Exhibit
99.2
MANAGEMENT’S DISCUSSION AND
ANALYSIS
October 10, 2008
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
plans to obtain partners to assist in the further development of our
product candidates;
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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,
and
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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, pre-clinical and
clinical studies and the regulatory approval
process;
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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 repay or refinance our convertible debentures at
maturity;
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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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the
progress of our clinical
trials;
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our
ability to maintain compliance with the operational covenants of the
convertible debenture agreement that could result in an event of default
and the requirement for early
repayment;
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our
liability associated with the indemnification of Old Lorus and its
directors, officers and
employees
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our
ability to find and enter into agreements with potential
partners;
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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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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 management, discussion and analysis 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.
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. The remaining costs associated with the completion of the
LOR-2040 Phase I/II clinical trial program with the US National Cancer Institute
(“NCI”) will be borne by the US NCI. Lorus has undertaken an expanded
LOR-2040 trial at its own cost and acquired additional quantities of LOR-2040
drug to support this ongoing trial and any further development of
LOR-2040. We will continue the development of our
small molecule programs from internal resources.
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 significant
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. We
believe that it is unlikely the the holder will chose to convert at $1/share as
in the present agreement. 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 will not be able to continue as a going concern and realize our assets and
pay our liabilities as they fall due.
Management believes
that our current level of cash and cash equivalents and short term investments
will be sufficient to execute our current planned expenditures for the next
twelve months; however, our $15 million convertible debt obligation is due in
October 2009 and we currently do not have the cash and cash equivalents to
satisfy this obligation. Given the current market capitalization of the
Company it is unlikely that the Company will be able to raise additional funds
to repay this liability in which case, the Company may not be able to continue
as a going concern and realize its assets and pay its liabilities as they fall
due. If the Company cannot repay or refinance the debentures at or
prior to maturity, the lender may, at its discretion, among other things:
commence legal action; take possession of our assets; carry on our business;
appoint a receiver; and take any other action permitted by law to obtain
payment.
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 these
financial statements, then adjustments would be necessary in the carrying value
of the assets and liabilities, the reported revenues and expenses and the
balance sheet classifications used.
The following discussion should be read
in conjunction with the audited financial statements for the year ended May 31,
2008 and the accompanying notes (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. In
this MD&A, "Lorus", “New Lorus”, the "Company', "we", "us" and "our" each
refers to Lorus Therapeutics Inc.
OVERVIEW
Lorus 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 pre-clinical to an advanced Phase II clinical trial. A
growing intellectual property portfolio supports our diverse product
pipeline. Lorus’ pipeline is a combination of internally developed
products and products licensed in from other entities at a pre-clinical
stage.
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 business model is to take our
product candidates through pre-clinical testing and into Phase I and Phase II
clinical trials. It is our intention to then partner or co-develop
these product candidates after successful completion of Phase I or II clinical
trials. Lorus will give careful consideration in the selection of
partners that can best advance the drug candidates into a pivotal Phase III
clinical trial and, upon successful results, commercialization. Our
objective is to receive cash for milestone payments and royalties from such
partnerships which will support continued development of our product
pipeline. We assess each product candidate and determine the optimal
time to work towards partnering out that product candidate.
Our success is dependent upon several
factors, including, our ability to repay or refinance our $15 million
convertible debentures, maintaining sufficient levels of funding through public
and/or private financing, establishing the efficacy and safety of our products
in clinical trials and securing strategic partnerships.
Our loss from
operations for the three months ended August 31, 2008 increased to $2.7 million
($0.01 per share) compared to $2.1 million ($0.01 per share) during the same
period in fiscal 2008. During the quarter ended August 31, 2008 the Company
recorded a gain on sale of shares related to the Arrangement of $450 thousand
which resulted in a net loss and other comprehensive loss of $2.2 million ($0.01
per share). On close of the Arrangement (as described below) during
the period ended August 31, 2007, the Company realized a gain on the sale of the
shares of Old Lorus in the amount of $6.1 million resulting in net earnings and
other comprehensive income for the period of $4.0 million ($0.02 earnings per
share). The increase in loss from operations in the current three-month period
as compared to the previous year is primarily a result of higher research and
development costs of $396 thousand resulting from higher levels of activity
within our LOR-2040 and LOR-253 programs in fiscal 2009 compared with fiscal
2008 and higher general and administrative expenses of $105 thousand due to
higher personnel and consulting costs incurred within our business development
department as well as foreign exchange losses on our outstanding accounts
payable balances.
We utilized cash of
$1.8 million in our operating activities in three-month period ended August 31,
2008 compared with $2.3 million during the same period in fiscal
2008. The decrease is primarily a result of a reduction in accounts payable and
increase in prepaid and other assets in 2007 offset by an increased net
loss for the quarter ended August 31, 2008. At August 31, 2008, we
had cash and cash equivalents and short term investments of $11.3 million
compared to $9.4 million at May 31, 2008.
Revenues for the three-month period
ended August 31,
2008 decreased to $3
thousand compared with revenue of $26 thousand for 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 August 31, 2008 compared to $782 thousand during the
same period last year, primarily
resulting from $396 thousand of
increased activity within our GTI-2040 and Small Molecule
programs. These additional costs included completion of the
GLP-toxicology studies for both LOR-253 (our lead small molecule drug candidate)
and GTI-2040 in bladder cancer, drug validation in preparation for LOR-253
manufacturing and GTI-2040 drug filing costs.
General and
Administrative
General and
administrative expenses totaled $841 thousand in the three-month period ended
August 31, 2008 compared to $736 thousand in same period last year. The slight
increase in general and administrative costs is the result of higher personnel
and consulting costs incurred within our business development department as well
as foreign exchange losses on our outstanding accounts payable
balances.
Stock-Based
Compensation
Stock-based
compensation expense totaled $91 thousand in the three-month period ended August 31, 2008, compared with
$103 thousand in the same period last year. The expense is lower than
the prior year as stock options were granted at a later date than in prior years
which resulted in less amortization in the quarter ended August 31, 2008 as well
as lower exercise prices and associated fair value offset by a higher number of
options issued.
Depreciation and
Amortization
Depreciation and amortization expenses
decreased to $43 thousand in the three-month period ended August 31, 2008 as
compared to $79 thousand in the same period last year. The decrease in depreciation and
amortization expense is the result of reduced capital asset purchases during the
past three fiscal years.
Interest Expense
Non-cash interest expense was $217
thousand in the three-month period ended August 31, 2008 compared with $270
thousand in the same period last year. These amounts represent
interest at a rate of prime plus 1% on the $15.0 million convertible
debentures. The interest expense for the quarter ended August 31,
2008 has decreased due to a reduction in the prime rate of interest in
comparison with the same period last year. 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
debentures amounted to $377 thousand for the three-month period ended August 31,
2008 compared with $298 thousand in the same period last year. These
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 for the quarter ended August 31, 2008 compared with the
prior year is due to a higher effective rate of interest and a larger principal
balance.
Interest Income
Interest income totaled $82 thousand in
the three-month period ended August 31, 2008 compared to $140 thousand in the
same period last year. The decrease in interest income in the current
three-month period is due to lower average cash and marketable securities
balance and lower interest rates available on investments in comparison with the
same period in the prior year.
Loss from operations for the
period
Our loss from
operations for the three months ended August 31, 2008 increased to $2.7 million
($0.01 per share) compared to $2.1 million ($0.01 per share) during the same
period in fiscal 2008. During the quarter ended August 31, 2008 the Company
recorded a gain on sale of shares related to the Arrangement of $450 thousand
which resulted in a net loss and other comprehensive loss of $2.2 million ($0.01
per share). On close of the Arrangement during the period ended
August 31, 2007, the Company realized a gain on the sale of the shares of Old
Lorus in the amount of $6.1 million resulting in net earnings and other
comprehensive income for the period of $4.0 million ($0.02 earnings per share).
The increase in loss from operations in the current three-month period as
compared to the previous year is primarily a result of higher research and
development costs of $396 thousand, higher general and administrative expenses
of $105 thousand and lower interest income of $58 thousand as discussed
above.
Gain on sale of
shares
As a result of the Arrangement described
below, the Company recognized a gain on the sale of the shares of Old Lorus to
the Investor of approximately $6.1 million for the three month period ended
August 31, 2007. For the period ended August 31, 2008 the Company has
recognized a gain on sale of $450 thousand which represents the $600 thousand
released from escrow less the $150 thousand liability associated with the
guarantee described below.
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 were
held in escrow until the first anniversary of the transaction and was released
to Lorus in July 2008. Lorus has recorded a liability of $150
thousand, which it believes is a reasonable estimate of the fair value of the
obligation for the indemnifications provided. There have been no
claims under this indemnification to date. This amount is included on
the balance sheet under Accrued Liabilities as at August 31, 2008.
PLAN OF ARRANGEMENT AND CORPORATION
REORGANIZATION
On July 10, 2007 (the “Arrangement
Date”), Lorus Therapeutics Inc. (the “Company”, “Lorus” 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 consolidated
financial statements are those of Old Lorus prior to the Arrangement Date and
the Company after the Arrangement Date. References in this
Management’s Discussion and Analysis (“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.
REGULATORY MATTER
Subsequent to the quarter end Lorus
submitted written notice to the NYSE Alternext US LLC (“NYX”) of its intention to voluntarily delist
its common stock from the NYX. On or about October 20, 2008, Lorus
intends to file a Form 25 with the Securities Exchange Commission to complete
the voluntary delisting of its common stock from the NYX, which will become
effective 10 days after the filing date.
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.
Research and development expenditures
have increased over the past four quarters in comparison with the comparitive
quarters in the prior year. This is due to increased activity related
to the LOR-2040 and LOR-253 programs for which development has
accelerated. In particular research and development costs were
significantly higher during the quarter ended February 29, 2008 due to the
manufacturing costs associated with producing additional quantities of LOR-2040
to support the ongoing Phase II clinical trial in AML. Q3 and Q4 of
2007 and Q1 of 2008 had particularly low research and development expenditures
as the Company was in between wrapping up the Virulizin®
Phase III clinical trial
and escalating development within the LOR-2040 and LOR-253
programs.
General and administrative expenses have
remained relatively consistent across last eight quarters with the exception of
the following quarters:
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three months
ended November 30, 2006 due to severance
charges,
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three months
ended November 30, 2007 reflecting corporate governance costs and
increased corporate communication costs over the previous periods,
and
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the quarter
ended May 31, 2008 resulting from increased legal, professional and
internal control compliance fees.
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The Company recognized a gain on sale of
shares of $6.1 million on the close of the Arrangement as discussed above in the
quarter ended August 31, 2007. For the quarter ended August 31,
2008 the Company recognized a gain on sale of shares of $450 thousand related to
the release of funds from escrow net of the value of the guarantee as discussed
above.
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(Amounts in 000’s except for per
common share data)
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Aug. 31,
2008
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May 31,
2008
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Feb. 29,
2008
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Nov. 30,
2007
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Aug. 31,
2007
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May 31,
2007
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Feb. 28,
2007
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Nov. 30,
2006
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Revenue
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$ |
3 |
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$ |
13 |
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$ |
3 |
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$ |
1 |
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$ |
26 |
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$ |
40 |
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$ |
37 |
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$ |
23 |
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Research and
development
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1,178 |
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1,836 |
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2,222 |
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1,247 |
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782 |
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259 |
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672 |
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1,122 |
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General and
administrative
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841 |
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1,186 |
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863 |
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1,103 |
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736 |
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820 |
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833 |
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1,407 |
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Net loss
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(2,212 |
) |
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(3,650 |
) |
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(3,850 |
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(2,825 |
) |
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3,991 |
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(1,689 |
) |
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(2,062 |
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(3,117 |
) |
Basic
and diluted
net (loss) profit per
share
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$ |
(0.01 |
) |
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$ |
(0.02 |
) |
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$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
0.02 |
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|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
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Cash used in operating
activities
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|
$ |
(1,800 |
) |
|
$ |
(2,722 |
) |
|
$ |
(2,586 |
) |
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|
(2,537 |
) |
|
$ |
(2,348 |
) |
|
$ |
(89 |
) |
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$ |
(1,805 |
) |
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(2,585 |
) |
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The Company’s objectives when
managing capital are to:
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Maintain its
ability to continue as a going concern in order to provide returns to
shareholders and benefits to other
stakeholders;
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Maintain a
flexible capital structure which optimizes the cost of capital at
acceptable risk;
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Ensure
sufficient cash resources to fund its research and development activity,
to pursue partnership and collaboration opportunities and to maintain ongoing
operations.
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The capital
structure of the Company consists of secured convertible debt and equity
comprised of share capital, warrants, the equity portion of our secured
convertible debentures, stock options, contributed surplus and deficit. The
Company manages its capital structure and makes adjustments to it in light of
economic conditions. The Company, upon approval from its Board of Directors,
will balance its overall capital structure through new share issuances, acquiring or disposing of assets,
adjusting the amount of cash and short-term investments balances or by
undertaking other activities as deemed appropriate under the specific
circumstances. The Company expects
that its current capital resources will be sufficient to carry its research and
development plans and operations for the next twelve months.
The Company is not subject to externally
imposed capital requirements and the Company’s overall strategy with respect to
capital risk management remains unchanged from the year ended May 31,
2008.
On June 25, 2008,
the Company filed a short-form prospectus for a rights offering to its
shareholders.
Under the rights offering, holders of
the Company's common shares as of July 9, 2008 (the "Record Date") received
one right for each common share held as of the Record Date. Each four
rights entitled the holder thereof to purchase a unit of Lorus
("Unit"). Each Unit consists of one common share of Lorus at $0.13
and a one-half common share purchase warrant to purchase additional common
shares of Lorus at $0.18 per common share until August 7,
2010. Rights expired on August 7, 2008.
The Company issued 28,538,889 common
shares and 14,269,444 common share purchase warrants in exchange for cash
consideration of $3.71 million. The total costs associated with the
transaction were $500 thousand. The Company has allocated the net
proceeds of $3.2 million received from the issuance of the units to the
common shares and the common share purchase warrants based on their relative
fair values. The fair value of the common share purchase warrants has
been determined based on an option pricing model. The allocation
based on relative fair values resulted in the allocation of approximately $2.8
million to the common shares and approximately $417 thousand to the common share
purchase warrants.
At August 31, 2008, Lorus had cash
and cash equivalents and short-term investments totaling $11.3 million compared
to $9.4 million at May 31, 2008. 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, short term investments and other
current assets less current liabilities) at August 31, 2008 was $9.8 million
as compared to $8.0 million at May 31, 2008. However, our $15 million
convertible debentures become a current liability on October 6, 2008 which will
result in negative working capital as of that date.
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
August 31, 2008, we had
contractual obligations requiring annual payments as follows:
(Amounts
in 000’s)
|
|
|
Less
than 1 year
|
|
|
1-3
years
|
|
|
Total
|
|
|
Operating
leases
|
|
|
145 |
|
|
|
250 |
|
|
|
395 |
|
|
Convertible Debenture1
|
|
|
- |
|
|
|
15,000 |
|
|
|
15,000 |
|
|
Total
|
|
|
145 |
|
|
|
15,250 |
|
|
|
15,395 |
|
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. The convertible debentures will
fall into the “less than 1 year” category effective October 6,
2008.
In addition, the
Company is party to certain licensing agreements that require the Company to pay
a proportion of any fees that the Company may receive from future revenues or
milestone payments. As of August 31, 2008 no amounts are owing and the amount of
future fees is not determinable.
As at August 31, 2008, we have not entered into any off-
balance sheet arrangements.
Under the
Arrangement, Lorus 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.
|
Lorus has recorded
a liability of $150 thousand, which we believe is a reasonable estimate of the
fair value of the obligation for the indemnifications provided. There
have been no claims under this indemnification to date. This amount
is included on the balance sheet under Accrued Liabilities.
The Company has classified its financial
instruments as follows:
|
|
|
|
| Financial assets |
|
|
Cash
and cash equivalents, consisting of term deposits, and guaranteed
investment certificates, held for trading, measured at fair
value
|
|
|
Short-term
investments, held-to-maturity, recorded at amortized
cost
|
|
|
Short-term
investments, held-for-trading, recorded at fair
value
|
|
|
Amount
held in escrow, measured at amortized cost
|
|
|
|
Financial
liabilities
|
|
|
|
Accounts
payable, measured at amortized cost
|
|
|
Accrued
liabilities, measured at amortized cost
|
|
|
Secured
convertible debentures, measured at amortized
cost
|
|
|
Financial risk
management
The Company has exposure to credit risk,
liquidity risk and market risk. The Company’s Board of Directors has the overall
responsibility for the oversight of these risks and reviews the Company’s
policies on an ongoing basis to ensure that these risks are appropriately
managed.
Credit risk
Credit risk is the risk of financial
loss to the Company if a customer, partner or counterparty to a financial
instrument fails to meet its contractual obligations, and arises principally
from the Company’s cash and cash equivalents and short-term investments. The
carrying amount of the financial assets represents the
maximum credit
exposure.
The Company manages credit risk for its
cash and cash equivalents and short-term investments by maintaining minimum
standards of R1 low or A low investments and Lorus invests only in highly rated
Canada and U.S. corporations with debt securities that are traded on active
markets and are capable of prompt liquidation.
Liquidity risk
Liquidity risk is the risk that the
Company will not be able to meet its financial obligations as they come due. To
the extent that the Company does not believe it has sufficient liquidity to meet
its current obligations, the Board considers securing additional funds through
equity, debt or partnering transactions. The Company manages its liquidity risk
by continuously monitoring forecasts and actual cash flows.
Market risk
Market risk is the risk that changes in
market prices, such as interest rates, foreign exchange rates, and equity prices
will affect the Company’s income or the value of its financial
instruments.
The Company is subject to interest rate
risk on its cash and cash equivalents and short-term investments and secured
convertible debentures. The Company does not believe that the results
of operations or cash flows would be affected to any significant degree by a
sudden change in market interest rates relative to interest rates on the
investments, owing to the relative short-term nature of the
investments. The secured convertible debentures accrue interest at a
rate of prime + 1%. A change of 100 basis points in the prime
interest rate would have increased (decreased) equity and net income by
approximately $38 thousand ($38 thousand) for the quarter ended August 31,
2008. This analysis assumes all other variables remain
constant.
Financial instruments potentially
exposing the Company to foreign exchange risk consist principally of accounts
payable and accrued liabilities. The Company holds minimal amounts of
U.S. denominated cash, purchasing on an as needed basis to cover U.S.
denominated payments. At August 31, 2008 U.S. denominated accounts
payable and accrued liabilities amounted to $460 thousand. Assuming
all other variables remain constant, a 10% depreciation or appreciation of the
Canadian dollar against the U.S. dollar would result in an increase or
(decrease) in net loss and comprehensive loss of $46 thousand ($46
thousand). The Company does not have any forward exchange contracts
to hedge this risk.
The Company does not invest in equity
instruments of other corporations other than a 25% interest held in Zor
Pharmaceuticals that holds the license of Virulizin. The Company paid
a nominal fee for this equity interest and is not exposed to any losses in
excess of this nominal amount. However, changes in the Company’s
equity price could impact its ability to raise additional
capital.
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.
TRANSACTIONS WITH RELATED
PARTIES
During the quarter ended August 31,
2008, we expensed consulting fees of $3,000 to a director of Lorus
(2008 - nil) of which $3,000 remained payable at
August 31, 2008 (2007 -
nil).
This transaction was in the normal
course of business and has been measured at the exchange amount, which is the
amount of consideration established and agreed by the related
parties.
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 2008 Annual Report for a complete
discussion of risks and uncertainties.
|
|
•
|
The cash and
cash equivalents on hand are not sufficient to repay the debentures at
maturity. If we cannot repay or refinance the debentures at or
prior to maturity, the lender may, at its discretion: commence legal
action; take possession of our assets; carry on our business; appoint a
receiver; and take any other action permitted by law to obtain
payment.
|
|
|
•
|
We have a
history of operating losses. We expect to incur net losses and we may
never achieve or maintain
profitability.
|
|
|
•
|
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.
|
|
|
•
|
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.
|
|
|
•
|
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.
|
|
|
•
|
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.
|
|
|
•
|
Our share
price has been and may continue to be volatile and an investment in our
common shares could suffer a decline in
value.
|
|
|
•
|
Future sales
of our common shares by us or by our existing shareholders could cause our
share price to fall.
|
|
|
•
|
Conversion of
our secured convertible debentures will dilute the ownership interest of
existing shareholders.
|
|
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 2008 annual report. As well, our significant accounting
policies are disclosed in Note 3, Significant
Accounting Policies, of the
notes to the financial statements of Lorus provided in our annual report for the
fiscal year ended May 31, 2008.
|
Recently Adopted Accounting
Recommendations
|
Effective June 1, 2008, the Company
adopted the following accounting policies:
Accounting changes:
Effective June 1, 2008, the Company
adopted the Accounting Standards Board’s (“AcSB”) replacement of Section 1506,
Accounting Changes. The new standard allows for voluntary changes in accounting
policy only when they result in the financial statements providing reliable and
more relevant information; requires changes in accounting policy to be applied
retrospectively unless doing so is impracticable; requires prior period errors
to be corrected retrospectively; and calls for enhanced disclosures about the
effects of changes in accounting policies, estimates and errors on the financial
statements. The adoption of this standard did not have any impact on the
Company’s financial statements during the three-month period ended August 31,
2008.
Capital disclosures:
Effective June 1, 2008, the Company
adopted the new recommendations of the Canadian Institute of Chartered
Accountants (“CICA”) Handbook Section 1535, Capital Disclosures (“Section
1535”). Section 1535 establishes standards for disclosing information about an
entity’s capital and how it is managed. It requires the disclosure of
information about: (i) an entity’s objectives, policies and processes for
managing capital; complied with any capital requirements; and if it has not
complied, the consequences of such non-compliance. The Company has included
disclosures recommended by Section 1535 in note 3 of the financial
statements.
Financial
instruments:
Effective June 1, 2008, the Company
adopted the new recommendations of CICA Handbook Section 3862, Financial
Instruments - Disclosures (“Section 3862”) and
Handbook Section 3863, Financial Instruments - Presentation (“Section 3863”). Section
3862 requires entities to provide disclosures in their financial statements that
enable users to evaluate the significance of financial instruments on the
entity’s financial position and its performance and the nature and extent of
risks arising from financial instruments to which the entity is exposed during
the period and at the balance sheet date, and how the entity manages those
risks. Section 3863 establishes standards for presentation of financial
instruments and nonfinancial derivatives. It deals with the classification of
financial instruments, from the perspective of the issuer, between liabilities
and equities, the classification of related interest, dividends, losses and
gains, and circumstances in which financial assets and financial liabilities are
offset. The adoption of these standards did not have any impact on the
classification and valuation of the Company’s financial instruments. The Company
has included disclosures recommended by these new Handbook Sections in note 4 of
the financial statements
General standards of financial statement
presentation:
In May 2007, the AcSB amended CICA
Handbook Section 1400 “General Standards of Financial Statement Presentation”,
to change the guidance related to management’s responsibility to assess the
ability of the entity to continue as a going concern.
The main features of the changes are as
follows:
|
(i)
|
management is required to make an
assessment of an entity’s ability to continue as a going
concern;
|
|
(ii)
|
in making its assessment,
management takes into account all available information about the future,
which is at least, but is not limited to, twelve months from the balance
sheet date;
|
|
(iii)
|
financial statements must be
prepared on a going concern basis unless management either intends to
liquidate the entity, to cease trading or cease operations, or has no
realistic alternative but to do so;
|
|
(iv)
|
disclosure is required of material
uncertainties related to events or conditions that may cast significant
doubt upon the entity’s ability to continue as a going concern;
and
|
|
(v) |
when financial statements are not
prepared on a going concern basis, that fact should be disclosed, together
with the basis on which the financial statements are prepared and the
reason the entity is not regarded as a going
concern.
|
The effective date of these amendments
is for interim and annual financial statements relating to fiscal years
beginning on or after January 1, 2008, specifically June 1, 2008 for the
Company. The new disclosure requirements pertaining to this Section are
contained in note 1 of the financial statements.
|
Recent Accounting Recommendations
not yet adopted
|
The CICA plans to converge Canadian GAAP
with International Financial Reporting Standards (IFRS) over a transition period
expected to end in 2011. The impact of the transition to IFRS on
the Company’s financial statements has not been determined.
Section 3064,
“Goodwill and intangible assets”, will be replacing Section 3062, “Goodwill and
other intangible assets” and Section 3450,
“Research and development costs”. This new section, issued in February 2008,
will be applicable to financial statements relating to fiscal years beginning on
or after October 1, 2008. Accordingly, the Company will adopt the new standards
for its fiscal year beginning June 1, 2009. It establishes standards for the
recognition, measurement, presentation and disclosure of goodwill subsequent to
its initial recognition and of intangible assets by profit-oriented enterprises.
Standards concerning goodwill are unchanged from the standards included in the
previous Section 3062. The impact
of adoption of this new section on the Company’s financial statements has not
been determined.
DISCLOSURE CONTROLS AND
PROCEDURES
During the three-month period ended
August 31, 2008, the Company has not made any significant changes in its
internal controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company’s internal controls over
financial reporting.
UPDATED SHARE
INFORMATION
As at October 10, 2008, the Company had
249,077,800 common shares issued and outstanding
and 14,269,444 common share purchase warrants convertible into an equal number
of common shares. In addition, the Company had issued and outstanding 20,309,000
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.
ADDITIONAL
INFORMATION
Additional information relating to
Lorus, including Lorus' 2008 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).