MANAGEMENT’S DISCUSSION AND
ANALYSIS
January 14, 2009
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 on October 6,
2009 should the holder not choose to convert the debentures into common
shares. We
believe that it is unlikely 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 which raises significant doubt related to the Company’s
ability 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 take any action
permitted by law to realize on its security.
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 and six months ended November 30, 2008 decreased
to $2.3 million ($0.01 per share) and $4.9 million ($0.02 per share),
respectively, compared to $3.0 million ($0.01 per share) and $5.1 million ($0.02
per share) during the same periods in fiscal 2008. During the six months ended
November 30, 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 $4.5 million ($0.02 per share). During the six
month period ended November 30, 2007, the Company realized a gain on the sale of
the shares related to the Arrangement in the amount of $6.3 million resulting in
net earnings and other comprehensive income for the period of $1.2 million
($0.01 earnings per share).
The
decrease in loss from operations for the three months ended November 30, 2008
compared with the same period last year is due primarily to reduced research and
development spending of $553 thousand, resulting from the completion of toxicity
studies ongoing in the quarter ended November 30, 2007 and reduced general and
administrative expenditures of $183 thousand due to lower legal and annual
general meeting costs.
The
decrease in net loss from operations for the six months ended November 30, 2008
compared with the same period last year is primarily the result of lower
research and development costs of $157 thousand due to less spending on the
small molecule program due to timing.
We
utilized cash of $2.1 million in our operating activities in three-month period
ended November 30, 2008 compared with $2.5 million during the same period in
fiscal 2008. The decrease is primarily a result of a reduced net
loss. We utilized cash of $3.9 million for the six months ended
November 30, 2008 compared with $4.9 million in the same period last
year. The reduced cash use is the result of a lower net loss as well
as a reduction in accounts payable
and increase in prepaid and other assets in for the six months ended
November 30, 2007.
At
November 30, 2008, we had cash and cash equivalents and short-term investments
of $9.2 million compared to $9.4 million at May 31, 2008.
Revenues for the three-month period
ended November 30, 2008 increased to $39 thousand compared with revenue of $1
thousand for the same period last year. For the six-month period
ended November 30, 2008, total revenue increased to $42 thousand from $27
thousand in the same period last year. This increase in revenue is
related to an increase in milestone revenues associated with the license of
Virulizin to ZOR Pharmaceuticals. During the quarter ended November
30, 2008 Lorus received a $178 thousand (US$150 thousand) milestone payment from
ZOR related to their achievement of a financing milestone, this milestone is
being recognized over the remaining 12 months of a service contract whereby
Lorus agreed to provide consulting services to ZOR
Pharmaceuticals. During the quarter Lorus recognized $30,000
(US$25,000) in revenue related to this payment and the remaining $148 thousand
(US$125 thousand) has been recorded as deferred revenue in the Accrued
Liabilities line of the balance sheet.
Research and development expenses
totaled $694 thousand in the three-month period ended November 30, 2008 compared
to $1.2 million during the same period last year and decreased to $1.9 million
from $2.0 million in the six month period ended November 30, 2008 as compared to
the same period in fiscal 2008.
The decrease during the three months
ended November 30, 2008 compared with the prior year is due primarily to
GLP-toxicity studies for our small molecule program that were initiated in the
second quarter 2008 and are now completed as well as a reduced headcount due to
voluntary resignations throughout the research and development
departments.
Research and development costs for the
six-month period ending November 30, 2008 decreased due to reduced spending on
the small molecule program as we prepare to move it into the clinic as well as
reduced headcount.
General and
Administrative
General
and administrative expenses totaled $920 thousand in the three-month period
ended November 30, 2008 compared to $1.1 million in same period last
year. For the six month period ended November 30, 2008, general and
administrative expense was $1.8 million compared with $1.8 million in the same
period last year.
The
decrease in general and administrative costs for the three month period ended
November 30, 2008 is the result of reduced legal costs, annual report
publication and annual meeting costs in comparison with the prior
year. For the six-month period ended November 30, 2008 general and
administrative costs remained consistent with the prior year as cost savings
were offset by foreign exchange losses.
Stock-Based
Compensation
Stock-based
compensation expense totaled $145 thousand in the three-month period ended
November 30, 2008 compared with $209 thousand in the same period last year and
$236 in the six-month period ended November 30, 2008 compared with $312 thousand
for the same period last year.
The
decrease in stock based compensation for the three and six month periods ending
November 30, 2008 is due primarily to an increase in expense of $83 thousand in
the second quarter ended November 30, 2007 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 $43 thousand in the three-month period and $86 thousand in the
six-month period ended November 30, 2008 as compared to $80 thousand and $159
thousand in the same periods, respectively, last year. The decrease in depreciation and
amortization expense is the result of reduced capital asset purchases over the
past three fiscal years.
Interest Expense
Non-cash interest expense was $201
thousand in the three-month period ended November 30, 2008 compared with $271
thousand in the same period last year. For the six-month period ended
November 30, 2008 interest expense was $418 thousand compared with $541 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 decrease in interest expense in fiscal 2009 compared
with fiscal 2008 is a function of significantly lower prime rates in comparison
with the prior 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
Company’s secured convertible debentures amounted to $391 thousand in the
three-month period ended November 30, 2008 compared with $307 thousand in the
same period last year. For the six month period ended November 30,
2008, accretion charges were $768 thousand compared to $605 thousand in the same
period in fiscal 2008. The accretion charges arise as under GAAP the
Company has allocated the proceeds from each tranche of the debentures to the
debt and equity instruments issued on a relative fair value basis resulting in
the $15.0 million debentures having an initial cumulative carrying value of $9.8
million as of their dates of issuance. Each reporting period, the Company is
required to accrete the carrying value of the convertible debentures such that
at maturity on October 6, 2009, the carrying value of the debentures will be the
face value of $15.0 million. The increase in expense for the three
and six month periods ending November 30, 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 $71 thousand in
the three-month period ended November 30, 2008 compared to $175 thousand in the
same period last year. For the six-month period ended November 30,
2008 interest income totaled $153 thousand compared with $315 thousand in the
same period last year. The decrease in interest income during both
the three and six month periods ended November 30, 2008 is due to a lower
average cash and marketable securities balance and significantly 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 and six months ended November 30, 2008 decreased
to $2.3 million ($0.01 per share) and $4.9 million ($0.02 per share),
respectively, compared to $3.0 million ($0.01 per share) and $5.1 million ($0.02
per share) during the same periods in fiscal 2008. During the six months ended
November 30, 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 $4.5 million ($0.02 per share). During the six
month period ended November 30, 2007, the Company realized a gain related to the
Arrangement in the amount of $6.3 million resulting in net earnings and other
comprehensive income for the period of $1.2 million ($0.01 earnings per
share).
The
decrease in loss from operations for the three months ended November 30, 2008
compared with the same period last year is due primarily to reduced research and
development spending of $553 thousand, resulting from the completion of toxicity
studies ongoing in Q2 2007 and reduced general and administrative expenditures
of $183 thousand due to lower legal and annual general meeting
costs.
The
decrease in net loss from operations for the six months ended November 30, 2008
compared with the same period last year is due primarily to lower research and
development costs of $157 thousand resulting from less spending on the small
molecule program due to timing.
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 $6.3 million for the six-month period ended
November 30, 2007. For the period six month period ended November 30,
2008 the Company recognized a gain on sale of $450 thousand which represents the
$600 thousand released from escrow less the $150 thousand liability associated
with the indemnification described below. During the three months
ended November 30, 2008 no amounts were recognized on the gain on sale of the
shares. In the same period last year $216 thousand was recorded as a
gain on sale of the shares reflecting an adjustment to the transaction
costs.
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 were 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 November 30,
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
On October 31, 2008 Lorus voluntarily
delisted its common shares from trading on the NYSE Alternext US LLC
(formerly the American Stock Exchange or AMEX).
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
increased over the four quarters ended August 31, 2008 in comparison with the
comparative 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. Research and
development expenditures decreased during the quarter ended November 30, 2008
compared with the prior period due to reduced spending on the small molecule
toxicity studies which are now completed.
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,
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 $450 thousand related to
the release of funds from escrow net of the value of the guarantee as discussed
above.
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(Amounts in 000’s except for per
common share
data)
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Nov. 30,
2008
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Aug. 31,
2008
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May 31,
2008
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Feb. 29,
2008
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Nov. 30,
2007
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Aug. 31,
2007
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May 31,
2007
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Feb. 28,
2007
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Revenue
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$ |
39 |
|
|
$ |
3 |
|
|
$ |
13 |
|
|
$ |
3 |
|
|
$ |
1 |
|
|
$ |
26 |
|
|
$ |
40 |
|
|
$ |
37 |
|
|
Research and
development
|
|
|
694 |
|
|
|
1,178 |
|
|
|
1,836 |
|
|
|
2,222 |
|
|
|
1,247 |
|
|
|
782 |
|
|
|
259 |
|
|
|
672 |
|
|
General and
administrative
|
|
|
920 |
|
|
|
841 |
|
|
|
1,186 |
|
|
|
863 |
|
|
|
1,103 |
|
|
|
736 |
|
|
|
820 |
|
|
|
833 |
|
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Net loss
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|
|
(2,284 |
) |
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|
(2,212 |
) |
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|
(3,650 |
) |
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|
(3,850 |
) |
|
|
(2,825 |
) |
|
|
3,991 |
|
|
|
(1,689 |
) |
|
|
(2,062 |
) |
Basic and diluted net
(loss) profit per share
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|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
0.02 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
Cash used in operating
activities
|
|
$ |
(2,080 |
) |
|
$ |
(1,800 |
) |
|
$ |
(2,722 |
) |
|
$ |
(2,586 |
) |
|
|
(2,537 |
) |
|
$ |
(2,348 |
) |
|
$ |
(89 |
) |
|
$ |
(1,805 |
) |
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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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•
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Maintain
a flexible capital structure which optimizes the cost of capital at
acceptable risk;
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•
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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 November 30, 2008, Lorus had cash
and cash equivalents and short-term investments totaling $9.2 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 November 30, 2008 was ($5.3
million) as compared to $8.0 million at May 31, 2008. The negative
working capital balance is the result of the $15 million convertible debentures
which are due on October 6, 2009 and classified as a current
liability.
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, 2008, we had
contractual obligations requiring annual payments as follows:
(Amounts
in 000’s)
|
|
|
Less
than
1
year
|
|
|
1-3
years
|
|
|
Total
|
|
|
Operating
leases
|
|
|
146 |
|
|
|
213 |
|
|
|
359 |
|
|
Convertible Debenture1
|
|
|
15,000 |
|
|
|
- |
|
|
|
15,000 |
|
|
Total
|
|
|
15,146 |
|
|
|
213 |
|
|
|
15,359 |
|
1
The convertible debentures
as described above may be converted into common shares of Lorus at a conversion
price of $1.00 per share. 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 are
due on October 6, 2009.
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 November 30, 2008 no amounts have been
received by the Company relating to these licensing agreements and therefore, no
amounts are owing and the amount of future fees is not
determinable.
The
Company has entered into various consulting agreements that upon achievement of
a partnership agreement could result in liabilities owing to such
consultants. The payments in these agreements are contingent on the
value of the partnership agreement and would be paid out of proceeds received by
Lorus. As of November 30, 2008 no amounts are owing and the amount of
future fees is not determinable.
The
Company has entered into an agreement to acquire certain research and
development equipment at an expected cost of $170 thousand. This
equipment was not received at November 30, 2008 and no amounts have been
recorded related to it.
As at November 30, 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:
|
|
|
November
30,
2008
|
|
|
May
31,
2008
|
|
|
Financial assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents, consisting of term deposits, and guaranteed
investment certificates, held for trading, measured at fair
value
|
|
$ |
6,030 |
|
|
$ |
2,652 |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments, held-to-maturity, recorded at amortized
cost
|
|
|
2,705 |
|
|
|
6,304 |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments, held-for-trading, recorded at fair
value
|
|
|
480 |
|
|
|
480 |
|
|
|
|
|
|
|
|
|
|
|
|
Amount
held in escrow, measured at amortized cost
|
|
|
- |
|
|
|
600 |
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable, measured at amortized cost
|
|
|
402 |
|
|
|
923 |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
liabilities, measured at amortized cost
|
|
|
1,364 |
|
|
|
1,194 |
|
|
|
|
|
|
|
|
|
|
|
|
Secured
convertible debentures, measured at amortized
cost
|
|
|
13,510 |
|
|
|
12,742 |
|
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 November 30,
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 November 30, 2008 U.S. denominated accounts
payable and accrued liabilities amounted to $390 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 $39 thousand ($39
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 19% 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. As mentioned above Lorus has a $15 million
convertible debenture due on October 6, 2009 for which it does not currently
have the cash and cash equivalents to satisfy this
obligation.
TRANSACTIONS WITH RELATED
PARTIES
During the three months ended November
30, 2008 Lorus expensed consulting fees of $9 thousand (2008 - $nil) to a director of Lorus and for the
six months ended November 30, 2008, we expensed consulting fees of $12 thousand
(2008 - $nil) to the same
director. At November 30, 2008 $12 thousand (2008 - $nil) remained payable and is included
in Accrued Liabilities on the balance sheet.
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.
|
|
|
•
|
Our
current capital resources are not sufficient to fund our long-term
business strategy or to repay our convertible debentures. We
need to raise additional capital. We cannot assure you that additional
funding will be available at all or on terms which are acceptable to us or
in amounts that will enable us to carry out our business
plan.
|
|
|
•
|
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 and six month periods ended
November 30, 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
November 30, 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 January 14, 2009, the Company had
252,405,000 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
17,028,000 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).