
Valuation
of Long Lived Assets
We
periodically review the useful lives and the carrying values of our long lived
assets. We review for impairment in long lived assets whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be
recoverable. If the sum of the undiscounted future cash flows expected to result
from the use and eventual disposition of an asset is less than its carrying
amount, it is considered to be impaired. An impairment loss is measured at
the
amount by which the carrying amount of the asset exceeds its fair value; which
is estimated as the expected future cash flows discounted at a rate commensurate
with the risks associated with the recovery of the asset.
ACCOUNTING
POLICY CHANGES
There
were no new accounting policies implemented during the year-ended May 31,
2007. The following changes were implemented in 2006:
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 issuer’s option in
cash or the equivalent value by a variable number of the issuer’s 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.
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.
Section
3831, Non-Monetary Transactions
In
June
2005, the CICA released a new Handbook Section 3831, Non-monetary
Transactions, effective for all non-monetary transactions initiated in
periods beginning on or after January 1, 2006. This standard requires all
non-monetary transactions to be measured at fair value unless they meet one
of
four very specific criteria. Commercial substance replaces culmination of the
earnings process as the test for fair value measurement. A transaction has
commercial substance if it causes an identifiable and measurable change in
the
economic circumstances of the entity. Commercial substance is a function of
the
cash flows expected by the reporting entity.
RECENT
ACCOUNTING PRONOUNCEMENTS
Comprehensive
Income and Equity
In
January 2005, the CICA released new Handbook Section 1530, Comprehensive Income,
and Section 3251, Equity. Section 1530 establishes standards for reporting
comprehensive income. The section does not address issues of recognition or
measurement for comprehensive income and its components. Section 3251
establishes standards for the presentation of equity and changes in equity
during the reporting period. The requirements in this section are in addition
to
Section 1530.
Section
3855, Financial Instruments - Recognition and
Measurement
CICA
Handbook Section 3855 establishes standards for the recognition and measurement
of all financial instruments, provides a characteristics-based definition of
a
derivative instrument, provides criteria to be used to determine when a
financial instrument should be recognized, and provides criteria to be used
to
determine when a financial liability is considered to be
extinguished.
Section
3865, Hedges
Section
3865 establishes standards for when and how hedge accounting may be applied.
Hedge accounting is optional.
These
three Sections are effective for fiscal years beginning on or after October
1,
2006. An entity adopting these Sections for a fiscal year beginning
before October 1, 2006 must adopt all the Sections simultaneously.
Section
3861, Financial Instruments - Disclosure and Presentation
Section
3861discusses the presentation and disclosure of these items. In
December 2006, the Canadian Institute of Chartered Accountants issued Section
3862 Financial Instrument - Disclosures and Section 3863 Financial Instruments
-
Presentation to replace 3861 Financial Instruments - Disclosure and
Presentation. These new Sections are effective for interim and annual
financial statements with fiscal years beginning on or after October 1, 2007,
but may be adopted in place of Section 3861, before that date.
SELECTED
ANNUAL FINANCIAL DATA
The
following selected consolidated financial data has been derived from, and should
be read in conjunction with, the accompanying audited Financial Statements
for
the year ended May 31, 2007 which are prepared in accordance with Canadian
GAAP.
On
July
10, 2007 (the “Arrangement Date”), the Company completed a plan of arrangement
and corporate reorganization with among others 4325231 Canada Inc. (formerly
Lorus Therapeutics Inc.) (“Old Lorus”), 6707157 Canada Inc. and Pinnacle
International Lands Inc. 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 of the Company and the assets (excluding certain future
tax
assets and related valuation allowance) and liabilities of Old Lorus were
transferred to the Company and/or its subsidiaries. The Company
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. Therefore, the Company’s
operations have been accounted for on a continuity of interest basis and
accordingly, the consolidated financial statement information below reflect
that
of the Company as if it had always carried on the business formerly carried
on
by Old Lorus. Therefore, the following Information is taken from the
financial statements of Lorus Therapeutics Inc. (subsequently renamed 4325231
Canada Inc.) See “Supplemental Information” section.
|
Consolidated
Statements of Loss and Deficit
|
|
(amounts
in Canadian 000's except for per common share data)
|
|
Years
Ended May 31
|
|
| |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
REVENUE
|
|
$ |
107
|
|
|
$ |
26
|
|
|
$ |
6
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
16
|
|
|
|
3
|
|
|
|
1
|
|
|
Research
and development
|
|
|
3,384
|
|
|
|
10,237
|
|
|
|
14,394
|
|
|
General
and administrative
|
|
|
3,848
|
|
|
|
4,334
|
|
|
|
5,348
|
|
|
Stock-based
compensation
|
|
|
503
|
|
|
|
1,205
|
|
|
|
1,475
|
|
|
Depreciation
and amortization
|
|
|
402
|
|
|
|
771
|
|
|
|
564
|
|
|
Operating
expenses
|
|
|
8,153
|
|
|
|
16,550
|
|
|
|
21,782
|
|
|
Interest
expense on convertible debentures
|
|
|
503
|
|
|
|
882
|
|
|
|
300
|
|
|
Accretion
in carrying value of secured convertible debentures
|
|
|
1,050
|
|
|
|
790
|
|
|
|
426
|
|
|
Amortization
of deferred financing charges
|
|
|
110
|
|
|
|
87
|
|
|
|
84
|
|
|
Interest
income
|
|
|
(503 |
) |
|
|
(374 |
) |
|
|
(524 |
) |
|
Loss
for the period
|
|
|
9,638
|
|
|
|
17,909
|
|
|
|
22,062
|
|
|
Basic
and diluted loss per common share
|
|
$ |
0.05
|
|
|
$ |
0.10
|
|
|
$ |
0.13
|
|
Weighted
average number of common shares outstanding used in the
calculation of basic and diluted loss per
share
|
|
|
204,860
|
|
|
|
173,523
|
|
|
|
172,112
|
|
|
Total
Assets
|
|
$ |
15,475
|
|
|
$ |
11,461
|
|
|
$ |
27,566
|
|
|
Total
Long-term liabilities
|
|
$ |
11,937
|
|
|
$ |
11,002
|
|
|
$ |
10,212
|
|
QUARTERLY
RESULTS OF OPERATIONS
The
following table sets forth certain unaudited consolidated statements of
operations data for each of the eight most recent fiscal quarters that, in
management's opinion, have been prepared on a basis consistent with the audited
consolidated financial statements contained elsewhere in this annual report
and
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information presented.
Research
and development expenses have decreased throughout 2007 in comparison with
the
same quarters in the prior year. This reduction is due to the close
of our Phase III Virulizin® clinical
trial as
well as corporate changes in November 2005 to reduce headcount.
General
and administrative expenses have remained relatively consistent across quarters
in the current fiscal year with the exception of an increase for the quarter
ended November 30, 2006 due to severance charges relating to the mutual
separation agreement executed in September as described in the Corporate Changes
section, above. Expenditures have continued to decline since Q2 2007
due to reduced headcount as well as reduced consulting, patent costs and
investor relation costs.
Net
loss decreased in Q3 and Q4 of 2007 as the result of reduced research and
development and general and administrative expenditures.
| |
|
Fiscal
2007
|
|
|
|
|
|
Fiscal
2006
|
|
| |
|
Quarter
Ended
|
|
|
|
|
|
Quarter
Ended
|
|
|
(Amounts
in 000’s except for per common share data)
|
|
May
31,
2007
|
|
|
Feb.
28, 2007
|
|
|
Nov.
30, 2006
|
|
|
Aug.
31, 2006
|
|
|
May
31, 2006
|
|
|
Feb.
28, 2006
|
|
|
Nov.
30, 2005
|
|
|
Aug.
31, 2005
|
|
|
Revenue
|
|
$ |
40
|
|
|
$ |
37
|
|
|
$ |
23
|
|
|
$ |
7
|
|
|
$ |
14
|
|
|
$ |
5
|
|
|
$ |
6
|
|
|
$ |
1
|
|
|
Research
and development
|
|
|
259
|
|
|
|
672
|
|
|
|
1,122
|
|
|
|
1,331
|
|
|
|
1,353
|
|
|
|
2,296
|
|
|
|
2,631
|
|
|
|
3,957
|
|
|
General
and administrative
|
|
|
820
|
|
|
|
833
|
|
|
|
1,407
|
|
|
|
788
|
|
|
|
730
|
|
|
|
909
|
|
|
|
1,619
|
|
|
|
1,076
|
|
|
Net
loss
|
|
|
(1,689 |
) |
|
|
(2,062 |
) |
|
|
(3,117 |
) |
|
|
(2,770 |
) |
|
|
(2,970 |
) |
|
|
(4,095 |
) |
|
|
(5,102 |
) |
|
|
(5,742 |
) |
Basic
and diluted net loss per share
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.03 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
used in operating activities
|
|
$ |
(89 |
) |
|
$ |
(1,805 |
) |
|
$ |
(2,585 |
) |
|
$ |
(1,814 |
) |
|
$ |
(1,940 |
) |
|
$ |
(3,956 |
) |
|
$ |
(2,360 |
) |
|
$ |
(4,809 |
) |
DISCLOSURE
CONTROLS AND PROCEDURES
Disclosure
controls and procedures are designed to provide reasonable assurance that all
material information required to be publicly disclosed by a public company
is
gathered and communicated to management, including the certifying officers,
on a
timely basis so that appropriate decisions can be made regarding public
disclosure. As at the end of May 31, 2007, the certifying officers and other
members of management evaluated the effectiveness of our disclosure controls
and
procedures (as this term is defined in the rules adopted by Canadian securities
regulatory authorities and the United States Securities and Exchange
Commission). This evaluation included a review of our existing
disclosure and insider trading policy, compliance with regard to that policy,
the disclosure controls currently in place surrounding our interim and annual
financial statements, MD&A and other required documents and discussions with
management surrounding the process of communicating material information to
management and in turn the certifying officers and all procedures taking into
consideration the size of the company and the number of
employees. Based on the evaluation described above, the certifying
officers have concluded that, as of May 31, 2007, the disclosure controls and
procedures were effective to provide reasonable assurance that the information
we are required to disclose on a continuous basis in annual and interim filings
and other reports is recorded, processed, summarized and reported or disclosed
on a timely basis as required.
As
at
August 7, 2007, the Company had 212,627,876 common shares issued and
outstanding. In addition, the Company had issued and outstanding 12,494,389
stock options to purchase an equal number of common shares, and a $15 million
convertible debenture convertible into common shares of Lorus at $1.00 per
share.
At
May
31, 2007, the Company recorded the repurchase of its 3,000,000 warrants in
accordance with the terms of an agreement with the Company’s convertible
debenture holder for $252,000 as related to the arrangement agreement which
closed July 10, 2007. The amount was set up as a liability and the
difference between the carrying value of the warrants and the amount paid was
been credited to contributed surplus.
CAUTION
REGARDING FORWARD-LOOKING STATEMENTS
This
management discussion and analysis may contain forward-looking statements within
the meaning of Canadian and U.S. securities laws. Such statements
include, but are not limited to, statements relating to:
|
|
•
|
our
expectations regarding future
financings;
|
|
|
•
|
our
plans to conduct clinical
trials;
|
|
|
•
|
our
expectations regarding the progress and the successful and timely
completion of the various stages of our drug discovery, preclinical
and
clinical studies and the regulatory approval
process;
|
|
|
•
|
our
plans to obtain partners to assist in the further development of
our
product candidates; and
|
|
|
•
|
our
expectations with respect to existing and future corporate alliances
and
licensing transactions with third parties, and the receipt and timing
of
any payments to be made by us or to us in respect of such
arrangements,
|
the
Company’s plans, objectives, expectations and intentions and other statements
including words such as “anticipate”, “contemplate”, “continue”, “believe”,
“plan”, “estimate”, “expect”, “intend”, “will”, “should”, “may”, and other
similar expressions.
Such
statements reflect our current views with respect to future events and are
subject to risks and uncertainties and are necessarily 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 required 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;
|
|
|
•
|
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 patent protection and protect our intellectual
property
rights;
|
|
|
•
|
our
ability to protect our intellectual property rights and to 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 greater financial resources than we
do;
|
|
|
•
|
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;
|
|
|
•
|
changing
market conditions; and
|
|
|
•
|
other
risks detailed from time-to-time in our ongoing quarterly filings,
annual
information forms, annual reports and annual filings with Canadian
securities regulators and the United States Securities and Exchange
Commission, and those which are discussed under the heading “Risk
Factors”.
|
Should
one or more of these risks or uncertainties materialize, or should the
assumptions set out in the section entitled “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 information form 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. We cannot assure you that such statements will 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.
ADDITIONAL
INFORMATION
Additional
information relating to Lorus, including Lorus' 2007 annual information form
and
other disclosure documents, is available on SEDAR at
www.sedar.com. For any information filed prior to July 10,
2007 please access the information on SEDAR for 4325231 Canada Inc.