Exhibit
99.2
Management's
discussion and
analysis
January
8, 2008
PLAN
OF ARRANGEMENT AND CORPORATION
REORGANIZATION
On
July 10, 2007 (the “Arrangement Date”),
Lorus Therapeutics Inc. (the
“Company or “New Lorus”) 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 (the “Arrangement”). As a
result of the plan of arrangement and reorganization, among other things, each
common share of Old Lorus was exchanged for one common share 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 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. All comparative figures presented in these interim
consolidated financial statements are those of 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") contained in the Company’s annual 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 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 commercial viability 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
loss from operations for the three months ended November 30, 2007 of $3.0
million ($0.01 per share) was approximately equal to the net loss of $3.1
million ($0.01 per share) in during the same period in fiscal
2007. For the six months ended November 30, 2007 our loss from
operations, excluding the gain on sale relating to the Arrangement, decreased
to
by 13% to $5.1 million from $5.9 million in the same period last
year. On close of the Arrangement, in July 2007, the Company realized
a gain on the sale of the shares of Old Lorus in the amount of $6.3 million
resulting in net income for the six month period of $1.2 million ($0.01 per
share). The gain on
sale of shares was increased by $200 thousand in the quarter reflecting an
adjustment to transaction costs. Research and development
expenses in the three months ended November 30, 2007 increased to $1.2 million
from $1.1 million in the same period last
year. In
the three and six month periods ended November 30, 2007, R&D expenditures
increased by $387 thousand and $231 thousand, respectively, offset by a decrease
in amortization expense related to intangible assets of $262 thousand and $655
thousand, respectively, over the same periods in the previous year. These increases are
primarily due to increased research and testing costs in fiscal 2008 associated
with the advancement of the Company’s small molecule program and clinical
development costs. These increased costs are partially offset by
lower manufacturing and compliance/regulation costs in the current year.
Staff reductions and a continued focus on reducing overhead costs in
areas such as corporate communications have contributed to the
decrease. We utilized cash of $4.9 million in our operating
activities in six-month period ended November 30, 2007 compared with $4.4
million during the same period in fiscal 2007 reflecting a reduction in
payables. At November 30, 2007 we had cash and cash equivalents and
marketable securities of $14.8 million compared to $12.4 million at May 31,
2007.
RESULTS
OF
OPERATIONS
Revenues
Revenues
for the three-month period
ended November 30, 2007 decreased to $1 thousand compared with revenue of $23
thousand for the same period last year. For the six month period
ended November 30, 2007, total revenue decreased to $27 thousand from $30
thousand in the same period last year. This decrease in revenue is
related to a reduction in laboratory services work performed by Lorus personnel
on behalf of other companies.
Research
and development expenses
totaled $1.2 million in the three-month period ended November 30, 2007 compared
to $1.1 million during the same period last year and decreased to $2.0 million
from $2.4 million in the six month period ended November 30, 2007 as compared
to
the same period in fiscal 2007. In the three and six
month periods ended
November 30, 2007, R&D expenditures increased by $387 thousand and $231
thousand, respectively, offset by a decrease in amortization expense related
to
intangible assets of $262 thousand and $655 thousand, respectively, over the
same periods in the previous year. These increases are primarily due
to increased research and testing costs in fiscal 2008 associated with the
advancement of the Company’s small molecule program and clinical development
costs. These increased costs are partially offset by lower
manufacturing and compliance/regulation costs in the current
year. The
Company continues to leverage its research and development activities through
the use of National Cancer Institute sponsored trials.
General
and
Administrative
General
and administrative expenses totaled $1.1 million in the three-month period
ended
November 30, 2007 compared to $1.4 million in same period last
year. For the six month period ended November 30, 2007, general and
administrative expense was $1.8 million compared with $2.2 million in the same
period last year. 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. In the second quarter of fiscal 2007, the
company incurred costs related to the mutual separation agreement between the
Company and the then President and CEO. Such costs were not incurred
in the current period.
Stock-Based
Compensation
Stock-based
compensation expense totaled $209 thousand in the three-month period ended
November 30, 2007 compared with $150 thousand in the same period last year
and
$312 in the six month period ended November 30, 2007 compared with $263 thousand
for the same period last year. The net increase in stock-based
compensation for both these periods is the result of reduced head count and
fair
values on the stock options issued, due to a decline in our stock price offset
by an increase in expense of $83 thousand in the quarter related to the
extension of options to directors not standing for re-election at the Company’s
annual general meeting and Dr. Wright for options granted in his capacity as
President and CEO.
Depreciation
and
Amortization
Depreciation
and amortization expenses
decreased to $80 thousand in the three-month period and $159 thousand in the
six
month period ended November 30, 2007 as compared to $100 thousand and $200
thousand in the same periods, respectively, last year. The decrease in depreciation
and
amortization expense is the result of reduced capital asset purchases during
fiscal 2008 and 2007.
Interest
Expense
Non-cash
interest expense was $271
thousand in the three-month period ended November 30, 2007 compared with $262
thousand in the same period last year. For the six month period ended
November 30, 2007 interest expense was $541 thousand compared with $527 thousand
for the same period last year. These amounts represent interest at a
rate of prime plus 1% on the $15.0 million convertible
debentures. The increase in interest expense in fiscal 2008 compared
with fiscal 2007 is a function of a higher prime rate beginning in July
2007. 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 $273 thousand in the
three-month period ended November 30, 2007 compared with $227 thousand in the
same period last year. For the six month period November 30, 2007,
accretion charges were $539 thousand compared to $446 thousand in the same
period in fiscal 2007. 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. Some
of the increase in expense in
fiscal 2008 compared with fiscal 2007 is due to a higher rate of
interest.
Amortization
of Deferred Financing
Charges
Amortization
of deferred financing
charges totaled $34 thousand in the three-month period ended November 30, 2007
compared with $27 thousand in the same period last year. Total
deferred financing costs for the six month period ended November 30, 2007 were
$66 thousand as compared to $52 thousand in the same period last
year. The deferred financing charges relate to the convertible
debenture transaction and are being amortized using the effective interest
rate
method over the five-year life of the debt commencing October 6,
2004.
Interest
and Other
Income
Interest
income totaled $175 thousand in
the three-month period ended November 30, 2007 compared to $158 thousand in
the
same period last year and $315 thousand for the six month period ended November
30, 2007 and $225 thousand for the comparable period last year. The
amount of Interest income in the current fiscal year has been impacted in the
six month period by a recognized gain in market value of held-for-trading
classified assets of $19 thousand as a result of the implementation of the
new
financial instruments accounting policy, see Recently
Adopted
Accounting Policies,
below. The overall increase in interest income in the current period
is due to higher average cash and marketable securities balances and interest
rates in the current three and six month periods compared to the same periods
in
fiscal 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 and the completion of the Arrangement in July
2007.
Loss
from operations for the
period
Operating
net loss for the three month
period ended November 30, 2007 decreased to $3.0 million or $0.01 per share
in
the first three month ended November 30, 2007 compared to $3.1 million or $0.01
per share in the same period last year. Operating net loss for the six month
period, before the gain on sale of shares associated with the completion of
the
Arrangement, decreased to $5.1 million as compared with $5.9 million in the
same
period last year. The decrease in net loss in the current three month period
as
compared to the previous year is primarily a result of lower general and
administration costs partially offset by increased research and development
costs as discussed above. The decrease in net operating loss for the
six month period as compared to last year is primarily due to lower research
and
development costs, inclusive of amortization of acquired R&D costs fully
amortized in fiscal 2007, and lower general and administrative costs as
discussed above.
Gain
on sale of
shares
As
a result of the Arrangement, the
Company recognized a gain on the sale of the shares of Old Lorus to the Investor
of approximately $6.3 million. Under the Arrangement, numerous steps
were undertaken as part of a taxable reorganization. However, these
steps did not result in any taxes payable as the tax benefit of income tax
attributes was applied to eliminate any taxes otherwise payable. Of
the total unrecognized future tax assets available at the time of the
Arrangement, approximately $7.0 million was transferred to New Lorus and the
balance remained with Old Lorus and is subject to the indemnification agreement
as described below. Those tax attributes remaining with Old Lorus are
no longer available to the Company.
Under
the Arrangement, New Lorus and its
subsidiaries have agreed to indemnify Old Lorus and its directors, officers
and
employees from and against all damages, losses, expenses (including fines and
penalties), other third party costs and legal expenses, to which any of them
may
be subject arising out of any matter occurring (i) prior to, at or after the
effective time of the Arrangement (“Effective Time”) and directly or indirectly
relating to any of the assets of Old Lorus transferred to New Lorus pursuant
to
the Arrangement (including losses for income, sales, excise and other taxes
arising in connection with the transfer of any such asset) or conduct of the
business prior to the Effective Time; (ii) prior to, at or after the Effective
Time as a result of any and all interests, rights, liabilities and other matters
relating to the assets transferred by Old Lorus to New Lorus pursuant to the
Arrangement; and (iii) prior to or at the Effective Time and directly or
indirectly relating to, with certain exceptions, any of the activities of Old
Lorus or the Arrangement.
In
reference to those indemnifications,
$600 thousand of the proceeds on the transaction have been held in escrow until
the first anniversary of the transaction (July 2008). The Company has
deferred the entire amount of the proceeds held in escrow as its estimate of
any
liability arising from the indemnifications. The Company will further
assess any adjustments required to this obligation when the escrowed amount
is
released.
As
discussed above, on July 10, 2007,
the Company and Old Lorus completed a plan of arrangement and corporate
reorganization with, among others, 6707157 Canada Inc. and Pinnacle
International Lands, Inc. As part of the Arrangement, all of the assets and
liabilities of Old
Lorus (including all of the shares of its subsidiaries held by it), with the
exception of certain future tax assets were transferred, directly or indirectly,
from Old Lorus to the Company. Securityholders in Old Lorus exchanged
their securities in Old Lorus for equivalent securities in New Lorus and the
board of directors and management of Old Lorus continued as the board of
directors and management of New Lorus. New Lorus obtained
substitutional listings of its common shares on both the Toronto Stock Exchange
and the American Stock Exchange.
As
part
of the Arrangement, the Company changed its name to Lorus Therapeutics Inc.
and
continued as a biopharmaceutical company, specializing in the research and
development of pharmaceutical products and technologies for the management
of
cancer as a continuation of the business of Old Lorus. In October
2007, Old Lorus changed its name from 4325231 Canada Inc. to Global Summit
Real
Estate Inc.
QUARTERLY
FINANCIAL INFORMATION
(UNAUDITED)
The
selected financial information
provided below is derived from the Company’s unaudited quarterly financial
statements for each of the last eight quarters.
To
the current quarter, research and
development expenses continue to trend lower than in the same quarters in the
previous year as a result of the reduction in R&D costs following the close
of our Phase III Virulizin®clinical
trials and the full
amortization of acquired R&D in August 2006. In the current and
most recent quarters, expenses are trending higher primarily as a result of
increased spending on the Company’s small molecule program. The
Company continues to leverage its clinical trial costs utilizing National Cancer
Institute sponsored trials.
General
and administrative expenses have
remained relatively consistent across last six quarters and with the exception
of an increase for the quarter ended November 30, 2006 due to severance charges
relating to the costs of
the mutual separation agreement as described in the Company’s annual
report.The current quarter
expenses are higher than the previous quarters, reflecting the incurrence of
annual corporate governance costs and increased corporate communication costs
over the previous periods.
The
Company recognized a gain on sale of
shares on the close of the Arrangement as discussed above in the quarter ended
August 31, 2007. .
|
(Amounts
in 000’s except for
per common share data)
|
|
Nov
30,
2007
|
|
|
Aug
31,
2007
|
|
|
May
31,
2007
|
|
|
Feb.
28,
2007
|
|
|
Nov.
30,
2006
|
|
|
Aug.
31,
2006
|
|
|
May
31,
2006
|
|
|
Feb.
28,
2006
|
|
|
Revenue
|
|
$ |
1 |
|
|
$ |
26 |
|
|
$ |
40 |
|
|
$ |
37 |
|
|
$ |
23 |
|
|
$ |
7 |
|
|
$ |
14 |
|
|
$ |
5 |
|
|
Research
and
development
|
|
|
1,247 |
|
|
|
782 |
|
|
|
259 |
|
|
|
672 |
|
|
|
1,122 |
|
|
|
1,331 |
|
|
|
1,353 |
|
|
|
2,296 |
|
|
General
and
administrative
|
|
|
1,103 |
|
|
|
736 |
|
|
|
820 |
|
|
|
833 |
|
|
|
1,407 |
|
|
|
788 |
|
|
|
730 |
|
|
|
909 |
|
|
Net
profit
(loss)
|
|
|
(2,825 |
)
|
|
|
3,991 |
|
|
|
(1,689 |
)
|
|
|
(2,062 |
)
|
|
|
(3,117 |
)
|
|
|
(2,770 |
)
|
|
|
(2,970 |
)
|
|
|
(4,095 |
)
|
Basic
and diluted net profit (loss) per
share
|
|
$ |
(0.01 |
)
|
|
$ |
0.02 |
|
|
$ |
(0.01 |
)
|
|
$ |
(0.01 |
)
|
|
$ |
(0.01 |
)
|
|
$ |
(0.01 |
)
|
|
$ |
(0.02 |
)
|
|
$ |
(0.02 |
)
|
|
Cash
used in operating
activities
|
|
$ |
(2,537 |
)
|
|
$ |
(2,348 |
)
|
|
$ |
(89 |
)
|
|
$ |
(1,805 |
)
|
|
$ |
(2,585 |
)
|
|
$ |
(1,814 |
)
|
|
$ |
(1,940 |
)
|
|
$ |
(3,956 |
)
|
LIQUIDITY
AND CAPITAL
RESOURCES
Since
its inception, Lorus has financed
its operations and technology acquisitions primarily from equity and debt
financing, the proceeds from 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 has undertaken an expanded GTI-2040
trial at its own cost and will acquire additional quantities of 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 programs 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 cash equivalents and short term
investments is sufficient to execute our current planned expenditures for the
next twelve months.
At
November 30, 2007, Lorus had cash and cash equivalents and short-term
investments totaling $14.8 million compared to $12.4 million at May 31,
2007. 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,
cash equivalents and short term investments less current liabilities) at
November 30, 2007 was $13.9 million as compared to $6.2 million at May 31,
2007.
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.
Contractual
obligations and Off-Balance
Sheet Financing
At
November 30, 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
|
|
|
43 |
|
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
45 |
|
|
Convertible
Debenture1
|
|
|
- |
|
|
|
15,000 |
|
|
|
- |
|
|
|
- |
|
|
|
15,000 |
|
|
Total
|
|
|
|
|
|
|
15,002 |
|
|
|
-
|
|
|
|
- |
|
|
|
15,045 |
|
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.
As
at November 30, 2007, we have not
entered into any off- balance sheet arrangements.
Until
one of our drug candidates
receives regulatory approval and is successfully commercialized, Lorus will
continue to incur operating losses. The magnitude of these operating
losses will be largely affected by the timing and scope of future research
and
development, clinical trials and other development activities related to the
Company’s lead products, as well as any new initiatives. Finally, the
duration of the operating losses will depend on the scientific results of such
clinical trials.
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.
Please
refer to the MD&A included in our 2007 Annual Report for a complete
discussion of risks and uncertainties.
|
|
•
|
We
have a history of operating losses. We expect to incur net losses
and we
may never achieve or maintain profitability.
|
|
|
•
|
Our
cash flow may not be sufficient to cover interest payments on our
secured
convertible debentures or to repay the debentures at maturity.
|
|
|
•
|
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.
|
|
|
•
|
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.
|
|
|
•
|
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.
|
|
|
•
|
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.
|
|
|
•
|
If
we fail to attract and retain key employees, the development and
commercialization of our products may be adversely affected.
|
|
|
•
|
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.
|
|
|
•
|
Our
products and product candidates may infringe the intellectual property
rights of others, which could increase our costs.
|
|
|
•
|
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.
|
|
|
•
|
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.
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Our
operations involve hazardous materials and we must comply with
environmental laws and regulations, which can he expensive and restrict
how we do business.
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We
have limited sales, marketing and distribution experience.
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Our
interest income is subject to fluctuations of interest rates in our
investment portfolio.
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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.
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Our
share price has been and may continue to be volatile and an investment
in
our common shares could suffer a decline in value.
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Future
sales of our common shares by us or by our existing shareholders
could
cause our share price to fall.
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Conversion
of our secured convertible debentures will dilute the ownership interest
of existing shareholders.
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CRITICAL
ACCOUNTING
POLICIES
Critical
Accounting Policies and Estimates
Our
accounting policies are in
accordance with Canadian GAAP including some that require management to make
assumptions and estimates that could significantly affect the results of
operations and financial position. The significant accounting
policies that we believe are the most critical in fully understanding and
evaluating the reported financial results are disclosed in the MD&A section
of our 2007 annual report. As well, our significant accounting
policies are disclosed in Note 2, Significant
Accounting Policies, of the
notes to the financial statements of Old Lorus (subsequently renamed 4325231
Canada Inc.) provided as Supplemental Financial Information in our annual report
for the fiscal year ended May 31, 2007.
Recently
Adopted Accounting
Recommendations
Effective
on June 1, 2007, the Company
adopted the recommendations of CICA Handbook Section 1530, Comprehensive Income
("Section 1530"); Section 3855, Financial Instruments- Recognition
and Measurement ("Section
3855); Section 3861, Financial Instruments- Disclosure
and Presentation; and Section
3251, Equity. These sections provide standards for recognition,
measurement, disclosure and presentation of financial assets, financial
liabilities and non-financial derivatives. Section 1530 provides standards
for
the reporting and presentation of comprehensive income, which represents the
change in equity, from transactions and other events and circumstances from
non-owner sources. Other comprehensive income refers to items
recognized in comprehensive income that are excluded from net income calculated
in accordance with Canadian GAAP.
Adoption
of the above recommendations
had the following impact on the current financial
statements:
Short-term
investments:
Short-term
investments consist of fixed
income government investments and corporate instruments. Any fixed
income government investments and corporate instruments that are not cash
equivalents are classified as held-to-maturity investments except where the
Company cannot reasonably demonstrate that the investment could be expected
to
be held-to-maturity by virtue of its long term nature in which case the
investment instrument is considered a held-for-trading
investment. Held-to-maturity investments are measured at amortized
cost while held-for-trading investments are measured at fair value and the
resulting gain or loss is recognized in the consolidated statement of loss
and
deficit. As a result of adopting the new standards, the Company
designated certain corporate instruments previously carried at amortized cost
as
held for trading investments. This change in accounting policy
resulted in a reduction of the opening deficit accumulated during the
development stage by $27 thousand and a net gain in the consolidated statement
of loss and deficit for the six month period ended November 30, 2007 of $19
thousand.
Embedded
derivatives:
Section
3855 requires that the Company
identify embedded derivatives that require separation from the related host
contract and measure those embedded derivatives at fair
value. Subsequent change in fair value of embedded derivatives is
recognized in the consolidated statement of operations and deficit in the period
the change occurs.
The
Company did not identify any
embedded derivatives that required separation from the related host contract
as
at June 1, 2007 that resulted in a material adjustment to the consolidated
interim financial statements.
Transaction
costs:
Transactions
costs that are directly
attributable to the acquisition or issuance of financial assets or liabilities
are accounted for as part of the respective asset or liability's carrying value
at inception.
Guarantee:
On
July
10, 2007, as part of the Arrangement, the Company, including its subsidiaries,
indemnified Old Lorus and its directors. This indemnity is required
to be accounted for at fair value in accordance with Section
3855. Management has accrued an amount of $600 thousand being the
amount held in escrow and has recorded this amount as a deferred gain on sale
of
shares within its liabilities. The fair value of the indemnity will
be reassessed as the escrowed amount is released in July 2008.
Recent
Accounting Recommendations not
yet adopted
In
October 2006, the AcSB approved
disclosure and presentation requirements for financial instruments that revise
and enhance the disclosure requirements of Section 3861. These
requirements included Sections 3862- Financial
Instruments- Disclosure,
which replaces Section 3861
and Section 1535, Capital Disclosures ("Section 1535"), which establishes
standards for disclosing information about an entity's capital and how it is
managed.
Section
3862 is based on IFRS 7,
“Financial Instruments: Disclosures”, and places an increased emphasis on
disclosures about the risks associated with both recognized and unrecognized
financial instruments and how these risks are managed. Section 3862
requires disclosures, by class of financial instrument that enables users to
evaluate the significance of financial instruments for an entity's financial
position and performance, including disclosures about fair value. In addition,
disclosure is required of qualitative and quantitative information about
exposure to risks arising from financial instruments, including specified
minimum disclosures about credit risk, liquidity risk and market risk. The
quantitative disclosures must also include a sensitivity analysis for each
type
of market risk to which an entity is exposed, showing how net income and other
comprehensive income would have been affected by reasonably possible changes
in
the relevant risk variable.
Section
3863 “Financial
Instruments- Presentation”,
which replaces Section
3861, “Financial Instruments- Disclosure
and Presentation”. The
existing requirements on presentation of financial instruments have been carried
forward unchanged to Section 3863, “Financial Instruments- 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
Section
1535 requires disclosure of an
entity's objectives, policies and processes for managing capital, quantitative
data about what the entity regards as capital and whether the entity has
complied with any capital requirements and, if it has not complied, the
consequences of such non-compliance. This standard is effective for
us for interim and annual financial statements relating to fiscal years
beginning on December 1, 2007. Early adoption is permitted at the same time
an
entity adopts other standards relating to accounting for financial
instruments.
We
do not expect the adoption of these
standards to have a material impact on our consolidated financial position
and
results of operations.
UPDATED
SHARE
INFORMATION
As
at January 8, 2008, the Company had
215,262,229 common shares issued and outstanding. In addition, the
Company had issued and outstanding 13,922,254 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.
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:
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our
expectations regarding
future financings;
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our
plans to conduct clinical
trials;
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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;
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our
plans to obtain partners
to assist in the further development of our product candidates;
and
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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,
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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:
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our
ability to obtain the
substantial capital required to fund research and
operations;
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our
lack of product revenues
and history of operating
losses;
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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;
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our
drug candidates require
time-consuming and costly preclinical and clinical testing and regulatory
approvals before
commercialization;
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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;
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the
regulatory approval
process;
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the
progress of our clinical
trials;
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our
ability to find and enter
into agreements with potential
partners;
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our
ability to attract and
retain key personnel;
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our
ability to obtain patent
protection and protect our intellectual property
rights;
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our
ability to protect our
intellectual property rights and to not infringe on the intellectual
property rights of others;
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our
ability to comply with
applicable governmental regulations and
standards;
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development
or
commercialization of similar products by our competitors, many of
which
are more established and have greater financial resources than we
do;
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commercialization
limitations
imposed by intellectual property rights owned or controlled by third
parties;
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our
business is subject to
potential product liability and other
claims;
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our
ability to maintain
adequate insurance at acceptable
costs;
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further
equity financing may
substantially dilute the interests of our
shareholders;
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changing
market conditions;
and
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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”.
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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 Global Summit
Real Estate Inc. (Old Lorus).