APTOSE BIOSCIENCES INC.
10-Ks,20-Fs and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 20-F
(Mark One)
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o
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Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934.
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Or
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x
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Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the fiscal year ended
May
31, 2011.
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Or
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o
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ________ to ________ .
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Or
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o
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Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Date of event requiring this shell company report _______________.
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Commission file number 001-32001
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LORUS THERAPEUTICS INC.
(Exact Name of Registrant as Specified in Its Charter)
Canada
(Jurisdiction of Incorporation or Organization)
2 Meridian Road
Toronto, Ontario
M9W 4Z7
Canada
(Address of Principal Executive Offices)
Elizabeth Williams
Director of Finance
2 Meridian Road
Toronto, Ontario M9W 4Z7
Canada
Telephone: (416) 798-1200
Facsimile: (416) 798-2200
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange On Which Registered
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Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
Common Shares, without par value, at May 31, 2011: 15,684,746
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X ]
If this is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes [ ] No [X]
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
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U.S. GAAP [ ] International Financial Reporting Standards as issued by the International Accounting Standards Board [ ] Other [X]
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If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 [ ] Item 18 [X]
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
TABLE OF CONTENTS
Page
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PART I
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3 | ||||
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ITEM 1.
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IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
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3 | |||
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ITEM 2.
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OFFER STATISTICS AND EXPECTED TIMETABLE
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3 | |||
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ITEM 3.
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KEY INFORMATION
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3 | |||
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ITEM 4.
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INFORMATION ON THE COMPANY
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14 | |||
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ITEM 4A.
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UNRESOLVED STAFF COMMENTS
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32 | |||
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ITEM 5.
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OPERATING AND FINANCIAL REVIEW AND PROSPECTS
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33 | |||
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ITEM 6.
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DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
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50 | |||
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ITEM 7.
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MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
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64 | |||
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ITEM 8.
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FINANCIAL INFORMATION
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66 | |||
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ITEM 9.
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THE OFFER AND LISTING
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66 | |||
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ITEM 10.
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ADDITIONAL INFORMATION
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67 | |||
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ITEM 11.
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QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
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80 | |||
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ITEM 12.
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DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
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81 | |||
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PART II
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82 | ||||
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ITEM 13.
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DEFAULTS, DIVIDENDS, ARREARAGES AND DELINQUENCIES
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82 | |||
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ITEM 14.
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MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
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82 | |||
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ITEM 15.
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CONTROLS AND PROCEDURES
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82 | |||
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ITEM 16.
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[RESERVED]
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83 | |||
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ITEM 16A.
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AUDIT COMMITTEE FINANCIAL EXPERT
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83 | |||
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ITEM 16B.
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CODE OF ETHICS
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83 | |||
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ITEM 16C.
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PRINCIPAL ACCOUNTANT FEES AND SERVICES
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83 | |||
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ITEM 16D.
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EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
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84 | |||
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ITEM 16E.
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PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
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84 | |||
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PART III
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85 | ||||
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ITEM 17.
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FINANCIAL STATEMENTS
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85 | |||
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ITEM 18.
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FINANCIAL STATEMENTS
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85 | |||
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ITEM 19.
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EXHIBITS
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86 |
GENERAL
On July 10, 2007 (the ”
Arrangement Date
”), Lorus Therapeutics Inc. completed a plan of arrangement and corporate reorganization with, among others, 4325231 Canada Inc. (now Global Summit Real Estate 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 of
our common shares and the assets (excluding certain future tax assets and related valuation allowance) and liabilities of Old Lorus (including all of the shares of its subsidiaries) were transferred, directly or indirectly, to our corporation and/or our subsidiaries. We 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. In this Annual Report on Form 20-F, all references to “
Lorus
”, the “
Corporation
”, the “
Company
”, “
we
”,
“
our
”, “
us
” and similar expressions, unless otherwise stated, are references to Old Lorus prior to the Arrangement Date and Lorus after the Arrangement Date. References to this “
Form 20-F
” and this “
Annual Report
” mean references to this Annual Report on Form 20-F for the fiscal year ended May 31, 2011.
We use the Canadian dollar as our reporting currency. All references in this Annual Report to “dollars” or “$” are expressed in Canadian dollars, unless otherwise indicated. See also “Item 3. Key Information” for more detailed currency and conversion information. Our Consolidated Financial Statements, which form part of this Annual Report, are presented in Canadian dollars and are prepared in accordance with accounting principles generally accepted in Canada (“
Canadian GAAP
”), which differ in certain respects from accounting principles generally accepted in the United States
(“
U.S. GAAP
”). The differences between Canadian GAAP and U.S. GAAP, as they relate to our business, are explained in the Supplementary Information included with the Consolidated Financial Statements included in Item 18 of this Annual Report.
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of securities laws. Such statements include, but are not limited to, statements relating to:
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our ability to obtain the substantial capital required to fund research and operations;
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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;
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our expectations regarding future financings;
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our plans to conduct clinical trials and pre-clinical programs;
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the length of clinical trials;
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the partnering potential of our products;
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our business strategy;
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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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our plans, objectives, expectations and intentions;
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annual sales potential of our clinical stage drugs; and
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other statements including words such as “anticipate”, “contemplate”, “continue”, “believe”, “plan”, “estimate”, “expect”, “intend”, “will”, “should”, “may”, and other similar expressions.
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Such statements reflect our current views with respect to future events, are subject to risks and uncertainties, and are 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 continue to operate as a going concern;
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our ability to obtain the substantial capital required to fund research and operations;
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1
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our lack of product revenues and history of operating losses;
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our early stage of development, particularly the inherent risks and uncertainties associated with (i) developing new drug candidates generally, (ii) demonstrating the safety and efficacy of these drug candidates in clinical studies in humans, and (iii) obtaining regulatory approval to commercialize these drug candidates;
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our ability to recruit patients for clinical trials;
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the progress of our clinical trials;
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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;
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our ability to protect our intellectual property rights and 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 or have access to 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 (“
SEC
”), and those which are discussed under the heading “Risk Factors”.
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Should one or more of these risks or uncertainties materialize, or should the assumptions set out in the section entitled “Risk Factors” underlying those forward-looking statements prove incorrect, actual results may vary materially from those described herein. These forward-looking statements are made as of the date of this Annual Report 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.
2
Not applicable.
Not applicable.
A. Selected Financial Data
The following tables present our selected consolidated financial data. You should read these tables in conjunction with our audited Consolidated Financial Statements and accompanying notes and Supplementary Information included in
Item 18
of this Annual Report and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 5 of this Annual Report.
The financial data as at May 31, 2011, 2010, 2009, 2008 and 2007 and for the fiscal years ended May 31, 2011, 2010, 2009, 2008 and 2007 have been derived from, and are qualified in their entirety by reference to, our audited Consolidated Financial Statements, which have been prepared in accordance with Canadian GAAP and reconciled to U.S. GAAP in
the Supplementary Information included with the Consolidated Financial Statements included in this Annual Report.
The following table presents a summary of our consolidated statement of operations derived from our audited Consolidated Financial Statements for the fiscal years ended May 31, 2011, 2010, 2009, 2008 and 2007.
Consolidated statements of operations data
(1) (2)
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(In thousands, except per share data)
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Years Ended May 31,
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2011
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2010
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2009
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2008
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2007
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In accordance with
Canadian GAAP
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Revenue
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$ | - | $ | 131 | $ | 184 | $ | 43 | $ | 107 | ||||||||||
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Research and development
(a)
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$ | 2,298 | $ | 2,517 | $ | 3,757 | $ | 6,260 | $ | 3,505 | ||||||||||
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General and administrative
(a)
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$ | 2,101 | $ | 2,964 | $ | 2,958 | $ | 3,715 | $ | 3,727 | ||||||||||
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Loss from operations
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$ | (5,038 | ) | $ | (5,725 | ) | $ | (9,310 | ) | $ | (12,633 | ) | $ | (9,638 | ) | |||||
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Net earnings (loss)
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$ | (5,038 | ) | $ | 5,331 | $ | (8,860 | ) | $ | (6,334 | ) | $ | (9,638 | ) | ||||||
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Basic and diluted earnings (loss) per common share
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$ | (0.38 | ) | $ | 0.57 | $ | (1.08 | ) | $ | (0.87 | ) | $ | (1.41 | ) | ||||||
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Weighted average number of common shares outstanding
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13,157 | 9,364 | 8,236 | 7,169 | 6,829 | |||||||||||||||
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In accordance with U.S. GAAP
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Net earnings (loss)
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$ | (5,036 | ) | $ | 5,705 | $ | (7,735 | ) | $ | (5,526 | ) | $ | (9,150 | ) | ||||||
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Basic and diluted earnings (loss) per share
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$ | (0.38 | ) | $ | 0.61 | $ | (0.94 | ) | $ | (0.77 | ) | $ | (1.41 | ) | ||||||
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(a)
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Amounts in fiscal 2008 and 2007 have been reclassified to conform to the financial statement presentation adopted in fiscal 2009.
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3
The following table presents a summary of our consolidated balance sheet as at May 31, 2011, 2010, 2009, 2008 and 2007.
Consolidated balance sheet data
(
1)
(
2)
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(In thousands, except per share data)
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As at May 31,
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2011
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2010
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2009
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2008
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2007
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I
n accordance with Canadian GAAP
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Cash and cash equivalents
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$ | 911 | $ | 667 | $ | 5,374 | $ | 2,652 | $ | 1,405 | ||||||||||
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Marketable securities and other investments
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$ | - | $ | 247 | $ | 490 | $ | 6,784 | $ | 10,993 | ||||||||||
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Total assets
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$ | 2,004 | $ | 2,303 | $ | 7,527 | $ | 11,607 | $ | 15,475 | ||||||||||
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Total debt
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$ | 1,159 | $ | 2,845 | $ | 15,878 | $ | 15,459 | $ | 14,714 | ||||||||||
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Total shareholders’ equity (deficit)
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$ | 845 | $ | (542 | ) | $ | (8,351 | ) | $ | (3,852 | ) | $ | 761 | |||||||
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Number of common shares outstanding
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15,685 | 9,933 | 8,560 | 7,255 | 7,075 | |||||||||||||||
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Dividends paid on common shares
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- | - | - | - | - | |||||||||||||||
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In accordance with U.S. GAAP
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Total assets
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$ | 2,004 | $ | 2,303 | $ | 7,592 | $ | 11,911 | $ | 15,579 | ||||||||||
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Total debt
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$ | 1,159 | $ | 2,845 | $ | 16,322 | $ | 17,314 | $ | 17,232 | ||||||||||
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Total shareholders’ equity (deficit)
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$ | 845 | $ | (542 | ) | $ | (8,729 | ) | $ | (5,403 | ) | $ | (1,653 | ) | ||||||
Footnotes to two prior tables:
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(1)
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On July 10, 2007, the Company completed a plan of arrangement and corporate reorganization with Old Lorus, 6707157 Canada Inc. and Pinnacle International Lands Inc. As a result of the plan of arrangement and reorganization, among other things, each common share of Old Lorus was exchanged for one common share of the Company and the assets (excluding certain future tax assets and related valuation allowance) and liabilities of Old Lorus were transferred to the Company and/or its subsidiaries. The Company continued the business of Old Lorus after the Arrangement Date with the same officers and employees and continued to be governed by the same board of directors as Old Lorus prior to the Arrangement Date. Therefore, the Company’s operations have
been accounted for on a continuity of interest basis and accordingly, the consolidated financial statement information above reflect that of the Company as if it had always carried on the business formerly carried on by Old Lorus.
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(2)
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At our annual and special meeting of shareholders held on November 30, 2009, our shareholders approved a special resolution permitting our board of directors, in its sole discretion, to file an amendment to our articles of incorporation to consolidate our issued and outstanding common shares. On May 12, 2010, our board approved the share consolidation on the basis of one post-consolidation common share for every 30 pre-consolidation common shares. The record date and effective date for the share consolidation was May 25, 2010. Our common shares began trading on the Toronto Stock Exchange (the “
TSX
”) on a post-consolidation basis on May 31, 2010. The share consolidation resulted in an adjustment to the exercise price
and number of common shares issuable upon exercise of outstanding stock options and warrants. In this Annual Report, all references to number of shares, stock options and warrants in the current and past periods have been adjusted to reflect the impact of the consolidation unless noted otherwise.
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Changes in accounting polices:
There were no new accounting policies adopted in the year ended May 31, 2011.
4
The significant differences between the line items under Canadian GAAP and those as determined under U.S. GAAP arise primarily from:
Fiscal 2007 to 2011
The following table reconciles the earnings (loss) per Canadian GAAP to the earnings (loss) per U.S. GAAP for the fiscal years ended May 31, 2007, 2008, 2009, 2010 and 2011:
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(In thousands, except per share data)
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Years Ended May 31,
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2011
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2010
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2009
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2008
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2007
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Net earnings (loss) per Canadian GAAP
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$ | (5,038 | ) | $ | 5,331 | $ | (8,860 | ) | $ | (6,334 | ) | $ | (9,638 | ) | ||||||
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Gain on repurchase of convertible debentures
and transfer of assets (i)
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- | 328 | - | - | - | |||||||||||||||
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Accretion of convertible debentures (i)
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- | 54 | 1,222 | 903 | 741 | |||||||||||||||
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Amortization and write off of debt issue costs (i)
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- | (4 | ) | (48 | ) | (40 | ) | (59 | ) | |||||||||||
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Stock compensation expense (gain) (ii)
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2 | 4 | (39 | ) | (47 | ) | (194 | ) | ||||||||||||
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Short-term investments (iii)
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- | (8 | ) | (10 | ) | (7 | ) | - | ||||||||||||
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Earnings (loss) per U.S. GAAP
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(5,036 | ) | 5,705 | (7,735 | ) | (5,526 | ) | (9,150 | ) | |||||||||||
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Other comprehensive gain (loss) (iii)
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- | 8 | 10 | (20 | ) | - | ||||||||||||||
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Earnings (loss) and comprehensive gain (loss) per U.S. GAAP
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(5,036 | ) | 5,713 | (7,725 | ) | (5,546 | ) | (9,150 | ) | |||||||||||
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Basic and diluted earnings (loss) per common share per U.S. GAAP
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$ | (0.38 | ) | $ | 0.61 | $ | (0.94 | ) | $ | (0.77 | ) | $ | (1.41 | ) | ||||||
Under U.S. GAAP, the number of weighted average common shares outstanding for basic and diluted loss per share is the same as under Canadian GAAP.
(i) Convertible debentures
On October 6, 2004 the Company entered into a Subscription Agreement with The Erin Mills Investment Corporation (“TEMIC”) to issue an aggregate of $15 million of secured convertible debentures issuable in three tranches of $5.0 each, in each of, October 2004, January 2005 and April 2005. The convertible debentures were due on October 6, 2009.
On June 22, 2009, the Company reached a settlement with TEMIC with respect to the purchase and settlement of the convertible debentures. Under the agreement, Lorus purchased all of the convertible debentures from TEMIC for consideration that included a cash payment of $3.3 million, the assignment of the rights under the license agreement with ZOR Pharmaceuticals, LLC (“
ZOR
”), certain intellectual property associated with Virulizin
®
and all of Lorus' shares in its wholly owned subsidiary, Pharma Immune Inc., which held an equity interest in
ZOR. As a result of the transaction, the Company recognized a gain on the repurchase of the debentures of $11.0 million reflecting the difference between the fair value of the debentures at the repurchase date, net of transaction costs of approximately $221 thousand, and the cash payment amount of $3.3 million. The gain on repurchase of the debentures did not result in income taxes payable as the Company has sufficient capital loss and non-capital loss carryforwards to shelter these gains. As the carrying value of the convertible debentures was different under U.S. GAAP, as explained below, the Company recognized an additional gain of $328 thousand on the repurchase of the convertible debentures and transfer of assets including the write-down of the deferred financing charges compared to under Canadian GAAP in the year ended May 31, 2010.
Under Canadian GAAP, the conversion option embedded in the convertible debentures is presented separately as a component of shareholders’ equity. Under U.S. GAAP, the embedded conversion option is not subject to bifurcation and is thus presented as a liability along with the balance of the convertible debentures. Measurement differences from the accretion of the value attributed to the conversion option on the convertible debentures and amortization of debt issue costs are further explained in the Supplementary Information entitled “Reconciliation of Canadian and United States Generally Accepted Accounting Principles” included in Item 18 of this Annual Report.
5
(ii) Stock options
Effective June 1, 2006, the Company adopted the fair value-based method of accounting for stock options granted to employees and directors as required by FASB Statement of Financial Accounting Standards No. 123R, Share-Based Payment (“
SFAS 123R
”), in accordance with the modified prospective method. Accordingly the Company has applied the fair value-based method to all employee stock options granted after June 1, 2006. Additionally, compensation costs for awards granted in prior periods for which the requisite service period has not been rendered as of June 1, 2006 will be recognized in the consolidated statement of
operations and deficit as the requisite service is rendered.
During fiscal 2007, the Company recorded stock compensation expense of $503 thousand in accordance with Canadian GAAP in the consolidated statement of operations, representing the amortization applicable to the current year at the estimated fair value of options granted since June 1, 2002, and an offsetting adjustment to stock options of $503 thousand in the consolidated balance sheets. Under U.S. GAAP, the Company recognized $697 thousand in expense during the same period as a result of adopting SFAS 123R.
The primary reason for the difference between U.S. GAAP and Canadian GAAP relating to fiscal years 2008, 2009 and 2010 and 2011 is due to estimation of forfeitures in the determination of the stock-based compensation expense under U.S. GAAP and accounting for forfeitures as they occur under Canadian GAAP.
(iii) Financial instruments
Effective June 1, 2007, the Company adopted the recommendations of The Canadian Institute of Chartered Accountants’ Handbook Section 3855, Financial Instruments - Recognition and Measurement, retroactively without restatement of prior periods. This section provides standards for recognition, measurement, disclosure and classification of financial assets, financial liabilities and non-financial derivatives.
As part of the adoption of the new standards on June 1, 2007, the Company designated certain short-term investments consisting of corporate instruments as “held-for-trading”. This change in accounting policy for Canadian GAAP resulted in a decrease in the carrying amount of these investments of $27 thousand and an increase in the fiscal 2008 opening deficit accumulated during the development stage of $27 thousand. Further, the Company recognized a net unrealized gain in the consolidated statements of operations for the fiscal year ended May 31, 2011 of nil (2010- $8 thousand, 2009 - $10 thousand, 2008 - $7 thousand).
Under U.S. GAAP, the Company previously accounted for these investments as “held-to-maturity” in accordance with SFAS 115, now Accounting Standards (ASC) 320, Investments in Debt and Equity Securities. Because the Company did not have the ability or intent to hold these investments until their stated maturity date, the Company made a reassessment of the appropriateness of the previous classification and reallocated these investments as “available-for-sale” as of May 31, 2008, in accordance with SFAS 115. Consequently, an unrealized holding gain in the amount of nil for the year ended May 31, 2011 (2010 - $8 thousand, 2009 - $10 thousand gain, 2008 - loss of $20 thousand) was recorded
in other comprehensive income.
We publish our Consolidated Financial Statements in Canadian (“
CDN
”) dollars. In this Annual Report, except where otherwise indicated, all amounts are stated in CDN dollars.
The following table sets out the exchange rates of CDN$ for US$1.00 for the following periods as taken from the Bank of Canada’s website:
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Period
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Average Close
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High
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Low
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|||||||||
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October, 2011
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1.0207 | 1.0604 | 0.9935 | |||||||||
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September, 2011
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1.0026 | 1.0389 | 0.9752 | |||||||||
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August, 2011
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0.9828 | 0.9910 | 0.9580 | |||||||||
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July, 2011
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0.9553 | 0.9668 | 0.9449 | |||||||||
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June, 2011
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0.9768 | 0.9861 | 0.9643 | |||||||||
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May, 2011
|
0.9680 | 0.9809 | 0.9490 | |||||||||
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April, 2011
|
0.9582 | 0.9691 | 0.9486 | |||||||||
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Fiscal Year Ended May 31, 2011
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1.0066 | 1.0660 | 0.9486 | |||||||||
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Fiscal Year Ended May 31, 2010
|
1.0635 | 1.1676 | 0.9988 | |||||||||
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Fiscal Year Ended May 31, 2009
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1.1567 | 1.2991 | 1.0012 | |||||||||
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Fiscal Year Ended May 31, 2008
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1.0140 | 1.0750 | 0.9170 | |||||||||
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Fiscal Year Ended May 31, 2007
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1.1366 | 1.1855 | 1.0696 | |||||||||
6
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Investing in our securities involves a high degree of risk. 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 in this Annual Report. Additional risks not currently known by us or that we consider immaterial at the present time may also impair our business, financial condition, prospects or results of operations. If any of the following risks occur, our business, financial condition, prospects or results of operations would likely be affected. 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. The risks set out below are not the only we currently face; other risks may arise in the future.
RISKS RELATED TO OUR BUSINESS
We might not be able to continue as a going concern.
We have forecasted that our level of cash and cash equivalents and short-term investments, including the proceeds from the recent equity offering and financing commitment described below, will be sufficient to execute our current planned expenditures for the next 6-8 months without further investment and/or strategic alliances. We intend to continue to actively pursue additional funding and partnership opportunities to provide additional funding to execute our planned expenditures in the future, and although we believe that we will complete one or more arrangements in sufficient time to execute our planned expenditures without interruption, there can be no assurance that sufficient capital will be
available to enable us to meet these continuing expenditures, or if the capital is available, that it will be available on terms acceptable to us. If we are unable to obtain sufficient financing on acceptable terms in order to meet our future operational needs, there is a significant doubt as to whether we will be able to continue as a going concern and realize on our assets and pay our liabilities as they fall due, in which case investors may lose their investment.
We need to raise additional capital.
We need to raise additional capital. To obtain the necessary capital, we must rely on some or all of the following: additional share issues, collaboration agreements or corporate partnerships and grants and tax credits to provide full or partial funding for our activities. We cannot assure you that additional funding will be available on terms that are acceptable to us or in amounts that will enable us to carry out our business plan.
Our need for capital may require us to:
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engage in equity financings that could result in significant dilution to existing investors;
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delay or reduce the scope of or eliminate one or more of our development programs;
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obtain funds through arrangements with collaborators or others that may require us to relinquish rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves; or license rights to technologies, product candidates or products on terms that are less favourable to us than might otherwise be available;
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considerably reduce operations; or
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cease our operations.
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7
We have a history of operating losses. We expect to incur net losses and we may never achieve or maintain profitability.
We have not been profitable since our inception in 1986. Under Canadian generally accepted accounting principles, we reported net losses (earnings) of $5.0 million, ($5.3 million) and $8.9 million and for the years ended May 31, 2011, 2010 and 2009, respectively, and as of May 31, 2011, we had an accumulated deficit of $189.1 million.
To date we have only generated nominal revenues from the sale of Virulizin
®
in Mexico and revenues associated with the license agreement with ZOR. We stopped selling Virulizin
®
in Mexico in July 2005 and assigned the rights under the ZOR Agreement to TEMIC, as part of the consideration for our repurchase of secured convertible debentures in June 2009. We have not generated any other revenue from product sales to date and it is possible that we will never have sufficient product sales revenue to achieve profitability. We
expect to continue to incur losses for at least the next several years as we or our collaborators and licensees pursue clinical trials and research and development efforts. To become profitable, we, either alone or with collaborators and licensees (which we currently do not have), must successfully develop, manufacture and market our current product candidates LOR-253 and LOR-2040 as well as continue to identify, develop, manufacture and market new product candidates. It is possible that we will never have significant product sales revenue or receive significant royalties on our licensed product candidates. If funding is insufficient at any time in the future, we may not be able to develop or commercialize our products, take advantage of business opportunities or respond to competitive pressures.
We are an early stage development company.
We are at an early stage of development. Significant additional investment will be necessary to complete the development of any of our products. Pre-clinical and clinical trial work must be completed before our products could be ready for use within the market that we have identified. We may fail to develop any products, to obtain regulatory approvals, to enter clinical trials or to commercialize any products. We do not know whether any of our potential product development efforts will prove to be effective, meet applicable regulatory standards, obtain the requisite regulatory approvals, be capable of being manufactured at a reasonable cost or be accepted in the marketplace.
The product candidates we are currently developing are not expected to be commercially viable for several years and we may encounter unforeseen difficulties or delays in commercializing our product candidates. In addition, our products may cause undesirable side effects.
Our product candidates require significant funding to reach regulatory approval assuming positive clinical results. Such funding will be very difficult, or impossible to raise in the public markets or through partnerships. If such funding or partnerships are not attainable, the development of these product candidates maybe significantly delayed or stopped altogether. The announcement of such delay or discontinuation of development may have a negative impact on our share price.
We have indemnified our predecessor, Old Lorus, and its directors, officers and employees in respect of the Arrangement.
In connection with the reorganization that we undertook in fiscal 2008, we have agreed to indemnify our predecessor, 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:
8
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•
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prior to, at or after the effective time of the Arrangement, and directly or indirectly relating to any of the assets of Old Lorus transferred to us 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 of the Arrangement;
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•
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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 usunder the Arrangement; and
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•
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prior to or at the effective time of the Arrangement and directly or indirectly relating to, with certain exceptions, any of the activities of Old Lorus or the Arrangement.
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This indemnification could result in significant liability to us.
We may be unable to obtain partnerships for one or more of our product candidates, which could curtail future development and negatively affect our share price. In addition, our partners might not satisfy their contractual responsibilities or devote sufficient resources to our partnership.
Our strategy for the research, development and commercialization of our products requires entering into various arrangements with corporate collaborators, licensers, licensees and others, and our commercial success is dependent upon these outside parties performing their respective contractual responsibilities. The amount and timing of resources that such third parties will devote to these activities may not be within our control. We cannot assure you that such parties will perform their obligations as expected. We also cannot assure you that our collaborators will devote adequate resources to our programs. In addition, we could become involved in disputes with our collaborators, which could result in a delay
or termination of the related development programs or result in litigation. We intend to seek additional collaborative arrangements to develop and commercialize some of our products. We may not be able to negotiate collaborative arrangements on favourable terms, or at all, in the future, or that our current or future collaborative arrangements will be successful.
If we cannot negotiate collaboration, licence or partnering agreements, we may never achieve profitability.
Clinical trials are long, expensive and uncertain processes and Health Canada or the FDA may ultimately not approve any of our product candidates. We may never develop any commercial drugs or other products that generate revenues.
None of our product candidates has received regulatory approval for commercial use and sale in North America. We cannot market a pharmaceutical product in any jurisdiction until it has completed thorough preclinical testing and clinical trials in addition to that jurisdiction’s extensive regulatory approval process. In general, significant research and development and clinical studies are required to demonstrate the safety and effectiveness of our product candidates before we can submit any regulatory applications.
Clinical trials are long, expensive and uncertain processes. Clinical trials may not be commenced or completed on schedule, and Health Canada or the U.S. Food and Drug Administration (“
FDA
”) or any other regulatory body may not ultimately approve our product candidates for commercial sale.
The clinical trials of any of our drug candidates could be unsuccessful, which would prevent us from advancing, commercializing or partnering the drug.
Even if the results of our preclinical studies or clinical trials are initially positive, it is possible that we will obtain different results in the later stages of drug development or that results seen in clinical trials will not continue with longer term treatment. Positive results in early Phase I or Phase II clinical trials may not be repeated in larger Phase II or Phase III clinical trials. For example, results of our Phase III clinical trial of Virulizin
®
did not meet the primary endpoint of the study despite promising preclinical and early stage clinical data. All of our potential drug candidates
are prone to the risks of failure inherent in drug development.
Preparing, submitting and advancing applications for regulatory approval is complex, expensive and time intensive and entails significant uncertainty. A commitment of substantial resources to conduct time-consuming research, preclinical studies and clinical trials will be required if we are to complete development of our products.
9
Clinical trials of our products require that we identify and enrol a large number of patients with the illness under investigation. We may not be able to enrol a sufficient number of appropriate patients to complete our clinical trials in a timely manner particularly in smaller indications such as acute myeloid leukemia. If we experience difficulty in enrolling a sufficient number of patients to conduct our clinical trials, we may need to delay or terminate ongoing clinical trials and will not accomplish objectives material to our success that could affect the price of our common shares. Delays in planned patient enrolment or lower than anticipated event rates in our current clinical trials or
future clinical trials may result in increased costs, program delays, or both.
In addition, unacceptable toxicities or adverse side effects may occur at any time in the course of preclinical studies or human clinical trials or, if any product candidates are successfully developed and approved for marketing, during commercial use of any approved products. The appearance of any such unacceptable toxicities or adverse side effects could interrupt, limit, delay or abort the development of any of our product candidates or, if previously approved, necessitate their withdrawal from the market. Furthermore, disease resistance or other unforeseen factors may limit the effectiveness of our potential products.
Our failure to develop safe, commercially viable drugs would substantially impair our ability to generate revenues and sustain our operations and would materially harm our business and adversely affect our share price. We may never achieve profitability.
As a result of intense competition and technological change in the pharmaceutical industry, the marketplace may not accept our products or product candidates, and we may not be able to compete successfully against other companies in our industry and achieve profitability.
Many of our competitors have:
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•
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drug products that have already been approved or are in development, and operate large, well-funded research and development programs in these fields;
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•
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substantially greater financial and management resources, stronger intellectual property positions and greater manufacturing, marketing and sales capabilities, areas in which we have limited or no experience; and
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•
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significantly greater experience than we do in undertaking preclinical testing and clinical trials of new or improved pharmaceutical products and obtaining required regulatory approvals.
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Consequently, our competitors may obtain Health Canada, FDA and other regulatory approvals for product candidates sooner and may be more successful in manufacturing and marketing their products than we or our collaborators are.
Our competitor’s existing and future products, therapies and technological approaches will compete directly with the products we seek to develop. Current and prospective competing products may provide greater therapeutic benefits for a specific problem or may offer easier delivery or comparable performance at a lower cost;
Any product candidate that we develop and that obtains regulatory approval must then compete for market acceptance and market share. Our product candidates may not gain market acceptance among physicians, patients, healthcare payers and the medical community. Further, any products we develop may become obsolete before we recover any expenses we incurred in connection with the development of these products. As a result, we may never achieve profitability.
If we fail to attract and retain key employees, the development and commercialization of our products may be adversely affected.
We depend on the principal members of our scientific and management staff. If we lose any of these persons, our ability to develop products and become profitable could suffer. The risk of being unable to retain key personnel may be increased by the fact that we have not executed long-term employment contracts with our employees, except for our senior executives. Our future success will also depend in large part on our ability to attract and retain other highly qualified scientific and management personnel. We face competition for personnel from other companies, academic institutions, government entities and other organizations.
10
We may be unable to obtain patents to protect our technologies from other companies with competitive products, and patents of other companies could prevent us from manufacturing, developing or marketing our products.
Patent protection:
The patent positions of pharmaceutical and biotechnology companies are uncertain and involve complex legal and factual questions. The United States Patent and Trademark Office and many other patent offices in the world have not established a consistent policy regarding the breadth of claims that they will allow in biotechnology patents.
Allowable patentable subject matter and the scope of patent protection obtainable may differ between jurisdictions. If a patent office allows broad claims, the number and cost of patent interference proceedings in the United States, or analogous proceedings in other jurisdictions and the risk of infringement litigation may increase. If it allows narrow claims, the risk of infringement may decrease, but the value of our rights under our patents, licenses and patent applications may also decrease.
The scope of the claims in a patent application can be significantly modified during prosecution before the patent is issued. Consequently, we cannot know whether our pending applications will result in the issuance of patents or, if any patents are issued, whether they will provide us with significant proprietary protection or will be circumvented, invalidated or found to be unenforceable.
Until recently, patent applications in the United States were maintained in secrecy until the patents issued, and publication of discoveries in scientific or patent literature often lags behind actual discoveries. Patent applications filed in the United States after November 2000 generally will be published 18 months after the filing date unless the applicant certifies that the invention will not be the subject of a foreign patent application. In many other jurisdictions, such as Canada, patent applications are published 18 months from the priority date. We cannot assure you that, even if published, we will be aware of all such literature. Accordingly, we cannot be certain that the named inventors
of our products and processes were the first to invent that product or process or that we were the first to pursue patent coverage for our inventions.
Enforcement of intellectual property rights:
Protection of the rights revealed in published patent applications can be complex, costly and uncertain. Our commercial success depends in part on our ability to maintain and enforce our proprietary rights. If third parties engage in activities that infringe our proprietary rights, our management’s focus will be diverted and we may incur significant costs in asserting our rights. We may not be successful in asserting our proprietary rights, which could result in our patents being held invalid or a court holding that the third party is not infringing, either of which would harm our competitive position.
Others may design around our patented technology. We may have to participate in interference proceedings declared by the United States Patent and Trademark Office, European opposition proceedings, or other analogous proceedings in other parts of the world to determine priority of invention and the validity of patent rights granted or applied for, which could result in substantial cost and delay, even if the eventual outcome is favourable to us. We cannot assure you that our pending patent applications, if issued, would be held valid or enforceable.
Trade secrets:
We also rely on trade secrets, know-how and confidentiality provisions in our agreements with our collaborators, employees and consultants to protect our intellectual property. However, these and other parties may not comply with the terms of their agreements with us, and we might be unable to adequately enforce our rights against these people or obtain adequate compensation for the damages caused by their unauthorized disclosure or use of our trade secrets or know how. Our trade secrets or those of our collaborators may become known or may be independently discovered by others.
11
See also “Business Overview - Intellectual Property and Protection of Confidential Information and Technology - Risks Relating to Intellectual Property.”
Our products and product candidates may infringe the intellectual property rights of others, which could increase our costs.
Our success also depends on avoiding infringement of the proprietary technologies of others. In particular, there may be certain issued patents and patent applications claiming subject matter which we or our collaborators may be required to license in order to research, develop or commercialize at least some of our product candidates, including LOR-2040 and LOR-253. In addition, third parties may assert infringement or other intellectual property claims against us based on our patents or other intellectual property rights. An adverse outcome in these proceedings could subject us to significant liabilities to third-parties, require disputed rights to be licensed from third-parties or require us to cease or
modify our use of the technology. If we are required to license such technology, we cannot assure you that a license under such patents and patent applications will be available on acceptable terms or at all. Further, we may incur substantial costs defending ourselves in lawsuits against charges of patent infringement or other unlawful use of another’s proprietary technology.
If product liability claims are brought against us or we are unable to obtain or maintain product liability insurance, we may incur substantial liabilities that could reduce our financial resources.
The clinical testing and commercial use of pharmaceutical products involves significant exposure to product liability claims. We have obtained limited product liability insurance coverage for our clinical trials on humans; however, our insurance coverage may be insufficient to protect us against all product liability damages. Further, liability insurance coverage is becoming increasingly expensive and we might not be able to obtain or maintain product liability insurance in the future on acceptable terms or in sufficient amounts to protect us against product liability damages. Regardless of merit or eventual outcome, liability claims may result in decreased demand for a future product, injury to reputation,
withdrawal of clinical trial volunteers, loss of revenue, costs of litigation, distraction of management and substantial monetary awards to plaintiffs. Additionally, if we are required to pay a product liability claim, we may not have sufficient financial resources to complete development or commercialization of any of our product candidates and our business and results of operations will be adversely affected.
We have no manufacturing capabilities. We depend on third parties, including a number of sole suppliers, for manufacturing and storage of our product candidates used in our clinical trials. Product introductions may be delayed or suspended if the manufacture of our products is interrupted or discontinued.
Other than limited quantities for research purposes, we do not have manufacturing facilities to produce supplies of LOR-2040, LOR-253 or any of our other product candidates to support clinical trials or commercial launch of these products, if they are approved. We are dependent on third parties for manufacturing and storage of our product candidates. If we are unable to contract for a sufficient supply of our product candidates on acceptable terms, or if we encounter delays or difficulties in the manufacturing process or our relationships with our manufacturers, we may not have sufficient product to conduct or complete our clinical trials or support preparations for the commercial launch of our product
candidates, if approved.
Our operations involve hazardous materials and we must comply with environmental laws and regulations, which can be expensive and restrict how we do business.
Our research and development activities involve the controlled use of hazardous materials, radioactive compounds and other potentially dangerous chemicals and biological agents. Although we believe our safety procedures for these materials comply with governmental standards, we cannot entirely eliminate the risk of accidental contamination or injury from these materials. We currently have insurance, in amounts and on terms typical for companies in businesses that are similarly situated that could cover all or a portion of a damage claim arising from our use of hazardous and other materials. However, if an accident or environmental discharge occurs, and we are held liable for any resulting damages,
the associated liability could exceed our insurance coverage and our financial resources.
12
RISKS RELATED TO OUR COMMON SHARES
Our share price has been and may continue to be volatile and an investment in our common shares could suffer a decline in value.
You should consider an investment in our common shares as risky and invest only if you can withstand a significant loss and wide fluctuations in the market value of your investment. We receive only limited attention by securities analysts and frequently experience an imbalance between supply and demand for our common shares. The market price of our common shares has been highly volatile and is likely to continue to be volatile. Factors affecting our common share price include but are not limited to:
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our financial position and doubt as to whether we will be able to continue as a going concern;
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our ability to raise additional capital;
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the progress of our clinical trials;
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our ability to obtain partners and collaborators to assist with the future development of our products;
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general market conditions;
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announcements of technological innovations or new product candidates by us, our collaborators or our competitors;
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fluctuations in our operating results;
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published reports by securities analysts;
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developments in patent or other intellectual property rights;
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the cash and short-term investments held us and our ability to secure future financing;
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public concern as to the safety and efficacy of drugs that we and our competitors develop; and
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governmental regulation and changes in medical and pharmaceutical product reimbursement policies.
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Future sales of our common shares by us or by our existing shareholders could cause our share price to fall.
The issuance of common shares by us could result in significant dilution in the equity interest of existing shareholders and adversely affect the market price of our common shares. Sales by existing shareholders of a large number of our common shares in the public market and the issuance of shares issued in connection with strategic alliances, or the perception that such additional sales could occur, could cause the market price of our common shares to decline.
There is no assurance that an active trading market in our common shares will be sustained.
Our common shares are listed for trading on the TSX. However, there can be no assurance that an active trading market in our common shares on the stock exchange will be sustained or that we will be able to maintain our listing.
There is a limited market for our common shares in the United States.
There is currently a limited market for our common shares in the United States. If a shareholder in the United States is unable to sell their common shares in the United States, they will be forced to sell their common shares over the TSX, which may expose the selling shareholder to currency exchange risk. In addition, because we are not listed on any United States stock exchange, resales of our common shares to United States residents under state securities or “blue sky” laws are likely to be limited to unsolicited transactions.
Our outstanding common shares could be subject to dilution.
The exercise of stock options and warrants already issued by us, and the issuance of other additional securities in the future, could result in dilution in the value of our common shares and the voting power represented by the common shares. Furthermore, to the extent holders of our stock options or other securities exercise their securities and then sell the common shares they receive, our share price may decrease due to the additional amount of our common shares available in the market.
13
It may be difficult for non-Canadian investors to obtain and enforce judgments against us because of our Canadian incorporation and presence.
We are a corporation existing under the laws of Canada. Most of our directors and officers, and all of the experts named in this prospectus and the documents incorporated by reference into this prospectus, are residents of Canada, and all or a substantial portion of their assets, and a substantial portion of our assets, are located outside the United States. Consequently, although we have appointed an agent for service of process in the United States, it may be difficult for holders of these securities who reside in the United States to effect service within the United States upon those directors and officers, and the experts who are not residents of the United States. It may also be difficult for holders of
these securities who reside in the United States to realize in the United States upon judgments of courts of the United States predicated upon our civil liability and the civil liability of our directors, officers and experts under the United States federal securities laws. Investors should not assume that Canadian courts (i) would enforce judgments of United States courts obtained in actions against us or such directors, officers or experts predicated upon the civil liability provisions of the United States federal securities laws or the securities or “blue sky” laws of any state within the United States or (ii) would enforce, in original actions, liabilities against us or such directors, officers or experts predicated upon the United States federal securities laws or any such state securities or “blue sky” laws. In addition, we have been advised by our Canadian
counsel that in normal circumstances, only civil judgments and not other rights arising from United States securities legislation are enforceable in Canada and that the protections afforded by Canadian securities laws may not be available to investors in the United States.
We are likely a “passive foreign investment company” which will likely have adverse U.S. federal income tax consequences for U.S. shareholders.
U.S. investors in our common shares should be aware that the Company believes it was classified as a passive foreign investment company (“
PFIC
”) during the tax year ended May 31, 2011, and based on current business plans and financial expectations, the Company believes that it will be a PFIC for the current tax year. If the Company is a PFIC for any year during a U.S. shareholder’s holding period, then such U.S. shareholder generally will be required to treat any gain realized upon a disposition of common shares, or any so-called “excess distribution” received on its common shares, as ordinary income, and to pay
an interest charge on a portion of such gain or distributions, unless the shareholder makes a timely and effective “qualified electing fund” election (“
QEF Election
”) or a “mark-to-market” election with respect to the common shares. A U.S. shareholder who makes a QEF Election generally must report on a current basis its share of the Company’s net capital gain and ordinary earnings for any year in which the Company is a PFIC, whether or not the Company distributes any amounts to its shareholders. However, U.S. shareholders should be aware that there can be no assurance that we will satisfy record keeping requirements that apply to a qualified electing fund, or that we will supply U.S. shareholders with information that such U.S. shareholders require to report under the
QEF Election rules, in the event that we are a PFIC and a U.S. shareholder wishes to make a QEF Election. Thus, U.S. shareholders may not be able to make a QEF Election with respect to their common shares. A U.S. shareholder who makes the mark-to-market election generally must include as ordinary income each year the excess of the fair market value of the common shares over the taxpayer’s basis therein. This paragraph is qualified in its entirety by the discussion below under the heading “Certain United States Federal Income Tax Considerations.” Each U.S. shareholder should consult its own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax consequences of the PFIC rules and the acquisition, ownership, and disposition of our common
shares.
A. History and Development of the Company
Old Lorus was incorporated under the
Business Corporations Act
(Ontario) on September 5, 1986 under the name RML Medical Laboratories Inc. On October 28, 1991, RML Medical Laboratories Inc. amalgamated with Mint Gold Resources Ltd., resulting in Old Lorus becoming a reporting issuer (as defined under applicable securities law) in Ontario, on such date. On August 25, 1992, Old Lorus changed its name to IMUTEC Corporation. On November 27, 1996, Old Lorus changed its name to Imutec Pharma Inc., and on November 19, 1998, Old Lorus changed its name to Lorus Therapeutics Inc. On October 1, 2005, Old Lorus continued
under the
Canada Business Corporations Act
.
14
On the Arrangement Date, Old Lorus completed a plan of arrangement and corporate reorganization with, among others, 6650309 Canada Inc., a corporation incorporated under the
Canada Business Corporations Act
(“
New Lorus
”), 6707157 Canada Inc. and Pinnacle International Lands, Inc. As a result of the plan of arrangement and reorganization each common share of Old Lorus was exchanged for one common share of New Lorus. New Lorus continued the business of Old Lorus after the Arrangement Date with the same officers and employees and continued to be governed by the
same board of directors as Old Lorus prior to the Arrangement Date.
Lorus is a biopharmaceutical company focused on the discovery, research and development of novel anticancer therapies with a high safety profile. Lorus has worked to establish a diverse, marketable anticancer product pipeline, with products in various stages of development ranging from discovery and pre-clinical to a product available to start a Phase III clinical trial. A growing intellectual property portfolio supports our diverse product pipeline.
Our success is dependent upon several factors, including maintaining sufficient levels of funding through public and/or private financing, establishing the efficacy and safety of our product candidates in clinical trials, securing strategic partnerships and obtaining the necessary regulatory approvals to market our products.
We believe that the future of cancer treatment and management lies in drugs that are effective, 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 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 candidate throughout the clinical trial process and consider partnership when appropriate.
Over the past three years, we have focused on advancing our product candidates through pre-clinical and clinical testing. It costs millions of dollars and takes many years before a product candidate may be approved for therapeutic use in humans and the risk exists that a product candidate may not meet the end points of any Phase I, Phase II or Phase III clinical trial. See “Risk Factors”.
Lorus currently has one subsidiary, NuChem Pharmaceuticals Inc., a corporation incorporated under the laws of Ontario (“
NuChem
”), of which Lorus owns 80% of the issued and outstanding voting share capital and 100% of the issued and outstanding non-voting preference share capital. On May 31, 2009, GeneSense Technologies Inc. (“
GeneSense
”), of which Lorus owned 100% of the issued and outstanding share capital, was wound up into Lorus and subsequently dissolved. Until June 22, 2009, Lorus owned 100% of the issued and outstanding share capital of Pharma Immune Inc., a
corporation incorporated under the laws of Delaware (“
Pharma Immune
”), at which time it disposed of these shares. See “Business Overview - Financial Strategy - Secured Convertible Debentures.”
Lorus’ common shares are listed on the TSX under the symbol “LOR”.
The address of the Company’s head and registered office is 2 Meridian Road, Toronto, Ontario, Canada, M9W 4Z7, and our phone number is (416) 798-1200. Our corporate website is www.lorusthera.com. The contents of the website, and items accessible through the website, are specifically not included in this Annual Report by reference.
Small Molecules
We have small molecule drug screening technologies and preclinical scientific expertise, which we are using to create a drug candidate pipeline. Our proprietary group of small molecule compounds, which include the lead compound LOR-253, have unique structures and modes of action, and are promising candidates for the development of novel, targeted anticancer agents with high safety profiles. See “-- Clinical Development” and “Business Overview - Small Molecule Therapies”.
15
RNA-Targeted Therapies
Lorus’ RNA-targeted therapeutics include LOR-2040, which has completed an advanced Phase II clinical trial, and LOR-1284, which is in the pre-clinical stage of development. See “-- Clinical Development” and “Business Overview - RNA-Targeted Therapies”.
Immunotherapy
In June 2009, as part of the consideration for the repurchase of the secured convertible debentures from TEMIC, Lorus’ assigned to TEMIC its rights under the license agreement with ZOR, and sold to TEMIC its intellectual property rights associated with Virulizin
®
. See “-- Business Overview - Immunotherapy” and “Business Overview - Financial Strategy - Secured Convertible Debentures” for more details. Lorus also has a drug candidate Interleukin-17E which is a protein-based therapeutic for cancer treatment. See “-- Clinical Development”,
“Business Overview - Immunotherapy” and “Business Overview - Financial Strategy - Secured Convertible Debentures” for more details.
Clinical Development
The chart below illustrates our current view of the clinical and preclinical development stage of each of our products. This chart reflects the current regulatory approval process for biopharmaceuticals in Canada and the United States. See “Regulatory Requirements” for a description of the regulatory approval process in Canada and the United States. These qualitative estimates of the progress of our products are intended solely for illustrative purposes and this information is qualified in its entirety by the information appearing elsewhere or incorporated by reference in this Annual Report.
PRODUCT PIPELINE
Capital Expenditures and Divestitures
Not applicable.
B. Business Overview
Overview
Chemotherapeutic drugs have been the mainstay medical treatment option for cancer, particularly metastatic cancer, for the past 30 years. More recently, a range of novel cancer drugs have been developed that are efficacious while improving patient quality of life. Unlike chemotherapies, which are typically based on chemical synthesis, these new drugs may be of biological origin, based on naturally occurring molecules, proteins or genetic material. While conventional chemotherapy drugs are relatively non-specific and as a result toxic to normal cells, these new generation agents specifically target individual molecules or genes that are involved in disease and are therefore preferentially toxic to
tumor cells. The increased targeted specificity of these drugs may result in fewer and milder side effects, meaning that, in theory, larger and therefore, more effective doses can be administered. The current paradigm in cancer management is a multi-modal approach that combines multiple treatment options tailored to the specific indication and individual patient. As a result, targeted drug regimens that combine novel small molecule therapies with biological agents, based on emerging understanding of cancer development, are of considerable and growing interest.
16
Since cancer progression is a complex process involving the accumulation of multiple genetic alterations leading to changes in many specialized cell functions, Lorus believes that no single drug will emerge as a cure for all cancers. Instead, we believe that cancer will continue to be treated by many different drugs with a variety of mechanisms of action. Since Lorus takes a multi-mechanistic approach for the treatment of cancer, we concentrate on the discovery and the development of different classes of anticancer compounds.
All of the drugs being developed by the research team at Lorus have one similar characteristic: they are designed with the goal of being well tolerated by patients. These drugs may not only provide effective cancer treatment and contribute to an improved quality of life for cancer patients, but may also be commercially attractive as they could more easily be combined with other leading therapies without significantly adding to the current side effect profiles of existing drugs.
Lorus has product candidates in three classes of anticancer therapies: (i) small molecule therapies; (ii) RNA-targeted therapies; and (iii) immunotherapeutics. Lorus has certain commercial rights in Virulizin
®
as described in “Immunotherapy”.
Small Molecule Therapies
Most anticancer chemotherapeutic treatments are DNA damaging, cytotoxic agents, designed to act on rapidly dividing cells. Treatment with these drugs is typically associated with unpleasant or even serious side effects due to the inability of these drugs to differentiate between normal and cancer cells and/or due to a lack of high specificity for the targeted protein. In addition, these drugs often lead to the development of tumor-acquired drug resistance. As a result of these limitations, a need exists for more effective anticancer drugs. One approach is to develop small molecules that have greater target specificity and are more selective against cancer
cells. Chemical compounds weighing less than 1000 daltons (a unit of molecular weight) are designated as small or low molecular weight molecules. These molecules can be designed to target specific proteins or receptors that are known to be involved with disease.
LOR-253
Lorus has selected two leading small molecule compounds from a series of novel small molecules discovered by our scientists that exhibit potent anticancer activity in
in vitro
screens. The results of characterization studies on one of these compounds were published in
Cancer Chemotherapy and Pharmacology.
From these two compounds, LOR-253 was selected as the lead compound for development as a drug candidate for the treatment of colon carcinoma and non-small cell lung cancer. This decision was based on its potent
in vitro
anti-proliferative activity, its efficacy in
in vivo
xenograft models of human colon and lung cancer, and on its safety profile.
In September 2009, we announced the publication from our research team of an article entitled “A Novel Small Molecule with Potent Anticancer Activity Inhibits Cell Growth by Modulating Intracellular Labile Zinc Homeostasis” in the peer-reviewed journal Molecular Cancer Therapeutics. The article presented data from the preclinical evaluation of ML-133, a parent compound that was a precursor in the development of LOR-253. The studies demonstrated potent anticancer activity in cancer cell lines and in an animal model of human colon cancer. Further examinations on the mechanism of action confirmed target dependent induction of the novel tumor suppressor called Krüppel-like factor 4, a
critical checkpoint protein that inhibits cell cycle progression in several cancer types. The mechanism of activity of this promising new class of antitumor agent described in the publication suggested a novel method for treating several different types of cancer.
17
In April 2011, we announced presentation of new preclinical findings for LOR-253 at the American Association for Cancer Research (AACR) annual meeting, in which LOR-253 was shown to be a potent inhibitor of growth of human non-small cell lung cancer (NSCLC), both in-vitro and in animal models. This anti-cancer activity was associated with induction of the tumor suppressor gene KLF-4.
Lorus has completed formal GLP toxicology studies for LOR-253 and in April 2010, we announced that the production of the first clinical batch of LOR-253 had been successfully completed. The clinical batch of LOR-253 was manufactured in full compliance with current Good Manufacturing Practice (“
cGMP
”) for use in the Phase I study.
Clinical Development
In June 1, 2010, Lorus announced the filing of an IND application with the FDA which was for a first-in-man Phase I dose escalation trial in advanced or metastatic solid tumors. In January 2011, Lorus announced initiation of a first-in-man Phase I dose escalation trial and enrolment of the first patient, and identified LOR-253 as the first clinical stage compound to stimulate the tumor suppressor factor KLF4.
Other Small Molecules
Lorus is also pursuing other candidates at earlier stages of development. These include:
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LOR-500 platform. LOR-500 targets multikinases including tyrosine kinase family members and a member of the AMPK family of Ser/Thr kinases. Hit-to-lead identification and optimization of LOR-500 is being currently conducted to identify a lead drug candidate.
|
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•
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LOR-264, a second generation LOR-253 derivative, is being developed for oral administration. Like LOR-253, LOR-264 has demonstrated potent anticancer activity in animal studies and represents the lead oral drug in this development platform. Derivatization of LOR-264 is required to improve anticancer activity and oral bioavailability as part of our lead optimization process.
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•
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LOR-220 platform. LOR-220 is a current lead compound that targets novel bacterial Ser/Thr kinases. Structural optimization of LOR-220 is required to identify clinical drug candidates that show potent antimicrobial activity in animal models.
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RNA-Targeted Therapies
Introduction
Metabolism, cell growth and cell division are tightly controlled by complex protein signalling pathways in response to specific conditions, thereby maintaining normal function. Many human diseases, including cancer, can be traced to faulty protein production and/or regulation. As a result, traditional therapeutics are designed to interact with disease-causing proteins and modify their function. A significant number of current anticancer drugs act by damaging either DNA or proteins within cells (
e.g
., chemotherapy) or by inhibiting the function of proteins using small molecules (
e.g.
, estrogen
blockers, such as Tamoxifen). RNA-targeted therapeutics offer a novel approach to treatment in that they are designed to prevent the production of proteins causing disease.
Our RNA-targeted drugs consist of antisense drugs and short-interfering RNA (“
siRNA
”). The premise of this therapeutic approach is to target an earlier stage of the biochemical process than is usually possible with conventional drugs. The blueprint for protein production is encoded in the DNA of each cell. To translate this code into protein the cell first produces mRNAs (messenger ribonucleic acids) specific to each protein and these act as intermediaries between the information encoded in DNA and production of the corresponding protein. Most traditional therapies interact with the final synthesized or processed
protein. Often this interaction lacks specificity that would allow for interaction with only the intended target, resulting in undesired side effects. In contrast, RNA-targeted therapies are based on altering gene expression at the mRNA level, prior to protein synthesis, and are intended to achieve better drug specificity towards the biochemical target. We believe that drugs based on this approach may have broad applicability, greater efficacy and fewer side effects than conventional drugs.
18
We have developed a number of antisense drugs, of which our lead product is LOR-2040 (formerly GTI-2040). LOR-2040 targets the R2 component of ribonucleotide reductase (“
RNR
”). RNR is a highly regulated, cell cycle-controlled protein required for DNA synthesis and repair. RNR is made up of two components, R1 and R2, encoded by different genes. RNR is essential for the formation of deoxyribonucleotides, which are the building blocks of DNA. Since RNR activity is highly elevated in tumor cell populations and is associated with tumor cell proliferation, we have developed antisense molecules specific for the mRNA
of the R2 component of RNR. Furthermore, the R2 component also appears to be capable of acting as a signal molecule in cancer cells and its elevation is believed to modify a biochemical pathway that can increase the malignant properties of tumor cells. Consequently, reducing the expression of the RNR components in a tumor cell with antisense drugs is expected to have antitumor effects.
LOR-2040
Our lead antisense drug candidate is LOR-2040, which targets the R2 component of RNR and has exhibited antitumor properties against over a dozen different human cancers, including xenograft tumor growth, metastasis and survival models. Additional studies have demonstrated combination drug efficacy in xenograft tumor growth studies for human cancer cells, including drug resistant tumor cell lines. We have completed a Phase I/II clinical trial of LOR-2040 in advanced or metastatic renal cell carcinoma. We have also completed multiple Phase I and/or II clinical trial programs in cooperation with the US National Cancer Institute
(“
NCI
”), for the study of LOR-2040 for the treatment of Acute Myeloid Leukemia (“
AML
”), breast cancer, lung cancer, colon cancer, prostate cancer, a series of solid tumors and myelodysplastic syndrome and acute leukemia.
In June 2009, we announced the publication of an article entitled, “A LC-MS/MS Method for the Analysis of Intracellular Nucleoside Triphosphate Levels” in the peer-reviewed journal Pharmaceutical Research. In the article investigators at the Ohio State University (“
OSU
”) presented data showing the pharmacological activity of LOR-2040 in five leukemia cell lines and in bone marrow samples of a patient with AML treated with LOR-2040 in a Phase II clinical trial. The tumor cells examined with the novel analytical method showed a significant decrease in intracellular deoxynucleoside triphosphate levels required
for DNA synthesis, confirming the target inhibition effect of LOR-2040.
In November 2009, we announced that a Phase II clinical trial in refractory and relapsed AML with LOR-2040 in combination with cytarabine had been successfully completed to the end-of-stage assessment time point, with favorable results. The Steering Committee review required at this stage determined that the Phase II efficacy and safety results fulfilled the protocol criteria for continued patient enrolment and were consistent with the promising Phase Ib clinical findings in relapsed and refractory AML. It was further agreed that based on the strength of the Phase Ib and II clinical data in a total of 48 patients treated in this indication, expansion to a definitive comparative trial was the most
appropriate next step to support registration. On this basis we proceeded with protocol development for the expanded development program. It is notable that the current preliminary evaluation found the response rate to be twice that expected from a risk-matched historical control, and that this is consistent with a further similar analysis of the findings from the prior Phase Ib clinical study.
LOR-1284
In 2003, Lorus began development of an anticancer therapeutic based on siRNA-mediated inhibition of R2 expression. Early screening experiments have identified lead compounds and preliminary
in vitro
and
in vivo
characterization of these compounds has yielded promising results. LOR-1284 (formerly siRNA-1284), the lead compound identified from the screening study, specifically targets R2 expression. In
in vitro
studies, down-regulation of R2 expression by LOR-1284 resulted in decreased tumor cell growth
(proliferation) with a concomitant block in cell cycle progression. Furthermore, LOR-1284 demonstrates anti-tumor activity against human kidney, skin and colon cancers in mouse experimental models of tumor growth. We feel that the results of these studies warrant further development of LOR-1284 as well as expansion of siRNA research to other cancer targets. Although in published reports LOR-1284 has shown significant in vivo anti-tumor activity on its own, we are collaborating with investigators at OSU to develop a novel nanotechnology formulation based on LOR-1284 to enhance uptake of the drug in tissues and to provide a selective affinity for specific tumors. Research is continuing to optimize delivery of siRNA in vivo, and is expected to be the key to the future therapeutic promise of siRNA therapeutics to effectively target specific genes associated with
cancer. In light of this, Lorus announced in 2009 that researchers at OSU have received a grant of approximately US $2 million to explore the potential for applying OSU’s proprietary tumor-targeted nanoparticle drug delivery technology with RNR-targeted RNA-based drugs including LOR-1284. Lorus agreed to supply LOR-1284 along with other developmental compounds that target R2, all of which have shown strong preclinical or clinical activity against a variety of cancers.
19
Clinical Development
NCI Sponsored Trials
Program in Solid Tumors and Other Indications:
Following completion by Lorus in the prior period of a Phase I dose escalation trial in solid tumors and a Phase I/II trial of LOR-2040 in combination with capecitabine in renal cell carcinoma, much of the clinical development for LOR-2040 was performed in conjunction with the NCI, which paid for the cost of the sponsored clinical trials. See “-- Agreements - Collaboration Agreements - National Cancer Institute”. To date we have completed six clinical trials with the NCI for LOR-2040 in patients with AML, metastatic breast cancer, non-small cell lung cancer, solid tumors, unresectable colon cancer, hormone refractory prostate cancer and have one study ongoing in MDS and acute
leukemia. These indications were selected based on the most promising results from our preclinical studies. Upon evaluation of the final clinical data emerging from the
completed NCI clinical trials, Lorus will analyze and make decisions regarding the strategic direction of our antisense portfolio. We do not believe that the data obtained from these trials will be material nor impact our current development plan of focusing on LOR-2040 in AML. Lorus continues to search for partnerships for the future development of LOR-2040.
High Grade Myelodysplastic Syndrome and Acute Leukemia:
Lorus announced in June 2006 a plan for a new clinical investigation of LOR-2040 as a single-agent in patients with high grade myelodysplastic syndrome and acute leukemia as an additional NCI-sponsored initiative. This trial was initiated in mid 2007. This clinical study is designed to evaluate the safety and activity of LOR-2040 as a single agent for acute leukemia and MDS using a novel treatment schedule. The effect on leukemic blasts and blood count recovery will be assessed as part of a detailed investigation of the pharmacodynamic and pharmacokinetic effects, dose-response relationships and tolerability of LOR-2040 during multiple courses of treatment. This clinical trial is now completed and
pending final reporting and publication.
Other Research Initiatives
In May 2009, Lorus announced the extension of a cooperative research agreement with the NCI for preclinical evaluation of LOR-2040 and other Lorus RNA-targeted drugs as part of a novel combination therapeutic strategy to target the renal tumor and not the normal regenerating kidney.
Acute Myeloid Leukemia: NCI Sponsored Trial Program
In July 2003, we announced the FDA’s approval of the NCI-sponsored IND application for a clinical trial of LOR-2040 in combination with cytarabine, in patients with refractory or relapsed AML. Cytarabine is the current established drug for treating AML patients. The study is part of a Phase II clinical program to be conducted under the sponsorship of the Cancer Treatment Evaluation Program of the NCI pursuant to a clinical trial agreement between Lorus and the NCI.
In August 2007, we announced the completion of this study. This clinical trial demonstrated safety and appropriate dosing of the combination regimen and showed promising clinical responses in patients under 60 years of age. Moreover, the clinical responses correlated with downregulation of R2, the cellular target of LOR-2040, and were further supported by demonstration of intracellular LOR-2040 in circulating and bone marrow leukemic cells. In July 2008, we announced publication of the final results of this clinical trial by the investigators in the journal
Clinical Cancer Research 14(12) 2008
. The results demonstrated safety and appropriate
dosing of the combination regimen. Notably, promising clinical responses in patients under 60 years of age were obtained which included complete responses in 35% of the 23 patients and significant cytoreduction of the leukemic blasts in two others. Moreover, the clinical responses correlated with down regulation of R2, the cellular target of LOR-2040 in circulating and bone marrow leukemic cells. Additionally, outcomes of complete response were associated with high pre-treatment levels of R2, suggesting that pre-treatment R2 may be a predictor of response and a possible basis for treatment stratification to this LOR-2040 and cytarabine combination. This proof of concept study provided the basis for proceeding to the larger Phase II study with the same regimen in patients less than 60 years of age with refractory and relapsed AML.
20
Additional research in this program has continued to add scientific support for action of LOR-2040 in AML. In September 2008, Lorus announced a further publication by the investigators presenting results on the metabolism of LOR-2040 in these AML patients along with supporting experiments. This identified factors including activity of liver microsomes that together predicted the circulating drug levels and clearance rates. The investigators also performed additional studies to further elucidate the intracellular activity of LOR-2040 in AML which were announced by Lorus in April 2009 following the presentation to the American Association for Cancer Research, and in June 2009 following their final publication
of this data in
Pharmaceutical Research 26(6) 2009
. A novel analytical method was used to monitor the intracellular activity of LOR-2040 in both preclinical models and in a patient’s samples and confirm an important mechanism of action of the drug to reduce the dNTP molecules in tumor cells that are required for DNA synthesis.
In February 2011, we announced publication in
The AAPS Journal 18 (1) 2011
by OSU investigators of data demonstrating that treatment of leukemia cells with LOR-2040 significantly increased the antiproliferative activity of Ara-C in leukemia cells and resulted in higher intracellular Ara-CTP, the cytotoxic product of Ara-C. The study provided support for the intracellular mechanism through which this increased anti-tumor activity is achieved.
Acute Myeloid Leukemia: Lorus Sponsored Trial Program
In August 2007, we announced an expansion of the LOR-2040 development program in the AML indication with initiation of a more advanced Phase II clinical trial with LOR-2040 and high dose Ara-C (“
HiDAC
”) in refractory and relapsed AML. The decision to advance clinical development of LOR-2040 into Phase II was based on the encouraging results from our completed proof of concept NCI-sponsored study of LOR-2040 in combination with HiDAC in patients with refractory and relapsed AML. This Phase II study included both an efficacy study and a novel additional study to measure intracellular target activities and pharmacological synergies between the
two agents. In the first stage of the 60 patient trial, the pharmacologic and target related activity of LOR-2040 and HiDAC was evaluated in two groups, to determine the contribution of each agent alone and in combination. The second stage of the trial was to provide efficacy evaluation in a larger patient population.
On November 30, 2009, we announced successful completion of the Phase II end of stage assessment of LOR-2040 in combination with HiDAC as salvage therapy in refractory/relapsed AML patients of 60 years of age or younger with favorable results. The Steering Committee review required at this stage determined that the Phase II efficacy and safety results fulfilled the protocol criteria and are consistent with the promising Phase Ib clinical findings. It was further determined on the strength of the Phase Ib and II clinical data that expansion to a definitive comparative trial is the appropriate next step to support registration. A preliminary evaluation found the response rate to be twice that expected from a
risk-matched historical control.
On June 14, 2010, we announced presentation of Phase II clinical trial data for LOR-2040 in combination with high dose cytarabine in the treatment of AML at the 15
th
Annual Congress of the European Hematology Association in Barcelona, Spain. This showed in patients under 60 years of age with relapsed and refractory AML that 28% achieved complete remission (“
CR
”) or CR with incomplete blood count recovery (“
CRi
”) and an additional 4% achieved partial remission. The investigators noted that this
compares favorably with the expected risk-matched historical CR rate of approximately 14% in this high risk AML patient group. In addition, 12-month overall survival of 41% was shown with median overall survival of 10.3 months, assessed as favorable in this predominantly high risk population, and merits further development in a larger randomized clinical trial.
Based on the data from two completed Phase Ib and II clinical trials, Lorus plans to move this clinical program to a larger, randomized, comparative trial in a multinational setting in order to achieve rapid enrolment.
On August 5, 2009, we announced the allowance of a patent from the Japan Patent Office for LOR-2040, which protects LOR-2040 composition and its use in treatment of cancer. On May 3, 2010, we announced allowance of a new patent in Australia for LOR-2040 in treatment of AML as a single agent and in combination therapies with cytarabine, which extends the patent life in Australia to 2024. And on May 3, 2011, we announced the allowance of a new patent in the United States for LOR-2040 in combination with cytarabine for the treatment of refractory and relapsed AML.
21
Orphan Drug Status
In May 2005, Lorus received orphan drug designation from the FDA for LOR-2040 in the treatment of AML. In June 2008, Lorus announced that the European Medicines Agency (“
EMEA
”) had granted orphan drug designation to LOR-2040 for development in AML.
Immunotherapy
Immunotherapy is a form of treatment that stimulates the body’s immune system to fight diseases including cancer. Immunotherapy may help the immune system to fight cancer by improving recognition of differences between healthy cells and cancer cells. Alternatively, it may stimulate the production of specific cancer fighting cells.
Interleukin-17E
Interleukin-17E (“
IL-17E
”) is a protein-based therapeutic that Lorus is developing as an immunotherapy for cancer treatment. We have shown that IL-17E has anticancer activity against a range of human cancers. In February 2010, we announced the publication of an article entitled “IL-17E, a proinflammatory cytokine, has antitumor efficacy against several tumor types in vivo”, in the peer-reviewed journal Cancer Immunology Immunotherapy. In this article, we demonstrated the antitumor effects of IL-17E alone and in combination with a number of approved anticancer agents in preclinical models. The
studies showed that IL-17E alone had potent antitumor activity in a number of solid tumors, including melanoma, breast, colon, pancreatic, and non-small cell lung cancers. In combination studies, IL-17E was compatible with a wide variety of approved anticancer drugs, including Avastin, Tarceva, Taxol, Cisplatin, Dacarbazine, Irinotecan, and Gemzar. Furthermore, the combination of IL-17E with each of these anticancer agents showed greater anticancer efficacy than either agent alone without additional toxicity. The article also provided data on the mechanism of anticancer activity for IL-17E, showing that IL-17E activated the immune system, specifically acting on eosinophils and B cells.
Additional preclinical studies are being done to further evaluate the efficacy and toxicity profile of IL-17E in comparison to other cancer-approved cytokines, including interferon-alpha and IL-2, and further non-clinical studies are planned to assess toxicity and optimize the therapeutic dose.
Virulizin
®
In April 2008, Lorus entered into an exclusive licensing deal with a Zoticon Bioventures’ subsidiary, ZOR, for Virulizin
®
. The license, covering North and South America, Europe and Israel, granted Lorus the right to receive in excess of US$10 million in upfront and milestone payments as well as royalties on sales of between 10 and 20%. In addition, Lorus’ wholly-owned subsidiary received a 25% equity interest in ZOR. ZOR is responsible for all future clinical developments, regulatory submissions, and all commercial activities. As discussed above, in June 2009, Lorus assigned these rights and the rights to the
intellectual property associated with Virulizin
®
to TEMIC as part of the consideration for Lorus’ repurchase of the secured convertible debentures. See “Business Overview - Financial Strategy- Secured Convertible Debentures”.
Agreements
Manufacturing Agreements
We currently rely upon subcontractors for the manufacture of our drug candidates. The subcontractors manufacture clinical material according to current GMP at contract manufacturing organizations that have been approved by our quality assurance department, following audits in relation to the appropriate regulations.
Manufactured product for clinical purposes is tested for conformance with product specifications prior to release by our quality assurance department. GMP batches of our drug candidates are subjected to prospectively designed stability test protocols.
22
License Agreements
Ion Pharmaceuticals
In December 1997, Lorus, through NuChem, acquired certain patent rights and a sublicense from Ion to develop and commercialize the anticancer applications of CLT and new chemical entities related to CLT (the “
NuChem Analogs
”). To May 31, 2011, NuChem had made cash payments totalling US$500,000 to Ion. The balance of up to US$3 million is payable upon the achievement of certain milestones based on the commencement and completion of clinical trials related to the NuChem Analogs. The Company does not currently expect to achieve any of the above milestones in fiscal years ended May 31, 2011 or 2012 and cannot reasonably
predict when such milestones will be achieved, if at all.
The NuChem Analog patents are ancillary to the Company’s primary development activities and do not relate to our core research and development focus, namely LOR-253, nor did they relate specifically to the development of LOR-2040 or Virulizin
®
.
University of Manitoba
The University of Manitoba, Dr. Jim Wright, Dr. Aiping Young and Cancer Care entered into an exclusive license agreement with GeneSense dated June 20, 1997 pursuant to which GeneSense was granted an exclusive worldwide license to certain patent rights with the right to sub-license. Effective May 31, 2009, the agreement was assigned from GeneSense to Lorus. In consideration for the exclusive license to GeneSense of the patent rights, the University of Manitoba and Cancer Care are entitled to an aggregate of 1.67% of the net sales received by GeneSense from the sale of products or processes derived from the patent rights and 1.67% of all monies received by Genesense from sub-licenses of
the patent rights. GeneSense is solely responsible for the preparation, filing, prosecution and maintenance of all patent applications and patents included in the patent rights and all related expenses. Pursuant to the terms of the license agreement, any and all improvements to any of the patent rights derived in whole or in part by GeneSense after the date of the license agreement are not included within the scope of the license agreement and do not trigger any payment of royalties.
The University of Manitoba agreement relates specifically to antisense and related technologies described in patent applications that were pending at the time of the agreement. Subsequent patent amendments or advancements to these patents remain as the property of Lorus, without license rights accruing back to the University of Manitoba. The Company is currently pursuing its antisense development program, primarily as a function of advancements and amendments to the original patents. We have not yet earned any revenue from the products covered under the agreement and have not paid any royalties under this agreement and cannot reasonably predict the timing and amount of any future
payment. We do not expect to make any royalty payments under this agreement in fiscal years ended May 31, 2012 or 2013.
Collaboration Agreements
Zoticon Bioventures Inc.
In April 2008, Lorus through its wholly owned subsidiary GeneSense Technologies Inc. signed an exclusive multinational license agreement with ZOR formed as a subsidiary of Zoticon Bioventures Inc. (“
Zoticon
”), a research-driven biopharmaceutical group, to further develop and commercialize Virulizin
®
for human therapeutic applications. As discussed above, in June 2009, Lorus assigned these rights to TEMIC. (See “Business Overview - Financial Strategy - Secured Convertible Debentures”)
As part of the Zoticon agreement, we entered into a service agreement in which we agreed to provide ZOR with 120 hours of consulting service at its own expense and thereafter will provide services at an agreed upon rate. This agreement expired in October 2009.
National Cancer Institute
In February 2003, Lorus and the NCI approved clinical protocols to conduct a series of clinical trials in a Phase I/II program to investigate the safety and efficacy of LOR-2040. Lorus and the NCI signed a formal clinical trial agreement in which the NCI financially sponsors the LOR-2040 clinical trials, while Lorus provides the clinical trial drug. The agreement was renewed in October 2007 for an additional three years and expired at the end of the term. We do not currently have an active agreement with the NCI.
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In May 2009, Lorus entered into an additional agreement with the NCI for the study of LOR-2501, LOR-2040, and LOR-1284 in combination with commercially-available drugs, to develop a drug cocktail(s) that is more effective for the treatment of Renal Cell Carcinoma tumors than for normal regenerating kidney.
In regards to future payment obligations, Lorus’ obligations under these agreements are limited to the supply of drugs, the cost for which has been incurred. The Company does not currently expect any significant costs associated with the supply of the drug in the future, depending on the outcome of the projects.
Other
From time to time, we enter into other research and technology agreements with third parties under which research is conducted and monies expended. These agreements outline the responsibilities of each participant and the appropriate arrangements in the event the research produces a product candidate.
Business Strategy
Our business strategy is based on the identification and development of novel therapies aimed at novel as well as validated cancer targets. We believe that these target-based approaches hold the promise of more effective therapies with fewer side effects. A target-based approach is increasingly recognized as several targeted agents are already approved by regulatory authorities around the globe. In order to minimize single technology-related risks, we have adopted three different technology approaches:
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1.
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Development of small molecules that recognize specific targets in cancer cells.
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2.
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RNA-targeted technologies such as antisense and siRNA.
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3.
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Immunotherapy using safe and efficacious products to stimulate the natural anticancer properties of the immune system.
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The first two approaches utilize selection strategies for identification and development of highly specific targeted drug candidates, capitalizing on proprietary libraries of compounds developed in-house.
In our efforts to obtain the greatest return on our investment in each drug candidate, we separately evaluate the merits of each drug candidate throughout the clinical development process and consider commercialization opportunities when appropriate. In the next fiscal year, we intend to pursue partnerships and collaborations for our compounds and further the development of our promising pipeline. More specifically, our main objectives are (i) to complete the Phase I clinical trial of our lead small molecule drug, LOR-253 to the end of Phase I and prepare for initiation of a Phase II clinical trial; (ii) to advance our pre-clinical product candidate LOR-500; and (iii) to secure
partnership and financing alternatives in order to successfully continue our operations.
Financial Strategy
To meet future financing requirements, we intend to finance our operations through some or all of the following methods: public or private equity financings, and collaborative and licensing agreements. We intend to pursue financing opportunities as they arise.
Equity Offering and Financing Commitment
On July 22, 2011, subsequent to fiscal year-end, we filed a final short form prospectus in Canada in connection with a best efforts offering (the “
Equity Offering
”) of a minimum of 5,000,000 units and a maximum of 10,000,000 units of the Company (the “
Units
”) at a price of $0.40 per Unit. Each Unit consists of one common share of Lorus and one common share purchase warrant of Lorus. Each warrant will entitle the holder to purchase one common share for five years after the closing of the Equity Offering at an exercise price of $0.45 per common share (the
“
Exercise Price
”). If on any date (the “
Accelerated Exercise Date
”) the 10-day volume weighted average trading price of the common shares on the TSX equals or exceeds 200% of the Exercise Price, then upon the Corporation’s sending the holders of the warrants written notice of such Accelerated Exercise Date and issuing a news release announcing such Accelerated Exercise Date, the warrants shall only be exercisable for a period of 30 days following the date on which such written notice is sent to holders of these warrants.
24
In connection with the Equity Offering, Herbert Abramson, a director of the Corporation, entered into an irrevocable commitment letter on June 20, 2011, and amended July 11, 2011, to purchase, directly or indirectly, common shares and common share purchase warrants (or as may otherwise be agreed) in the capital of Lorus having an aggregate subscription price equal to the difference, if any, between (a) the sum of (i) the gross proceeds realized by Lorus in the Equity Offering and (ii) the gross proceeds received by Lorus in respect of all financings completed by Lorus from the date of the final short form prospectus to November 30, 2011 and (b) $4.0 million.
The Equity Offering closed on August 15, 2011 for total gross proceeds of $2.2 million. In connection with the Equity Offering, Lorus issued 5.5 million common shares and 5.5 million warrants.
Mr. Abramson purchased 2.4 million Units.
December 2010 Private Placement
On December 1, 2010, pursuant to a private placement, the Company issued 1.6 million common shares in exchange for cash consideration of $1.66 million. The total costs associated with the transaction were approximately $20 thousand. The Company has allocated the net proceeds of the private placement to common shares. Mr. Herbert Abramson, a director of the Corporation, subscribed for 1,410,000 common shares, representing approximately 89% of the total number of common shares issued through the private placement. No commission was paid in connection with the private placement.
November 2010 Rights Offering
On August 27, 2010, the Company announced a proposed rights offering as described below including a $4 million standby purchase agreement from a director of the Company, Mr. Herbert Abramson. Mr. Abramson also provided the Company with interim financing by way of three $500 thousand monthly loans, advanced in August, September and October 2010. The loans were unsecured, had six-month terms (or the earlier of the closing of the rights issue) and bore interest at an annual rate of 10%. All three notes were repaid upon the close of the rights offering described below.
On September 27, 2010, Lorus filed a final short form prospectus in each of the provinces of Canada in connection with a distribution to its shareholders in eligible jurisdictions outside the United States of rights exercisable for units of the Company (the “
Rights Offering
”).
Under the Rights Offering, holders of common shares of the Company as of October 12, 2010, the record date, received one right for each common share held as of the record date. Each two rights entitled the holder thereof to purchase a unit of the Company at a price of $1.11 per unit. Each unit consisted of one common share of the Company and one warrant to purchase an additional common share of the Company at a price of $1.33 until May 2012.
A total of 4.2 million units of the Company at a price of $1.11 per unit were issued in connection with the Rights Offering. As a result of the rights offering Lorus issued 4.2 million common shares and 4.2 million common share purchase warrants.
In connection with the Rights Offering, the Company secured a standby purchase arrangement of $4 million by Herbert Abramson, one of Lorus’ directors. Mr. Abramson agreed to make an investment such that the minimum gross proceeds of the proposed rights offering would be $4 million. No fee was payable to Mr. Abramson for this commitment. In accordance with the terms of the stand-by purchase agreement, Mr. Abramson subscribed for 3.6 million of the 4.2 million units of the offering for $4.0 million.
The total costs associated with the transaction were approximately $370 thousand. The Company has allocated the net proceeds of the Rights Offering to the common shares and the common share purchase warrants based on their relative fair values. Based on relative fair values, $3.2 million of the net proceeds were allocated to the common shares and $1.0 million to the common share purchase warrants.
25
Share Consolidation
At our annual and special meeting of shareholders held on November 30, 2009, our shareholders approved a special resolution permitting our board of directors, in its sole discretion, to file an amendment to our articles of incorporation to consolidate our issued and outstanding common shares.
On May 12, 2010, our board approved the share consolidation on the basis of one post-consolidation common share for every 30 pre-consolidation common shares. The record date and effective date for the share consolidation was May 25, 2010. Our common shares began trading on the TSX on a post-consolidation basis on May 31, 2010. The share consolidation resulted in an adjustment to the exercise price and number of common shares issuable upon exercise of outstanding stock options and warrants.
In this Annual Report, all references to number of shares, stock options and warrants in the current and past periods have been adjusted to reflect the impact of the consolidation unless noted otherwise.
Promissory Notes
In April 2010, the Company entered into a loan agreement with Trapeze Capital Corporation, a corporation affiliated with Mr. Abramson, to borrow $1 million. The loan amount, which was received on April 14, 2010, was unsecured, evidenced by a promissory note and bore interest at an annual rate of 10%. The principal and interest amount were due on October 14, 2010, and have been fully repaid by the Company. The funds were used for general working capital purposes.
In October 2009, the Company entered into a loan agreement with Mr. Abramson to borrow $1 million. The loan amount, which was received on October 6, 2009, was unsecured, evidenced by a promissory note and bore interest at an annual rate of 10%. The principal and interest was due in six months. The principal amount of $1.0 million was applied to subscribe for units as part of the November 27, 2009 private placement described below and therefore the liability was discharged at that time.
November 2009 Private Placement
On November 27, 2009, pursuant to a private placement, the Company issued 41.0 million (pre-consolidation) common shares and 20.5 million (pre-consolidation) common share purchase warrants in exchange for cash consideration of $2.5 million. This amount includes the principal amount of $1.0 million originally received by way of a loan from a director, Mr. Abramson, on October 6, 2009, which was applied to subscribe for units as part of the private placement. In addition, the Company issued 2.2 million (pre-consolidation) brokers’ warrants to purchase an equivalent number of common shares at $0.08 (pre-consolidation) until May 27, 2011. The warrants expired unexercised on May 27,
2011.
Secured Convertible Debentures
On October 6, 2004, we entered into a subscription agreement with TEMIC to issue an aggregate of $15.0 million of secured convertible debentures issuable in three tranches of $5.0 million each, in each of, October 2004, January 2005 and April 2005. The debentures were due on October 6, 2009. On June 22, 2009, we reached a settlement with TEMIC with respect to the $15.0 million of debentures.
Under the settlement agreement, we purchased all of the debentures from TEMIC for a cash payment of $3.3 million, the assignment of the rights under the license agreement with ZOR, sale of intellectual property associated with Virulizin
®
and sale of the shares in our wholly owned subsidiary, Pharma Immune Inc., which holds an equity interest in ZOR. Under the agreement, we are entitled to 50% of any royalties received under the ZOR license agreement and 50% of the deal value of any transaction completed in territories not covered by the ZOR license agreement. We also retain a perpetual, royalty free license for the
animal use of Virulizin
®
. TEMIC will be fully responsible for all clinical and regulatory costs associated with commercialization of Virulizin
®
in territories not covered by the ZOR license agreement. We will assist TEMIC with certain agreed upon services.
26
For receipt of the intellectual property associated with Virulizin
®
and all of our shares in Pharma Immune, TEMIC has released all security interests in the assets of Lorus.
August 2008 Rights Offering
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 the July 9, 2008 record date received one right for each common share held as of this record date. Each four rights entitled the holder thereof to purchase a unit of Lorus. Each unit consisted of one common share of Lorus at $3.90 and a one-half common share purchase warrant to purchase additional common shares of Lorus at $4.53 per common share until August 7, 2010.
Pursuant to the rights offering the Company issued 951 thousand common shares and 571 thousand common share purchase warrants in exchange for cash consideration of $3.7 million. The total costs associated with the transaction were $500 thousand. The Company 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 $2.8 million to the common shares and $417 thousand
to the common share purchase warrants.
Intellectual Property and Protection of Confidential Information and Technology
We believe that our issued patents and pending applications are important in establishing and maintaining a competitive position with respect to our products and technology. As of May 31, 2011, we owned or had rights to 22 issued patents and 30 pending patent applications worldwide.
Small Molecule
We have been issued four patents and have 21 pending patents worldwide for our in-house small molecules. These patents cover composition of matter and method claims.
RNA-targeted Therapies
We have been issued one patent in Canada, seven patents in the United States and 10 patents in other jurisdictions around the world relating to our DNA/RNA-based therapeutics, which includes antisense and siRNA molecules. We also have 6 pending patents worldwide for this class of therapies. These patents include composition of matter and method claims.
Immunotherapy
We have three pending patents for our IL-17E immunotherapy program.
Risks Relating to Intellectual Property
We either own the issued patents discussed above or have the exclusive right to make, use, market, sell or otherwise commercialize products using these patents to diagnose and treat cancer. We cannot assure you that we will continue to have exclusive rights to these patents.
We cannot assure you that pending applications will result in issued patents, or that issued patents will be held valid and enforceable if challenged, or that a competitor will not be able to circumvent any such issued patents by adoption of a competitive, though non-infringing product or process. Interpretation and evaluation of pharmaceutical or biotechnology patent claims present complex and often novel legal and factual questions. Our business could be adversely affected by increased competition in the event that any patent granted to it is held to be invalid or unenforceable or is inadequate in scope to protect our operations.
While we believe that our products and technology do not infringe proprietary rights of others, we cannot assure you that third parties will not assert infringement claims in the future or that such claims will not be successful. Furthermore, we could incur substantial costs in defending ourselves against patent infringement claims brought by others or in prosecuting suits against others.
27
In addition, we cannot assure you that others will not obtain patents that we would need to license, or that if a license is required that it would be available to us on reasonable terms, or that if a license is not obtained that we would be able to circumvent, through a reasonable investment of time and expense, such outside patents. Whether we obtain a license would depend on the terms offered, the degree of risk of infringement, the vulnerability of the patent to invalidation and the ease of circumventing the patent.
Until such time, if ever, that further patents are issued to us, we will rely upon the law of trade secrets to the extent possible given the publication requirements under international patent treaty laws and/or requirements under foreign patent laws to protect our technology and our products incorporating the technology. In this regard, we have adopted certain confidentiality procedures. These include: limiting access to confidential information to certain key personnel; requiring all directors, officers, employees and consultants and others who may have access to our intellectual property to enter into confidentiality agreements which prohibit the use of or disclosure of confidential
information to third parties; and implementing physical security measures designed to restrict access to such confidential information and products. Our ability to maintain the confidentiality of our technology is crucial to our ultimate possible commercial success. We cannot assure you that the procedures adopted by us to protect the confidentiality of our technology will be effective, that third parties will not gain access to our trade secrets or disclose the technology, or that we can meaningfully protect our rights to our technology. Further, by seeking the aforementioned patent protection in various countries, it is inevitable that a substantial portion of our technology will become available to our competitors, through publication of such patent applications.
Regulatory Strategy
Our overall regulatory strategy is to work with Health Canada, the federal government department which, among other responsibilities, regulates the use and sale of therapeutic drug products in Canada and the FDA in the United States, the European Medicines Agency in Europe, and any other local regulatory agencies to have drug applications approved for the use of LOR-253 in clinical trials (alone and/or in combination with chemotherapeutic compounds) and subsequently for sale in international markets. Where possible, we intend to take advantage of opportunities for accelerated consideration of drugs designed to treat rare and serious or life-threatening diseases. We also intend to pursue priority evaluation of
any application for marketing approval filed in Canada, the United States or the European Union and to file additional drug applications in other markets where commercial opportunities exist. We cannot assure you that we will be able to pursue these opportunities successfully.
Revenues
The Company has not earned substantial revenues from its drug candidates and is therefore considered to be in the development stage.
Employees
As at May 31, 2011, we employed 13 full-time persons and four part-time people in research and drug development and administration activities. Of our employees, six hold Ph.D.s. To encourage a focus on achieving long-term performance, employees and members of the board of directors have the ability to acquire an ownership interest in the Company through Lorus’ stock option and alternative compensation plans and employees can participate in the employee share purchase plan. See Item 6.B - Compensation.
None of our employees are unionized, and we consider our relations with our employees to be good.
Office Facilities
Our head office, which occupies 20,500 square feet, is located at 2 Meridian Road, Toronto, Ontario. The leased premises include approximately 8,000 square feet of laboratory and research space. We believe that our existing facilities are adequate to meet our requirements for the near term. Our current lease expires on March 31, 2013.
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Competition
The biotechnology and pharmaceutical industries are characterized by rapidly evolving technology and intense competition. There are numerous players in both of these industries that are focusing their efforts on activities similar to ours. Some of these are companies with established positions in the pharmaceutical industry and may have substantially more financial and technical resources, more extensive research and development capabilities, and greater marketing, distribution, production and human resources than us. In addition, we may face competition from other companies for opportunities to enter into partnerships with biotechnology and pharmaceutical companies and
academic institutions. Many of these other companies, however, are not solely focused on cancer, as is the mission of our drug development strategy to specialize in the development of drugs for the treatment and management of cancer.
Competition with our products may include chemotherapeutic agents, monoclonal antibodies, antisense therapies, small molecules, biologics and immunotherapies with novel mechanisms of action. These are drugs that are delivered by specific means for treatment of cancer patients, with a potential to be used in non-cancer indications. We also expect that we may experience competition from established and emerging pharmaceutical and biotechnology companies that have other forms of treatment for the cancers that we target. There are many drugs currently in development for the treatment of cancer that employ a number of novel approaches for attacking these cancer
targets. Cancer is a complex disease with more than 100 indications requiring drugs for treatment. The drugs in competition with our drugs have specific targets for attacking the disease, targets which are not necessarily the same as ours. These competitive drugs therefore could potentially also be used together in combination therapies with our drugs to manage the disease.
Our ability to develop commercial products and to establish and maintain our competitive position in light of technological developments will depend, in part, on our ability to attract and retain qualified personnel. There is a significant level of competition in the marketplace for such personnel. We believe that to date we have been successful in attracting and retaining the highly skilled personnel critical to our business. We have also chosen to outsource activities where skills are in short supply or where it is economically prudent to do so.
Government Regulation
|
Overview
|
Regulation by government authorities in Canada, the United States, and the European Union is a significant factor in our current research and drug development activities. To clinically test, manufacture and market drug products for therapeutic use, we must satisfy the rigorous mandatory procedures and standards established by the regulatory agencies in the countries in which we currently operate or intend to operate.
The laws of most of these countries require the licensing of manufacturing facilities, carefully controlled research and the extensive testing of products. Biotechnology companies must establish the safety and efficacy of their new products in clinical trials, they must establish current Good Manufacturing Practices or current Good Manufacturing Practice and control over marketing activities before being allowed to market their products. The safety and efficacy of a new drug must be shown through clinical trials of the drug carried out in accordance with the mandatory procedures and standards established by regulatory agencies.
The process of completing clinical trials and obtaining regulatory approval for a new drug takes a number of years and requires the expenditure of substantial resources. Once a new drug or product license application is submitted, we cannot assure you that a regulatory agency will review and approve the application in a timely manner. Even after initial approval has been obtained, further studies, including post-marketing studies, may be required to provide additional data on efficacy and safety necessary to confirm the approved indication or to gain approval for the use of the new drug as a treatment for clinical indications other than those for which the new drug was initially
tested. Also, regulatory agencies require post-marketing surveillance programs to monitor a new drug’s side effects. Results of post-marketing programs may limit or expand the further marketing of new drugs. A serious safety or effectiveness problem involving an approved new drug may result in a regulatory agency requiring withdrawal of the new drug from the market and possible civil action. We cannot assure you that we will not encounter such difficulties or excessive costs in our efforts to secure necessary approvals, which could delay or prevent us from manufacturing or marketing our products.
29
In addition to the regulatory product approval framework, biotechnology companies, including Lorus, are subject to regulation under local provincial, state and federal law, including requirements regarding occupational safety, laboratory practices, environmental protection and hazardous substance control, and may be subject to other present and future local, provincial, state, federal and foreign regulation, including possible future regulation of the biotechnology industry.
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Regulation in Canada
|
In Canada, the manufacture and sale of new drugs are controlled by Health Canada. New drugs must pass through a number of testing stages, including pre-clinical testing and clinical trials. Pre-clinical testing involves testing the new drug’s chemistry, pharmacology and toxicology
in vitro
and
in vivo
. Successful results (that is, potentially valuable pharmacological activity combined with an acceptable low level of toxicity) enable the developer of the new drug to file a clinical trial application to begin clinical trials involving humans.
To study a drug in Canadian patients, a clinical trial application submission must be filed with Health Canada. The clinical trial application submission must contain specified information, including the results of the pre-clinical tests completed at the time of the submission and any available information regarding use of the drug in humans. In addition, since the method of manufacture may affect the efficacy and safety of a new drug, information on manufacturing methods and standards and the stability of the drug substance and dosage form must be presented. Production methods and quality control procedures must be in place to ensure an acceptably pure product, essentially
free of contamination, and to ensure uniformity with respect to all quality aspects.
Provided Health Canada does not reject a clinical trial application submission, clinical trials can begin. Clinical trials for product candidates to treat cancer are generally carried out in three phases. Phase I involves studies to evaluate toxicity and ideal dose levels in humans. The new drug is administered to human patients who have met the clinical trial entry criteria to determine pharmacokinetics, human tolerance and prevalence of adverse side effects. Phases II and III involve therapeutic studies. In Phase II, efficacy, dosage, side effects and safety are established in a small number of patients who have the disease or disorder that the new drug
is intended to treat. In Phase III, there are controlled clinical trials in which the new drug is administered to a large number of patients who are likely to receive benefit from the new drug. In Phase III, the effectiveness of the new drug is compared to that of standard accepted methods of treatment in order to provide sufficient data for the statistical proof of safety and efficacy for the new drug.
If clinical studies establish that a new drug has value, the manufacturer submits a new drug submission application to Health Canada for marketing approval. The new drug submission contains all information known about the new drug, including the results of pre-clinical testing and clinical trials. Information about a substance contained in an new drug submission includes its proper name, its chemical name, and details on its method of manufacturing and purification, and its biological, pharmacological and toxicological properties. The new drug submission also provides information about the dosage form of the new drug, including a quantitative listing of all ingredients used in
its formulation, its method of manufacture, manufacturing facility information, packaging and labelling, the results of stability tests, and its diagnostic or therapeutic claims and side effects, as well as details of the clinical trials to support the safety and efficacy of the new drug. Furthermore, for biological products, an on-site evaluation is completed to assess the production process and manufacturing facility. It is required prior to the issuance of a notice of compliance. All aspects of the new drug submission are critically reviewed by Health Canada. If a new drug submission is found satisfactory, a notice of compliance is issued permitting the new drug to be sold. In Canada an Establishment license must be obtained prior to marketing the product.
Health Canada has a policy of priority evaluation of new drug submissions for all drugs intended for serious or life-threatening diseases for which no drug product has received regulatory approval in Canada and for which there is reasonable scientific evidence to indicate that the proposed new drug is safe and may provide effective treatment.
The monitoring of a new drug does not cease once it is on the market. For example, a manufacturer of a new drug must report any new information received concerning serious side effects, as well as the failure of the new drug to produce desired effects. As well, if Health Canada determines it to be in the interest of public health, a notice of compliance for a new drug may be suspended and the new drug may be removed from the market.
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A post surveillance program involves clinical trials conducted after a drug is marketed (referred to as Phase 4 studies in the United States) and is an important source of information on as yet undetected adverse outcomes, especially in populations that may not have been involved in the premarketing trials (e.g., children, the elderly, pregnant women) and the drug’s long-term morbidity and mortality profile. Regulatory authorities may require companies to conduct Phase 4 studies as a condition of market approval. Companies often conduct post-marketing studies in the absence of a regulatory mandate.
An exception to the foregoing requirements relating to the manufacture and sale of a new drug is the limited authorization that may be available in respect of the sale of new drugs for emergency treatment. Under the special access program, Health Canada may authorize the sale of a quantity of a new drug for human use to a specific practitioner for the emergency treatment of a patient under the practitioner’s care. Prior to authorization, the practitioner must supply Health Canada with information concerning the medical emergency for which the new drug is required, such data as is in the possession of the practitioner with respect to the use, safety and efficacy of the new drug, the
names of the institutions at which the new drug is to be used and such other information as may be requested by Health Canada. In addition, the practitioner must agree to report to both the drug manufacturer and Health Canada the results of the new drug’s use in the medical emergency, including information concerning adverse reactions, and must account to Health Canada for all quantities of the new drug made available.
The Canadian regulatory approval requirements for new drugs outlined above are similar to those of other major pharmaceutical markets. While the testing carried out in Canada is often acceptable for the purposes of regulatory submissions in other countries, individual regulatory authorities may request supplementary testing during their assessment of any submission. We cannot assure you that the clinical testing conducted under Health Canada authorization or the approval of regulatory authorities of other countries will be accepted by regulatory authorities outside Canada or such other countries.
|
Regulation in the United States
|
In the United States, the FDA controls the manufacture and sale of new drugs. New drugs require FDA approval of a New Drug Application prior to commercial sale. In the case of a biological product, a biological license application must be obtained prior to marketing and batch releasing. To obtain marketing approval, data from adequate and well-controlled clinical investigations, demonstrating to the FDA’s satisfaction a new drug’s safety and effectiveness for its intended use, are required. Such data are generated in studies conducted pursuant to an IND submission, similar to that required for a clinical trial application in Canada. As in Canada,
clinical studies are characterized as Phase I, Phase II and Phase III trials or a combination thereof. In a marketing application, the manufacturer must also demonstrate the identity, potency, quality and purity of the active ingredients of the new drug involved, and the stability of those ingredients. Further, the manufacturing facilities, equipment, processes and quality controls for the new drug must comply with the FDA’s current Good Manufacturing Practice regulations for drugs or biological products both in a pre-licensing inspection before product licensing and in subsequent periodic inspections after licensing. An establishment license grants the sponsor permission to fabricate, package, label, distribute, import, wholesale or test of the newly approved drug. A five-year period of market exclusivity for a drug comprising a new chemical
entity is available to an applicant that succeeds in obtaining FDA approval of a new chemical entity, provided the active ingredient of the new chemical entity has never before been approved in an New Drug Application. During this exclusivity period, the FDA may not approve any abbreviated application filed by another sponsor for a generic version of the new chemical entity. To extend this market protection, especially important when the original patent may be close to expiration, new indications or dosage forms of previously approved drugs can receive new use or new clinical study exclusivity- up to a three-year period of market exclusivity. During this time, the FDA may not approve an abbreviated application filed by another sponsor for a generic version of the product for that use or indication. For orphan drugs or biologics, a seven-year period exclusivity is granted to benefit the
marketing of a drug, which treats rare diseases or conditions with less than 200,000 patients.
The FDA has “fast track” regulations intended to accelerate the approval process for the development, evaluation and marketing of new drugs used to diagnose or treat life-threatening and severely debilitating illnesses for which no satisfactory alternative therapies exist. “Fast track” designation affords early interaction with the FDA in terms of protocol design and eligibility for expedited review of an New Drug Application. It also permits, although it does not require, the FDA to issue marketing approval based on a surrogate endpoint (a measurement intended to substitute for the clinical measurement of interest, usually prolongation of survival) although the
FDA will often require subsequent clinical trials or even post-approval efficacy studies).
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The above describes briefly what is necessary for a new drug to be approved for marketing in North America. The European Medicines Agency and Japanese Pharmaceuticals and Medical Devices Agency are also important regulatory authorities in drug development. Together with the FDA, they are the three International Conference on Harmonization parties which oversee the three largest markets for drug sales.
C. Organizational Structure
Old Lorus was incorporated under the
Business Corporations Act
(Ontario) on September 5, 1986 under the name RML Medical Laboratories Inc. On October 28, 1991, RML Medical Laboratories Inc. amalgamated with Mint Gold Resources Ltd., resulting in Old Lorus becoming a reporting issuer (as defined under Canadian securities law) in Ontario, on such date. On August 25, 1992, Old Lorus changed its name to IMUTEC Corporation. On November 27, 1996, Old Lorus changed its name to Imutec Pharma Inc., and on November 19, 1998, Old Lorus changed its name to Lorus Therapeutics Inc. On October 1, 2005, Old Lorus continued
under the
Canada Business Corporations Act
. On July 10, 2007, the Old Lorus changed its name from Lorus Therapeutics Inc. to 4325231 Canada Inc. and on October 17, 2007 changed its name to Global Summit Real Estate Inc. As of the Arrangement Date, Old Lorus is not related to New Lorus.
New Lorus was incorporated on November 1, 2006 as 6650309 Canada Inc. under the
Canada Business Corporations Act
.
On the Arrangement Date, Old Lorus completed a plan of arrangement and corporate reorganization with, among others, 6650309 Canada Inc., subsequently renamed Lorus Therapeutics Inc. (“
New Lorus
”), 6707157 Canada Inc. and Pinnacle International Lands, Inc. As a result of the plan of arrangement and reorganization, among other things, each common share of Old Lorus was exchanged for one common share of New Lorus 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. New Lorus 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. At the Arrangement Date, New Lorus’ articles of incorporation were amended to change the name of the Company from 6650309 Canada Inc. to Lorus Therapeutics Inc.
Lorus currently has one subsidiary, NuChem, of which Lorus owns 80% of the issued and outstanding voting share capital and 100% of the issued and outstanding non-voting preference share capital. On May 31, 2009, GeneSense, of which Lorus owned 100% of the issued and outstanding share capital, was wound up into Lorus and subsequently dissolved. Until June 22, 2009, Lorus owned 100% of the issued and outstanding share capital of Pharma Immune, at which time it disposed of these shares. See “Business Overview - Financial Strategy - Secured Convertible Debentures.”
Lorus’ common shares are listed on the TSX under the symbol “LOR”.
The address of the Company’s head and registered office is 2 Meridian Road, Toronto, Ontario, Canada, M9W 4Z7, and our phone number is (416) 798-1200. Our corporate website is www.lorusthera.com. The contents of the website, and items accessible through the website, are specifically not included in this Annual Report by reference.
D. Property, Plant and Equipment
Our head office, which occupies 20,500 square feet, is located at 2 Meridian Road, Toronto, Ontario. The leased premises include approximately 8,000 square feet of laboratory and research space. We believe that our existing facilities are adequate to meet our requirements for the near term. Our current lease expires on March 31, 2013.
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Not applicable.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A. Operating Results
The following discussion should be read in conjunction with the audited Consolidated Financial Statements of the Company for the year ended May 31, 2011 and the accompanying notes (the “
Consolidated Financial Statements
”) set forth elsewhere in this Annual Report. The Consolidated Financial Statements, and all financial information discussed below, have been prepared in accordance with Canadian GAAP. Significant differences between Canadian GAAP and U.S. GAAP are identified in the Supplementary Information included with the Consolidated Financial Statements included in this Annual Report. All amounts are expressed in Canadian dollars unless
otherwise noted. In this Management’s Discussion and Analysis, “
Lorus
”, the “
Company
”, “
we
”, “
us
” and “
our
” each refers to Lorus Therapeutics Inc. both before and after the Arrangement Date.
Overview
Lorus is a biopharmaceutical company focused on the discovery, research and development of novel anticancer therapies with a high safety profile. Lorus has worked to establish a diverse, marketable anticancer product pipeline, with products in various stages of development ranging from discovery and pre-clinical to a product available to start a Phase III clinical trial. A growing intellectual property portfolio supports our diverse product pipeline.
We believe that the future of cancer treatment and management lies in drugs that are effective, 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 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 candidate throughout the clinical trial process and consider partnership when 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 maintaining sufficient levels of funding through public and/or private financing, establishing the efficacy and safety of our product candidates in clinical trials, securing strategic partnerships and obtaining the necessary regulatory approvals to market our products.
Our loss from operations for the year ended May 31, 2011 decreased to $5.0 million ($0.38 per share) compared to $5.7 million ($0.61 per share) for the year ended May 31, 2011 and decreased even further from the loss of $9.3 million ($1.13 per share) for the year ended May 31, 2009. For the year ended May 31, 2011, our net loss and other comprehensive loss was $5.0 million ($0.38 per share) compared with net earnings and other comprehensive earnings of $5.3 million (earnings of $0.57 per share) for the year ended May 31, 2010, as a result of the $11.0 million gain on sale recognized on the extinguishment of our convertible debentures in June 2009 (described below in the section titled “Gain
on repurchase of convertible debentures and transfer of assets”) as well as the gain on sale of shares related to the Arrangement (as described in the section titled “Gain on sale of shares”) of $50 thousand due to a reduction in the indemnification liability (described below). For the year ended May 31, 2009, the Company recorded a gain on sale of shares of $450 thousand resulting in a net loss and other comprehensive loss for the period of $8.9 million ($1.08 per share).
33
The decrease in net loss from operations for the year ended May 31, 2011 compared to the prior year is due primarily to lower general and administrative costs of $863 thousand due to reduced personnel and overhead costs as well as one-time financing charges of $569 thousand incurred in the prior year compared to $156 thousand in the current year, as well as lower research and development costs of $219 thousand, resulting from less spending on LOR-2040 compared to the prior year. These cost reductions were offset by higher stock based compensation expense of $350 thousand in the current year.
The decrease in net loss from operations for the year ended May 31, 2010 compared to the prior year is due primarily to lower research and development costs of $1.2 million resulting from less spending on GLP-toxicity studies as well as an overall reduction in our spending to conserve cash balances and a reduction in interest and accretion charges of $653 thousand and $1.6 million respectively, resulting from the settlement of the convertible debentures described below and lower stock based compensation costs of $270 thousand as a result of a lower share price in the current year. These reductions were offset by a decrease in interest income from $270 thousand for the year ended May 31, 2009 to $21
thousand for the year ended May 31, 2010 as a result of lower cash and investment balances.
We utilized cash of $5.9 million in our operating activities in the year ended May 31, 2011 compared to $3.7 million in the prior year. The increase is primarily a result of repayment of accounts payable and accrued liabilities balances in the current year.
At May 31, 2011, we had cash and cash equivalents and short-term investments of $911 thousand compared to $914 thousand at May 31, 2010. Subsequent to year end we completed an equity offering and obtained a commitment letter (described below under “-- Subsequent Events”) which will provide us with $4 million in cash over the next six months. Including the equity proceeds and commitment letter, Lorus had available $4.9 million for use in fiscal 2012.
Selected Annual Financial Data
The following selected consolidated financial data have been derived from, and should be read in conjunction with, the accompanying audited Consolidated Financial Statements for the year ended May 31, 2011, which are prepared in accordance with Canadian GAAP.
|
Consolidated Statements of Loss and Deficit
(1)(2)
|
||||||||||||
|
(In thousands, except per share data)
|
Years Ended May 31,
|
|||||||||||
|
2011
|
2010
|
2009
|
||||||||||
|
REVENUE
|
$ | - | $ | 131 | $ | 184 | ||||||
|
EXPENSES
|
||||||||||||
|
Cost of sales
|
- | - | - | |||||||||
|
Research and development
|
2,298 | 2,517 | 3,757 | |||||||||
|
General and administrative
|
2,101 | 2,964 | 2,958 | |||||||||
|
Stock-based compensation
|
526 | 176 | 446 | |||||||||
|
Depreciation and amortization
|
56 | 86 | 189 | |||||||||
|
Operating expenses
|
4,981 | 5,743 | 7,350 | |||||||||
|
Interest expense on convertible debentures
|
71 | 54 | 707 | |||||||||
|
Accretion in carrying value of secured convertible debentures
|
- | 80 | 1,707 | |||||||||
|
Interest income (expense)
|
(14 | ) | (21 | ) | (270 | ) | ||||||
|
Loss from operations for the period
|
(5,038 | ) | (5,725 | ) | (9,310 | ) | ||||||
|
Gain on sale of shares
|
- | 50 | 450 | |||||||||
|
Net earnings (loss) and other comprehensive income (loss)
|
(5,038 | ) | 5,331 | (8,860 | ) | |||||||
|
Basic and diluted earnings (loss) per common share
|
$ | (0.38 | ) | $ | 0.57 | $ | (1.08 | ) | ||||
|
Weighted average number of common shares
|
||||||||||||
|
outstanding used in the calculation of
|
||||||||||||
|
basic earnings (loss) per share
|
13,157 | 9,364 | 8,236 | |||||||||
|
diluted earnings (loss) per share
|
13,157 | 9,379 | 8,236 | |||||||||
|
Total assets
|
$ | 2,004 | $ | 2,303 | $ | 7,527 | ||||||
|
Total long-term liabilities
|
$ | - | $ | - | $ | - | ||||||
|
(1)
|
On July 10, 2007, the Company completed the Arrangement. As a result of the Arrangement, each common share of Old Lorus was exchanged for one common share of the Company and the assets (excluding certain future tax assets and related valuation allowance) and liabilities of Old Lorus were transferred to the Company and/or its subsidiaries. The Company continued the business of Old Lorus after the Arrangement Date with the same officers and employees and continued to be governed by the same 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 above reflects that of the Company as if it had always
carried on the business formerly carried on by Old Lorus.
|
|
(2)
|
In accordance the authority granted by shareholders at the Company’s annual and special meeting on November 30, 2009 to permit it to implement a consolidation of the Company’s outstanding common shares in a ratio of between 1-for-10 and 1-for-50 at any time prior to November 30, 2010, the Company’s board of directors approved a 1-for-30 share consolidation which became effective May 25, 2010. The share consolidation affects all of the Company’s common shares, stock options and warrants outstanding at the effective time. Prior to consolidation, the Company had approximately 298 million shares outstanding. Following the share consolidation, the Company had approximately 9.9 million common shares outstanding. Similarly, prior to consolidation, the Company
had approximately 20.2 million stock options and 36.9 million warrants to purchase common shares outstanding. Following the share consolidation, the Company had approximately 673 thousand stock options and 1.3 million warrants to purchase common shares outstanding. All references to number of shares, stock options and warrants in the current and past periods have been adjusted to reflect the impact of the consolidation. All amounts based on the number of shares, stock options or warrants, unless otherwise specified, such as earnings (loss) per share and weighted average issuance price in the case of stock options have been adjusted to reflect the impact of 1-for-30 share consolidation.
|
34
Recent Accounting Pronouncements Adopted - Canadian GAAP
2011
There were no new accounting policies adopted in the fiscal year ended May 31, 2011.
2010
The following accounting policies were adopted during the fiscal year ended May 31, 2010.
Goodwill and Intangible Assets:
Effective June 1, 2009, the Company adopted The Canadian Institute of Chartered Accountants’ Handbook Section 3064, Goodwill and Intangible Assets, which replaced Handbook Section 3062, Goodwill and Other Intangible Assets, and Section 3450, Research and Development Costs and establishes the standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The adoption of this new standard did not have an impact on the Company’s Consolidated Financial Statements.
35
Financial instruments:
Effective June 1, 2009, the Company adopted the amendments under Handbook Section 3862, Financial Instruments - Disclosures, to include additional disclosure requirements about fair value measurement for financial instruments and liquidity risk disclosures. These amendments require a three level hierarchy that reflects the significance of the inputs used in making the fair value measurements. Fair value of assets and liabilities included in Level 1 are determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level 2 include valuations using inputs other than the quoted prices for which all significant inputs are based on observable market data,
either directly or indirectly. Level 3 valuations are based on inputs that are not based on observable market data. The adoption of the new standard did not have a material impact on the Consolidated Financial Statements.
2009
The following accounting policies were adopted during the year ended May 31, 2009.
Credit risk and fair value of financial assets and financial liabilities:
Effective January 1, 2009, the Company adopted Emerging Issue Committee Abstract 173, Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. Emerging Issue Committee Abstract 173 requires the Company to take into account the Company’s own credit risk and the credit risk of the counterparty in determining the fair value of financial assets and financial liabilities, including derivative instruments. The adoption of the new standard did not have a material impact on the Consolidated Financial Statements.
Capital disclosures:
Effective June 1, 2008, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants Handbook Section 1535, Capital Disclosures. 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; (ii) an entity’s compliance with any capital requirements; and (iii) if it has not complied, the consequences of such non-compliance. The Company has included disclosures recommended by Section 1535 in note 8 to the Consolidated Financial Statements included in Item 18 of this Annual Report.
Financial instruments:
Effective June 1, 2008, the Company adopted the new recommendations of Canadian Institute of Chartered Accountants Handbook Section 3862, Financial Instruments - Disclosures and Handbook Section 3863, Financial Instruments - Presentation. 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 non-financial 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 9 to the Consolidated Financial Statements included in Item 18 of this Annual Report.
General standards of financial statement presentation:
In May 2007, the Accounting Standards Board amended Canadian Institute of Chartered Accountants 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.
36
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 to the Consolidated Financial Statements included in Item 18 of this Annual Report.
Recent Accounting Pronouncements Adopted - U.S. GAAP
There were no new accounting policies adopted under U.S. GAAP in the year ended May 31, 2011.
2010
The following accounting policies were adopted during the year ended May 31, 2010.
In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), which is primarily codified in ASC Topic 820 and delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the Company’s fiscal 2010 year. The adoption of this standard, when applied to non-financial assets and non-financial liabilities, did not have a material impact on the results of operations or financial position.
In December 2007, the FASB issued Statement No. 141R, which is primarily codified in ASC Topic 805,and requires most identifiable assets, liabilities, non-controlling interests and goodwill acquired in a business combination to be recorded at full fair value. ASC Topic 805 applies to all business combinations, including combinations among mutual entities and combinations by contract alone. Under ASC Topic 805, all business combinations will be accounted for by applying the acquisition method. ASC Topic 805 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15,
2008, specifically June 1, 2009 for the Company. As the Company did not enter into any business combination transactions on or after June 1, 2009, the adoption of this standard did not have any impact on the consolidated interim financial statements.
In December 2007, the FASB issued Statement No. 160, which is primarily codified in ASC Subtopic 810-10, and requires non-controlling interests (previously referred to as minority interests) to be treated as a separate component of equity, not as a liability or other item outside permanent equity. ASC Subtopic 810-10 applies to the accounting for non-controlling interests and transactions with non-controlling interest holders in consolidated financial statements. ASC Subtopic 810-10 is effective for annual periods beginning on or after December 15, 2008, specifically June 1, 2009 for the Company. The adoption of this standard did not have an impact on the
results of operations or financial position.
In December 2007, the FASB ratified EITF No. 07-1, Accounting for Collaborative Agreements ("EITF 07-1"), which is primarily codified in ASC Topic 808 and provides guidance on how the parties to a collaborative agreement should account for costs incurred and revenue generated on sales to third parties, how sharing payments pursuant to a collaboration agreement should be presented in the income statement and certain related disclosure requirements. ASC Topic 808 is effective for the first annual or interim reporting period beginning after December 15, 2008, specifically June 1, 2009 for the Company and should be applied retrospectively to all prior periods presented for all collaborative
arrangements existing as of the effective date. The adoption of this standard did not have an impact on the results of operations or financial position.
37
2009
The following accounting policies were adopted during the year ended May 31, 2009.
On June 1, 2008, the Company adopted ASC Subtopic 820-10 “Fair Value Measurements” formerly FASB Statement No. 157, which defines fair value, establishes a framework for measuring fair value under United States GAAP, and expands disclosures about fair value measurements. ASC Subtopic 820-10 applies to other accounting pronouncements that require or permit fair value measurements.
ASC Subtopic 820-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability. The adoption of this standard did not have an impact on the results of operations or financial position other than the additional disclosures as shown below.
(i) Fair value hierarchy:
ASC Subtopic 820-10 requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC Subtopic 820-10 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC Subtopic 820-10 prioritizes the inputs into three levels that may be used to measure fair value:
|
|
•
|
Level 1 - applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 - applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
|
|
|
•
|
Level 3 - applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
|
Critical Accounting Policies
The Company periodically reviews its financial reporting and disclosure practices and accounting policies to ensure that they provide accurate and transparent information relative to the current economic and business environment. As part of this process, the Company has reviewed its selection, application and communication of critical accounting policies and financial disclosures. Management has discussed the development and selection of the critical accounting policies with the Audit Committee of the board of directors and the Audit Committee has reviewed the disclosure relating to critical accounting policies in this Annual Report. Other important accounting polices are described in note 3 to the
Consolidated Financial Statements included in Item18 of this Annual Report.
38
Drug Development Costs
We incur costs related to the research and development of pharmaceutical products and technologies for the management of cancer. These costs include internal and external costs for preclinical research and clinical trials, drug costs, regulatory compliance costs and patent application costs. All research costs are expensed as incurred as required under Canadian GAAP.
Development costs, including the cost of drugs for use in clinical trials, are expensed as incurred unless they meet the criteria under Canadian GAAP for deferral and amortization. The Company continually assesses its activities to determine when, if ever, development costs may qualify for capitalization. By expensing the research and development costs as required under Canadian GAAP, the value of the product portfolio is not reflected on the Company’s Consolidated Financial Statements.
Stock-Based Compensation
We have applied the fair value based method to expense stock options awarded since June 1, 2002 using the Black-Scholes option-pricing model as allowed under Canadian Institute of Chartered Accountants Handbook Section 3870. The option pricing model calculates the theoretical fair value of fully transferable options, without vesting restrictions, which significantly differs from the stock option awards issued by Lorus. The model also requires four highly subjective assumptions including future stock price volatility and expected time until exercise, which greatly affect the calculated fair values. The increase or decrease of one of these assumptions could materially increase or decrease the fair value of
stock options issued and the associated expense.
Warrant Valuation
We often raise funding through the issuance of units and the exercise of warrants. Each issued unit has consisted of one common share and a portion of one common share purchase warrant with each whole warrant exercisable at a specified price for one additional common share for up to five years from the issue date. Canadian GAAP requires that when recording the issued units, a value should be ascribed to each component of the units based on the component’s fair value. The fair value of our common shares is established based on the trading price on the TSX. However, as the warrants do not trade on an exchange, the Black Scholes Option Pricing Model has been used to determine the fair
value of the warrants. In the even that the total calculated value of each individual component is greater than the price paid for the unit, the value of each component is reduced on a relative basis until the total is equal to the unit’s issue price. As noted above under “Stock-Based Compensation,” the Black-Scholes pricing model uses highly subjective assumptions which could significantly alter the valuation of the warrant.
Valuation Allowance for Future Tax Assets
We have a net tax benefit resulting from non-capital losses carried forward, and scientific research and experimental development expenditures. In light of the continued net losses and uncertainty regarding our future ability to generate taxable income, management is of the opinion that it is not more likely than not that these tax assets will be realized in the foreseeable future and hence, a full valuation allowance has been recorded against these income tax assets. Consequently, no future income tax assets or liabilities are recorded on the balance sheets.
The generation of future taxable income could result in the recognition of some portion or all of the remaining benefits, which could result in an improvement in our results of operations through the recovery of future income taxes.
Valuation of Goodwill and Long Lived Assets
Goodwill acquired in a business combination is tested for impairment on an annual basis and at any other time if an event occurs or circumstances change that would indicate that impairment may exist. The impairment test is carried out in two steps. In the first step, the carrying amount of the reporting unit including goodwill is compared with its fair value. When the fair value of a reporting unit including goodwill exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired and the second step of the impairment test is unnecessary. The second step is carried out when the carrying amount of a reporting unit exceeds its fair value, in which case the implied fair value of the
reporting unit's goodwill is compared with its carrying amount to measure the amount of the impairment loss if any. The implied fair value of goodwill is determined in the same manner as the value of goodwill is determined in a business combination.
39
The Company reviews long-lived assets which includes fixed assets for impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the undiscounted expected future cash flows expected to result from the use and eventual disposition of an asset is less than its carrying amount, it is considered to be impaired. An impairment loss is measured at the amount by which the carrying amount of the asset exceeds its fair value, which is estimated as the expected future cash flows discounted at a rate proportionate with the risks associated with the recovery of the asset.
Recent Accounting Pronouncements Yet To Be Adopted - Canadian GAAP
The following recent accounting pronouncements under Canadian GAAP have yet to be adopted:
International Financial Reporting Standards (IFRS)
The Canadian Accounting Standards Board requires all Canadian publicly accountable entities to adopt International Financial Reporting Standards (“
IFRS
”) for years beginning on or after January 1, 2011. The Company’s first annual filing under IFRS will be for the year ended May 31, 2012; its first quarterly filing under IFRS was for the quarter ending August 31, 2011 and includes IFRS comparative figures for the period ended August 31, 2010. Accordingly, the Company’s adoption date for IFRS is June 1, 2011, but its transition date (“
Transition Date
”) is June 1,
2010 in order to accommodate IFRS comparative figures in the Company’s Consolidated Financial Statements after the adoption date.
The Company reported its first set of interim financial statements under IFRS on November 11, 2011.
Recent Accounting Pronouncements Yet To Be Adopted - U.S. GAAP
The Company will no longer be reporting under U.S. GAAP following the adoption of IFRS.
Operating Results
Revenue
For the year-ended May 31, 2011, revenue decreased to nil from $131 thousand in the same period last year and from $184 thousand in 2009. Revenue recorded in the fiscal years ended May 31, 2010 and May 31, 2009 was primarily related to milestone revenues associated with the license of Virulizin
®
to ZOR. During the year ended May 31, 2009, Lorus received a $178 thousand (US$150 thousand) milestone payment from ZOR related to ZOR’s achievement of a financing milestone. This milestone was recognized over the remaining 12 months of a service contract whereby we agreed to provide consulting services to
ZOR. As of November 30, 2009, we had fully recognized the milestone payments. The service agreement with ZOR expired in October 2009 and no milestone or licensing revenue has been earned since that date.
Research and Development
Research and development expenses totaled $2.3 million in the year ended May 31, 2011 compared to $2.5 million during the prior year and $3.8 million in 2009. The decrease in expenditures of $0.2 million during the current year compared to the year ended May 31, 2010 is primarily a result of reduced spending on the development of LOR-2040 and emphasis on the development of LOR-253. Because LOR-253 is at an earlier stage of development, it results in lower development costs. In addition, we continue to reduce overall, noncritical research and development costs in order to conserve cash resources.
The decrease in expenditures of $1.2 million for the year ended May 31, 2010 compared to the prior year is primarily a result of the cost of toxicity studies for our lead small molecule drug candidate LOR-253 completed in fiscal 2009. No similar costs were incurred in the year ended May 31, 2010.
40
General and Administrative
General and administrative expenses totaled $2.1 million for the year ended May 31, 2011 compared to $3.0 million in the prior year and $3.0 million in fiscal 2009. General and administrative expenses were lower for the year ended May 31, 2011 compared with the prior year due to reduced personnel costs, lower patent charges due to one time charges in the prior year and a restructuring of our patent portfolio, lower legal and board fees as well as lower costs associated with the terminated financing described below. We do not expect to incur any further expenses related to this terminated financing.
While the general and administrative expenses in the year ended May 31, 2010 were consistent with the year ended May 31, 2009, there were significant reductions to personnel, travel, board of directors and general office costs over the prior year offset by financing costs of $569 thousand associated with the terminated financing (as described below).
Stock Based Compensation
Stock based compensation expense, net of forfeitures, totaled $526 thousand for the year ended May 31, 2011 compared to $176 thousand in the prior year and $446 thousand in 2009. The increase in stock based compensation in the current year compared with the prior year is the result of option grants in the current year to certain officers and employees who received one-time option grants and in turn agreed to the cancellation of the stock options previously held by them. In addition, in the year ended May 31, 2010, we recorded a recovery/reduction of expense of $173 thousand due to the forfeiture of unvested options which further reduced overall stock option expense.
The lower stock based compensation expense for the year ending May 31, 2010 compared to May 31, 2009 is due primarily to a lower share price and therefore lower fair value in the year ended May 31, 2010 as well as the reduction in expenditure of $173 thousand as discussed above.
Depreciation and Amortization
Depreciation and amortization expenses decreased to $56 thousand in the year ended May 31, 2011 as compared to $86 thousand in the prior year and $189 thousand in 2009. The decrease in depreciation and amortization expense is the result of reduced capital asset purchases over the past several fiscal years. During fiscal 2009, we acquired research and development equipment that provides us with the ability to do certain testing in house that was previously outsourced.
Interest Expense
Interest expense was $71 thousand for the year ended May 31, 2011 compared to $54 thousand for the prior year and $707 thousand for the year ended May 31, 2009. Interest expense incurred in the current year related to cash interest on the 10% interest promissory notes (described under “Promissory Notes” and “Rights Offering”), which were all repaid as of November 30, 2010. During the year ended May 31, 2010, $27 thousand interest expense was paid to the debenture holders (prior to June 22, 2010) with $15 thousand in common shares and $12 thousand in cash with the remaining $27 thousand in interest expense accrued on the two $1 million, 10% interest promissory
notes (described under “Promissory Notes”) advanced during the year. The interest expense in 2009 was for non-cash payments related to the interest payable at a rate of prime plus 1% on the $15.0 million convertible debentures that were repurchased in June 2009. All interest on the debentures (prior to May 31, 2009) was paid in common shares of the Company.
Accretion in Carrying Value of Secured Convertible Debentures
Accretion in the carrying value of our secured convertible debentures was nil in the year ended May 31, 2011 compared to $80 thousand in the prior year and $1.7 million in 2009. There is no accretion in the current year as the debentures were repurchased and cancelled in June 2009 (as discussed below). The amount of $80 thousand in the year ended May 31, 2010 relates to the period in the year during which the convertible debentures were outstanding, June 1, 2009 to June 19, 2009. Accretion charges arose as, under GAAP, we 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, we were required to accrete the carrying value of the convertible debentures such that at maturity on October 6, 2009, the carrying value of the debentures would have been the face value of $15.0 million.
41
Interest Income
Interest income totaled $14 thousand in the year ended May 31, 2011 compared to $21 thousand in the prior year and $270 thousand in 2009. The decrease in interest income during the current year is due to lower interest rates available on investments in comparison to the prior years. The interest income was lower for the year ended May 31, 2010 compared to the prior year due to a significantly lower average cash balance throughout the year.
Loss from operations for the period
For the reasons discussed above, our loss from operations for the year ended May 31, 2011 decreased to $5.0 million ($0.38 per share) compared to $5.7 million ($0.61 per share) in the prior year and $9.3 million ($1.13 per share) in 2009. During the current year For the year ended May 31, 2011 net loss and other comprehensive loss was $5.0 million ($0.38 per share). In the year ended May 31, 2010 the Company recognized a $11.0 million gain on sale on the extinguishment of its convertible debentures in June 2009 and a gain of $50 thousand related to a reduction in the indemnification liability. These gains resulted in net earnings and other comprehensive earnings of $5.3 million (earnings $0.57 per share) for
the year ended May 31, 2010. During the year ended May 31, 2009 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 $8.9 million ($1.08 per share).
Gain on repurchase of convertible debentures and transfer of assets
The terms of the secured convertible debentures are described in note 13 to the Company’s annual Consolidated Financial Statements for the period ended May 31, 2011. The Company repurchased these debentures, which were originally due on October 6, 2009, on June 19, 2009.
Under the agreement, Lorus repurchased all of the convertible debentures from TEMIC for consideration that included a cash payment on close of the transaction of $3.3 million, the assignment of the rights under the license agreement with ZOR, certain intellectual property associated with Virulizin
®
and all of Lorus’ shares in its wholly owned subsidiary, Pharma Immune, which held an equity interest in ZOR. Under the agreement, Lorus is entitled to 50% of any royalties received under the ZOR license agreement and 50% of the value of any transaction completed in territories not covered by the ZOR license agreement. Lorus
also retains a perpetual royalty free license for the animal use of Virulizin
®
. TEMIC will be fully responsible for all clinical and regulatory costs associated with the commercialization of Virulizin
®
in territories not covered by the ZOR license agreement. Lorus will assist TEMIC with certain agreed upon services.
For receipt of the intellectual property associated with Virulizin
®
and all of Lorus’ shares in Pharma Immune, TEMIC released all security interests in the assets of Lorus.
As a result of the transaction, in the year ended May 31, 2010, the Company recognized a gain on the repurchase of the debentures of $11.0 million reflecting the difference between the fair value of the debentures at the repurchase date, net of transaction costs of approximately $221 thousand, and the cash payment amount of $3.3 million. In addition, as a result of extinguishing the debentures in the amount of $3.8 million, the equity portion of the debentures, was transferred to contributed surplus. The gain on repurchase of the debentures did not result in income taxes payable as the Company had sufficient capital loss and non-capital loss carryforwards to shelter these
gains.
Plan of Arrangement and Corporate Reorganization
On the Arrangement Date, the Company completed a plan of arrangement and corporate reorganization with, among others, Old Lorus, 6707157 Canada Inc. and Pinnacle International Lands, Inc. As a result of the plan of arrangement and reorganization, among other things, each common share of Old Lorus was exchanged for one common share of the Company and the assets (excluding certain future tax attributes and related valuation allowance) and liabilities of Old Lorus (including all of the shares of its subsidiaries held by it) were transferred, directly or indirectly, to the Company and/or its subsidiaries. The Company continued the business of Old Lorus after the Arrangement Date with the same officers and
employees and continued to be governed by the same 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 included in this MD&A reflect that of the Company as if it had always carried on the business formerly carried on by Old Lorus.
42
Gain on sale of shares
As a result of the Arrangement described above, the Company recognized a gain on the sale of the shares of Old Lorus to the investor of approximately $6.3 million for the year ended May 31, 2008 and a gain on sale in 2009 of $450 thousand, which represents the $600 thousand released from escrow less $150 thousand accrued as management’s estimate of the fair value of the liability associated with the indemnification described below. This liability was reduced to $100 thousand in the year ended May 31, 2010 resulting in a gain on sale of $50 thousand recorded in net earnings and other comprehensive income. The reduction in liability was the result of the passage of time and related reduction in risk
associated with claims under the liability. This liability is included on the balance sheet in Accrued Liabilities as at May 31, 2011.
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 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 of the Arrangement 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 of the Arrangement and directly or indirectly relating to, with certain exceptions, any of the activities of Old Lorus or the Arrangement.
There have been no claims under this indemnity to date.
Share Consolidation
In accordance the authority granted by shareholders at the Company’s annual and special meeting on November 30, 2009 to permit it to implement a consolidation of the Company’s outstanding common shares, the Company’s board of directors approved a 1-for-30 share consolidation which became effective May 25, 2010. The share consolidation affected all of Lorus’ common shares, stock options and warrants outstanding at the effective time. Fractional shares were not issued. Prior to consolidation the Company had approximately 298 million shares outstanding. Following the share consolidation, Lorus has approximately 9.9 million common shares outstanding. Similarly, prior to consolidation, the
Company had approximately 20.2 million stock options and 36.9 million warrants to purchase common shares outstanding. Following the share consolidation, the Company had approximately 673 thousand stock options and 1.3 million warrants to purchase common shares outstanding.
In this Annual Report, all references to number of shares, stock options and warrants in the current and past periods, unless otherwise specified, have been adjusted to reflect the impact of the consolidation. All amounts based on the number of shares, stock options or warrants, such as earnings (loss) per share and weighted average issuance price in the case of stock options have been adjusted to reflect the impact of the 1-for-30 share consolidation.
License Transactions
In April 2008, Lorus, through its wholly owned subsidiary Genesense, signed an exclusive multinational license agreement with ZOR formed as a subsidiary of Zoticon Bioventures Inc. (“
Zoticon
”), a research-driven biophrarmaceutical group, to further develop and commercialize Virulizin
®
for human therapeutic applications.
43
Under the terms of the agreement, we received an upfront licensing fee of $100 thousand and a subsequent milestone payment of $170,000, and were entitled to receive in excess of US$10 million in milestone payments based on progress through financing and clinical development, and royalties on net sales that vary from 10-20% depending on the level of sales of Virulizin
®
achieved in those territories covered by the license and subject to certain other adjustments. In addition, Lorus’ wholly owned subsidiary, Pharma Immune, received a 25% interest in ZOR. ZOR assumed all future costs for clinical developments,
regulatory submissions and all commercial activities.
At the same time, we entered into a service agreement with ZOR under which we agreed to provide ZOR with 120 hours of consulting service at its own expense and thereafter provide services at an agreed-upon rate. This agreement expired in October 2009.
On June 22, 2009, we reached a settlement with TEMIC with respect to the purchase and settlement of the $15.0 million of secured convertible debentures.
Under the settlement agreement, we purchased all of the debentures from TEMIC for a cash payment of $3.3 million, the assignment of the rights under the license agreement with ZOR, sale of intellectual property associated with Virulizin
®
and sale of the shares in our wholly owned subsidiary, Pharma Immune Inc., which holds an equity interest in ZOR. Under the agreement, we are entitled to 50% of any royalties received under the ZOR license agreement and 50% of the deal value of any transaction completed in territories not covered by the ZOR license agreement. We also retain a perpetual, royalty free
license for the animal use of Virulizin
®
. TEMIC will be fully responsible for all clinical and regulatory costs associated with commercialization of Virulizin
®
in territories not covered by the ZOR license agreement. We will assist TEMIC with certain agreed-upon services.
For receipt of the intellectual property associated with Virulizin
®
and all of our shares in Pharma Immune, TEMIC released all security interests in the assets of Lorus.
Corporate Changes
As discussed above, on July 10, 2007, the Company and Old Lorus completed a plan of arrangement and corporate reorganization with, among others, 6707157 Canada Inc. and Pinnacle International Lands, Inc. As part of the Arrangement, all of the assets and liabilities of Old Lorus (including all of the shares of its subsidiaries held by it), with the exception of certain future tax assets were transferred, directly or indirectly, from Old Lorus to the Company. Securityholders in Old Lorus exchanged their securities in Old Lorus for equivalent securities in New Lorus and the board of directors and management of Old Lorus continued as the board of directors and management of New
Lorus. New Lorus obtained substitutional listings of its common shares on both the TSX and the NSYE Amex (formerly, the American Stock Exchange). As discussed under the heading “Regulatory Matters” below, the Company voluntarily delisted from the NYSE Amex effective October 31, 2008.
As part of the Arrangement, the Company changed its name to Lorus Therapeutics Inc. and continued as a biopharmaceutical company, specializing in the research and development of pharmaceutical products and technologies for the management of cancer as a continuation of the business of Old Lorus. In October 2007, Old Lorus changed its name from 4325231 Canada Inc. to Global Summit Real Estate Inc.
Quarterly Results of Operations
The selected financial information provided below is derived from the Company’s unaudited quarterly Consolidated Financial Statements for each of the last eight quarters.
Revenue recognized over the oldest three quarters is primarily related to milestone payments received from ZOR for the license of Virulizin
®
. Lorus received two milestone payments under the license agreement, one upon signing the agreement and a second upon ZOR achieving a financing milestone. The milestone revenue was recognized over the period of a service contract period whereby Lorus agreed to provide consulting services to ZOR. The milestone revenue was fully recognized by the end of the second quarter of 2010, as the service agreement with ZOR expired in October 2009.
44
Research and development expenditures have been consistent over the past eight quarters with variances primarily due to timing of expenditures. On an overall basis the four quarters in fiscal 2011 are lower than the prior year due to reduced spending on LOR-2040 and overall reduced expenditures. Higher expenses in the quarter ended February 28, 2011 relate to the initiation of the LOR-253 Phase I clinical trial in January 2011.
General and administrative expenses have trended lower for the past year quarter-over-quarter due to reduced headcount, and an overall reduction in spending to conserve cash balances. The increase in general and administrative costs for the quarter ended May 31, 2010 was due to the write off of $569 thousand in costs associated with a terminated financing initiative.
The net earnings shown in the quarter ended August 31, 2009 is related to the gain on settlement of the convertible debentures described above.
Cash used in operating activities was significantly lower in the quarters ended May 31, 2010 and August 31, 2010 due to increased accounts payables and accrued liabilities balances. The cash used in operating activities in the quarter ended November 30, 2010 was much higher than the other quarters due to a repayment of a $1 million promissory note.
|
(In thousands, except per share data)
|
May 31,
2011
|
Feb 28,
2011
|
Nov. 30,
2010
|
Aug. 31,
2010`
|
May 31,
2010
|
Feb 28,
2010
|
Nov. 30,
2009
|
Aug. 31,
2009
|
||||||||||||||||||||||||
|
Revenue
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | 3 | $ | 79 | $ | 49 | ||||||||||||||||
|
Research and development expense
|
446 | 760 | 603 | 489 | 601 | 718 | 658 | 540 | ||||||||||||||||||||||||
|
General and administrative expense
|
421 | 527 | 564 | 589 | 1,173 | 515 | 743 | 533 | ||||||||||||||||||||||||
|
Net (loss) earnings
|
(1,037 | ) | (1,581 | ) | (1,255 | ) | (1,165 | ) | (1,820 | ) | (1,343 | ) | (1,266 | ) | 9,760 | |||||||||||||||||
|
Basic and diluted net (loss)
|
||||||||||||||||||||||||||||||||
|
earnings per share
|
$ | (0.07 | ) | $ | (0.10 | ) | $ | (0.11 | ) | $ | (0.12 | ) | $ | (0.18 | ) | $ | (0.14 | ) | $ | (0.14 | ) | $ | 1.14 | |||||||||
|
Cash used in operating activities
|
$ | (930 | ) | $ | (1,676 | ) | $ | (2,603 | ) | $ | (685 | ) | $ | (271 | ) | $ | (1,812 | ) | $ | (651 | ) | $ | (987 | ) | ||||||||
Earnings per share (“
EPS
”) is shown as reported as per the quarterly published Consolidated Financial Statements. Share issuances during the second quarter result in different weighted average share numbers each quarter and as such the quarterly EPS will not total the annual EPS.
Outstanding Share Data
As at November 25, 2011, the Company had 21.2 million common shares issued and outstanding and 9.8 million common share purchase warrants convertible into an equal number of common shares. In addition, the Company had issued and outstanding 1.2 million stock options to purchase an equal number of common shares.
B. Liquidity and Capital Resources
The Company’s objectives when managing capital are to:
|
|
•
|
Maintain its ability to continue as a going concern in order to provide returns to shareholders and benefits to other stakeholders;
|
|
|
•
|
Maintain a flexible capital structure which optimizes the cost of capital at acceptable risk; and
|
|
|
•
|
Ensure sufficient cash resources to fund its research and development activity, to pursue partnership and collaboration opportunities and to maintain ongoing operations.
|
45
At May 31, 2011, the capital structure of the Company consisted of equity comprised of share capital, warrants, 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 settled its secured convertible debentures and extinguished its liability in the amount of $15.0 million for
consideration consisting of cash and other assets in June 2009. The Company expects that its current capital resources will not be sufficient to carry out its research and development plans and operations for more than the next six to eight months without further investment. (See “Liquidity and Capital Resources.”)
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, 2010.
Equity Offering and Financing Commitment
On July 22, 2011, subsequent to fiscal year-end, we filed a final short form prospectus in connection with the Equity Offering, which closed on August 15, 2011 for total gross proceeds of $2.2 million. In connection with the Equity Offering, Lorus issued 5.5 million common shares and 5.5 million warrants that entitle the holder to purchase one common share for five years after the closing of the Equity Offering at the Exercise Price of $0.45 per common share. If on any date, which we refer to as the Accelerated Exercise Date, the 10-day volume weighted average trading price of the common shares on the TSX equals or exceeds 200% of the Exercise Price, then upon the Corporation’s sending the
holders of the warrants written notice of such Accelerated Exercise Date and issuing a news release announcing such Accelerated Exercise Date, the warrants shall only be exercisable for a period of 30 days following the date on which such written notice is sent to holders of these warrants.
In connection with the Equity Offering, Herbert Abramson, a director of the Corporation, entered into an irrevocable commitment letter on June 20, 2011, and amended July 11, 2011, to purchase, directly or indirectly, common shares and common share purchase warrants (or as may otherwise be agreed) in the capital of Lorus having an aggregate subscription price equal to the difference, if any, between (a) the sum of (i) the gross proceeds realized by Lorus in the Equity Offering and (ii) the gross proceeds received by Lorus in respect of all financings completed by Lorus from the date of the final short form prospectus to November 30, 2011 and (b) $4.0 million. Mr. Abramson purchased 2.4 million
Units.
December 2010 Private Placement
On December 1, 2010, pursuant to a private placement, the Company issued 1.6 million common shares in exchange for cash consideration of $1.66 million. The total costs associated with the transaction were approximately $20 thousand. The Company has allocated the net proceeds of the private placement to common shares. Mr. Herbert Abramson, a director of the Corporation, subscribed for 1,410,000 common shares, representing approximately 89% of the total number of common shares issued through the private placement. No commission was paid in connection with the private placement.
November 2010 Rights Offering
On September 27, 2010, Lorus filed a final short form prospectus in each of the provinces of Canada in connection with a distribution to its shareholders in eligible jurisdictions outside the United States of the Rights Offering, under which holders of common shares of the Company as of the October 12, 2010 record date received one right for each common share held as of such date. Each two rights entitled the holder thereof to purchase a unit of the Company at a price of $1.11 per unit. Each unit consisted of one common share of the Company and one warrant to purchase an additional common share of the Company at a price of $1.33 until May 2012.
A total of 4.2 million units of the Company at a price of $1.11 per unit were issued in connection with the Rights Offering. As a result of the Rights Offering, Lorus issued 4.2 million common shares and 4.2 million common share purchase warrants.
Additionally, the Company secured a standby purchase arrangement of $4 million by Herbert Abramson, one of Lorus’ directors. Mr. Abramson agreed to make an investment such that the minimum gross proceeds of the proposed rights offering would be $4 million. No fee was payable to Mr. Abramson for this commitment. In accordance with the terms of the stand-by purchase agreement, Mr. Abramson subscribed for 3.6 million of the 4.2 million units of the offering for $4.0 million. Mr. Abramson also provided the Company with interim financing by way of three $500 thousand monthly loans, advanced in August, September and October 2010. The loans were unsecured, had six-month terms (or the earlier of
the closing of the rights issue) and bore interest at an annual rate of 10%. All three notes were repaid upon the close of the Rights Offering.
46
The total costs associated with the transaction were approximately $370 thousand. The Company has allocated the net proceeds of the rights offering to the common shares and the common share purchase warrants based on their relative fair values. Based on relative fair values, $3.2 million of the net proceeds were allocated to the common shares and $1.0 million to the common share purchase warrants.
Promissory Notes
In April 2010, the Company entered into a loan agreement with Trapeze Capital Corporation, a corporation affiliated with Mr. Abramson, to borrow $1 million. The loan amount, which was received on April 14, 2010, was unsecured, evidenced by a promissory note and bore interest at an annual rate of 10%. The principal and interest amount were due on October 14, 2010 and in August 2010 the due date was extended a further three months. This note was repaid at November 30, 2010.
In October 2009, the Company entered into a loan agreement with Mr. Abramson to borrow $1 million. The loan amount, which was received on October 6, 2009, was unsecured, evidenced by a promissory note and bore interest at an annual rate of 10%. The principal and interest were due in six months. The principal amount of $1.0 million was applied to subscribe for units as part of the November 27, 2009 private placement described below. This note was repaid at November 30, 2009.
November 2009 Private Placement
On November 27, 2009, pursuant to a private placement, the Company issued 1.366 million (post-consolidation) common shares and 683 thousand (post-consolidation) common share purchase warrants in exchange for cash consideration of $2.5 million. This amount includes the principal amount of $1.0 million originally received by way of a loan from a director, Mr. Abramson, on October 6, 2009, which was applied to subscribe for units as part of the private placement. In addition, the Company issued 72 thousand (post-consolidation) brokers’ warrants to purchase an equivalent number of common shares at $2.40 (post-consolidation) until May 27, 2011. These warrants expired unexercised on May 27,
2011. The total costs associated with the transaction were approximately $250 thousand, which included the $77 thousand that represented the fair value of the brokers’ warrants. The Company has allocated the net proceeds of the private placement to the common shares and the common share purchase warrants based on their relative fair values. Based on relative fair values, $1.7 million of the net proceeds were allocated to the common shares and $622 thousand to the common share purchase warrants.
August 2008 Rights Offering
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 the July 9, 2008 record date received one right for each common share held as of this record date. Each four rights entitled the holder thereof to purchase a unit of Lorus. Each unit consisted of one common share of Lorus at $3.90 and a one-half common share purchase warrant to purchase additional common shares of Lorus at $4.53 per common share until August 7, 2010.
Pursuant to the rights offering, the Company issued 951 thousand common shares and 571 thousand common share purchase warrants in exchange for cash consideration of $3.7 million. The total costs associated with the transaction were $500 thousand. The Company 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 $2.8 million to the common shares and $417 thousand
to the common share purchase warrants.
47
Cash Position
At May 31, 2011, we had cash and cash equivalents and short-term investments totaling $911 thousand compared to $914 thousand at May 31, 2010. On August 15, 2011, the Company raised $2.2 million in an equity offering (described below under “Subsequent Events”), which is available for use in fiscal 2012. We invest 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 May 31, 2011 was $140
thousand as compared to a deficiency of $1.3 million at May 31, 2010.
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.
If we are able to secure additional financing, we intend to use these 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 our ability to raise additional capital, 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 our compounds and the timing and development status of competitive products.
As discussed above, management has forecast that our current level of cash, cash equivalents, including the proceeds described under “Subsequent Events” will be sufficient to execute its current planned expenditures for the next six to eight months without further investment.
Terminated U.S. Financing
In April 2010, the Company filed a registration statement on Form F-1 with the SEC for an offering of up to US$17.5 million of units in the United States.
In August 2010, the Company announced that, due to unfavorable market conditions, the registration statement would be withdrawn and the public financing would not proceed. The Company incurred fees of approximately $569 thousand related to this filing which were included in general and administrative expenses for the year ended May 31, 2010. An additional $156 thousand in fees were incurred in the year ended May 31, 2011 and included in general and administrative expenditures.
Subsequent Events
On July 22, 2011, subsequent to fiscal year-end, we filed a final short form prospectus in connection with the Equity Offering, which closed on August 15, 2011 for total gross proceeds of $2.2 million. In connection with the Equity Offering, Lorus issued 5.5 million common shares and 5.5 million warrants that entitle the holder to purchase one common share for five years after the closing of the Equity Offering at the Exercise Price of $0.45 per common share. If on any date, which we refer to as the Accelerated Exercise Date, the 10-day volume weighted average trading price of the common shares on the TSX equals or exceeds 200% of the Exercise Price, then upon the Corporation’s sending the
holders of the warrants written notice of such Accelerated Exercise Date and issuing a news release announcing such Accelerated Exercise Date, the warrants shall only be exercisable for a period of 30 days following the date on which such written notice is sent to holders of these warrants.
In connection with the Equity Offering, Herbert Abramson, a director of the Corporation, entered into an irrevocable commitment letter on June 20, 2011, and amended July 11, 2011, to purchase, directly or indirectly, common shares and common share purchase warrants (or as may otherwise be agreed) in the capital of Lorus having an aggregate subscription price equal to the difference, if any, between (a) the sum of (i) the gross proceeds realized by Lorus in the Equity Offering and (ii) the gross proceeds received by Lorus in respect of all financings completed by Lorus from the date of the final short form prospectus to November 30, 2011 and (b) $4.0 million. Mr. Abramson purchased 2.4 million
Units. See “Business Overview - Financial Strategy - Equity Offering and Financing Commitment” above.
The Company disclosed in its management information circular dated October 28, 2011 that it would like to amend the exercise price of the November 2010 warrants from the $1.33 current exercise price to an exercise price equal to the 5-day volume weighted average trading price of the common shares of the Corporation on the Toronto Stock Exchange on the date of the approval of the shareholders to such amendment at the annual and special meeting (to be held on November 29, 2011), plus a 10%
premium (to be rounded up). The Company has not yet determined the impact the potential re-pricing may have on the financial statements.
48
C. Research and development, patents and licenses, etc.
Certain information concerning research and development and intellectual property is set forth in Item 4, “Information on the Company”.
D. Trend information
We have a history of operating losses and have not been profitable since our inception in 1986. We expect to continue to incur losses for at least the next several years as we and our collaborators and licensees pursue clinical trials and research and development efforts. See “Risk Factors” above.
E. Off-balance sheet arrangements
As at May 31, 2011, we have not entered into any off-balance sheet arrangements.
F. Tabular disclosure of contractual obligations
(In thousands)
|
Contractual Obligations
|
Less than
1 year
|
1-3 years
|
3-5 years
|
More than
5 years
|
Total
|
|||||||||||||||
|
Operating leases
|
$ | 142 | $ | 134 | $ | 12 | $ | - | $ | 288 | ||||||||||
The Company is party to certain licensing agreements that require it to pay a proportion of any fees that it may receive from future revenues or milestone payments. As of May 31, 2011, 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 execution of a partnership agreement, could result in liabilities owing to such consultants. The amounts payable under these agreements are contingent on the amounts receivable by Lorus under such partnership agreements. As of May 31, 2011, no amounts were owing and the amount of future fees payable to the consultants are not determinable.
During the year ended May 31, 2011, the Company entered into various contracts with service providers with respect to LOR-253 phase I clinical trial. These contracts could result in future payment commitments of approximately $860 thousand. Of this amount, $248 thousand has been accrued or paid at May 31, 2011. The payments will be based on services performed and amounts may be higher or lower based on actual services performed.
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 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;
|
49
|
|
(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 $100 thousand relating to the indemnifications provided, which we believe is a reasonable estimate of the obligation for these indemnifications. There have been no claims under this indemnity. This amount is included on the Company’s consolidated balance sheet in Accrued Liabilities at May 31, 2011.
A. Directors and Senior Management
The following table and notes thereto provide the name, province or state and country of residence, positions with the Company and term of office of each person who serves as a director or executive officer of Lorus as at the date hereof.
Each director has been elected or appointed to serve until the next annual meeting or until a successor is elected or appointed. We have an Audit Committee, a Corporate Governance and Nominating Committee and a Compensation Committee the members of each such committee are shown below. As at May 31, 2011, our directors and executive officers, as a group, beneficially owned, directly or indirectly, or exercised control over approximately 7.2 million common shares or approximately 46% of our outstanding common shares.
|
Name and Province/State and Country of Residence
|
Position
|
Director or Officer Since
|
|
Herbert Abramson
(1)(3)
Ontario, Canada
|
Director
|
July 2007
|
|
Dr. Denis Burger
(1)(2)
Oregon, United States
|
Chairman, Director
|
September 2007
|
|
D
r. Mark Vincent
(3)
Ontario, Canada
|
Director
|
September 2007
|
|
Warren Whitehead
(1)
Ontario, Canada
|
Director
|
April 2011
|
|
Dr. Jim A. Wright
(2)
Ontario, Canada
|
Director, former President and Chief Executive Officer
|
October 1999
|
|
Dr. Aiping H. Young
Ontario, Canada
|
President and Chief Executive Officer, Director
|
October 1999
(4)
|
|
Elizabeth Williams
Ontario, Canada
|
Acting Chief Financial Officer and Director of Finance
|
November 2005
|
|
Dr. Yoon Lee
Ontario, Canada
|
Vice President Research
|
May 2008
|
50
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Corporate Governance and Nominating Committee.
(4) Dr. Young has been with the Company since October 1999. She became President, Chief Executive Officer and director in October 2006.
The principal occupation and employment of each of the foregoing persons for the past five years is set forth below:
Mr. Herbert Abramson:
Mr. Abramson has been in the investment industry for 29 years managing portfolios for high net worth individuals. He is a co-founder, Chairman and Portfolio Manager of Trapeze Capital Corp., an investment dealer and portfolio management company and is also Chairman and Portfolio Manager of Trapeze Asset Management Inc., an affiliated investment counseling company. Mr. Abramson is a member of the Law Society of Upper Canada and practiced corporate/securities law for 12 years before going into the investment business. He is also currently a director of St Andrew Goldfields Ltd.
Dr. Denis Burger:
Dr. Burger is currently the executive Chairman of BioCurex, Inc. Dr. Burger was the past Chairman, Chief Executive Officer and a director of AVI Biopharma Inc, an Oregon based biotechnology company from 1992 to March 2007. Dr. Burger is also a partner in Sovereign Ventures, a healthcare consulting and funding firm based in Portland, Oregon. Dr. Burger received his MSc and PhD in Microbiology and Immunology from the University of Arizona. Dr. Burger is also currently on the Board of Trinity Biotech plc.
Dr. Mark Vincent:
Dr. Mark Vincent is an Associate Professor of Oncology at the University of Western Ontario and a staff medical oncologist at the London Regional Cancer Program. Dr. Vincent is also the co-founder and Chief Executive Officer of Sarissa, Inc. since 2000.
Dr. Jim Wright
: Dr. Wright is presently Chief Executive Officer of NuQuest Bio Inc. and has been since 2006. As of July 1, 2010 Dr. Wright has accepted a position as Adjunct Professor in the Department of Biochemistry and Biomedical sciences at McMaster University. Dr. Wright co-founded GeneSense Technologies Inc. in 1996, and served as Lorus’ President, Chief Scientific Officer and a member of the board of directors in October 1999 on a merger with GeneSense. In September 2006 he stepped down as the President and Chief Executive Officer of Lorus.
Mr. Warren Whitehead:
Mr. Whitehead is a Certified Management Accountant who has held senior financial management positions in several biotechnology and pharmaceutical companies. Most recently he served as Chief Financial Officer of ARIUS Research Inc., providing financial guidance and leadership during the acquisition of ARIUS by Roche in 2008. Prior to that Mr. Whitehead was CFO at Labopharm Inc., where he completed a series of public equity financings and a NASDAQ IPO. He is currently a member of the board of directors of PlantForm Corporation, a life sciences company that develops biosimilar antibody drugs for treatment of
cancer and other critical illnesses.
Dr. Aiping Young
: Dr. Young has been our President and Chief Executive Officer since September 21, 2006 and was a cofounder with Dr. Wright of GeneSense Technologies Inc. Dr. Young previously held the position of Chief Operating Officer, Senior Vice President, Research and Development and Chief Technology Officer at Lorus.
51
Elizabeth Williams
: Prior to joining Lorus in July 2004, Ms. Williams was an Audit Manager with Ernst & Young LLP. Ms. Williams is a chartered accountant and has received a bachelor’s degree in business administration.
Dr. Yoon Lee:
Dr. Lee is currently Vice President of Research. Dr. Lee has been with Lorus for ten years, most recently serving as the Director of Research. He joined Lorus in 1999 through the merger with GeneSense Technologies Inc., where he was a Research Scientist integrally involved in the development of GeneSense oligonucleotide therapeutics program.
There are no family relationships among the persons named above and there are no arrangements or understanding with major shareholders, customers, suppliers or others pursuant to which any person was selected as a director or member of senior management.
B. Compensation
Summary of Executive Compensation
The following table details the compensation information for the most recent fiscal year of the Corporation, for the President and Chief Executive Officer, the Director of Finance and Acting Chief Financial Officer and the Vice President of Research (“
Named Executive Officers
”). The figures are in Canadian dollars.
Summary Compensation Table
|
Non-equity incentive plan compensation
|
|||||||
|
Name and Principal Position
|
Fiscal
Year
|
Salary
($)
|
Share-based
awards
($)
|
Option-based
awards
(1)
($)
|
Annual
incentive
plans
($)
|
Long-term
incentive
plans
|
Total
Compensation
($)
|
|
Dr. Aiping Young
President and Chief Executive Officer
|
2011
|
342,819
|
N/A
|
644,711
|
127,845
|
Nil
|
1,115,375
|
|
Ms. Elizabeth Williams
Director of Finance, Acting Chief Financial Officer
|
2011
|
66,322
|
N/A
|
54,385
|
808
|
Nil
|
120,707
|
|
Dr. Yoon Lee
Vice President Research
|
2011
|
135,405
|
N/A
|
61,183
|
25,599
|
Nil
|
221,187
|
|
1.
|
In determining the fair value of these option awards, the Black-Scholes valuation methodology was used with the following assumptions: (i) expected life of five years; (ii) volatility of 117-119%; (iii) risk-free interest rate of 1.5-1.85%; and (iv) no dividend yield.
|
52
|
Name and Principal Position
|
Fiscal
Year
|
Salary
($)
|
Bonus
($)
|
Other Annual
Compensation
($)
|
Securities Under
Options/SARs
Granted
(#)
(1)
|
All Other
Compensation
($)
|
|
Dr. Aiping Young
President and Chief Executive Officer
|
2011
|
342,819
|
127,845
|
Nil
|
784,400
|
Nil
|
|
Ms. Elizabeth Williams
Director of Finance, Acting Chief Financial Officer
|
2011
|
66,322
|
808
|
Nil
|
62,015
|
Nil
|
|
Dr. Yoon Lee
Vice President, Research
|
2011
|
135,405
|
25,599
|
Nil
|
66,725
|
Nil
|
|
(1)
|
Number of stock options granted during fiscal 2011. These options were granted on December 20, 2010 and April 6, 2011 at a price of $1.05 and $0.89 respectively and have a ten-year life.
|
Directors’ Compensation
The following table details the compensation received by each director for the fiscal year ended May 31, 2011:
|
Name
|
Fees earned
($)
|
Share-based awards
($)
|
Option-based awards
($)
(2)
|
All Other Compensation
($)
|
Total
Compensation
($)
|
|
Mr. Herbert Abramson
|
36,500
|
Nil
|
4,330
|
Nil
|
40,830
|
|
Dr. Denis Burger
(1)
|
66,429
|
Nil
|
8,660
|
Nil
|
75,089
|
|
Dr. Mark Vincent
|
28,500
|
Nil
|
4,330
|
Nil
|
32,830
|
|
Mr. Warren Whitehead
(3)
|
14,000
|
Nil
|
3,630
|
Nil
|
17,630
|
|
Dr. Jim Wright
|
28,500
|
Nil
|
4,330
|
Nil
|
32,830
|
|
|
(1)
|
Non-Canadian directors were paid in US dollars. The amounts disclosed above are in Canadian dollars converted from US dollars at rates prevailing at the time of payment (December 10, 2010 - 1US$ = CDN$1.0094, January 11, 2011 - 1US$ = CDN$0.9897, April 6, 2011 - 1US$ = CDN$0.9604)
|
|
|
(2)
|
In determining the fair value of these option awards, the Black-Scholes valuation methodology was used with the following assumptions: (i) expected life of five years; (ii) volatility of 117-119%; (iii) risk free interest rate of 1.5-1.85%; and (iv) no dividend yield.
|
|
|
(3)
|
Mr. Whitehead joined the Board on April 7, 2011.
|
During the fiscal year ended May 31, 2011, each director who was not an officer of the Corporation was entitled to receive 5,000 stock options (the Chair received 10,000) and, at his election, common shares, deferred share units and/or cash compensation for attendance at the board of directors of the Corporation committee meetings. Compensation consisted of an annual fee of $15,000 (the Chair received $35,000) and $1,500 per Board meeting attended ($4,500 to the Chair of a Board meeting). Members of the Audit Committee received an annual fee of $8,000 (the Chair received $10,000). Each member of the Compensation Committee and Corporate Governance and Nominating Committee received an annual fee of $5,000 per
committee. Board members (including the Chair) receive $500 for meetings held via conference call. There have not been any changes to the fees from the prior year. Non-executive directors are reimbursed for any out-of pocket travel expenses incurred in order to attend meetings. Executive directors are not entitled to directors’ compensation or reimbursement of travel expenses.
Directors are entitled to participate in our Deferred Share Unit Plan. See “Equity Compensation Plans - Directors’ and Officers’ Deferred Share Unit Plan”. None of our directors participated in this plan in the years ended May 31, 2011 or 2010.
53
Management Contracts
Under the employment agreement with President and Chief Executive Officer of the Corporation, Dr. Aiping Young, dated September 21, 2006, Dr. Young’s salary for fiscal 2011 was $330,000. This agreement provides for a notice period equal to 18 months plus one additional month for each year of employment under the agreement in the event of termination without cause or a resignation. If within 18 months of a change of control of Lorus, Dr. Young’s employment is terminated without cause or if she terminates the agreement with good reason as defined in the agreement, then she is entitled to receive the equivalent of two years of her basic salary plus one month’s salary for each year under the
agreement, plus an annual bonus prorated over the severance period (based on the bonus paid in respect of the last completed fiscal year).
Dr. Young will also be entitled to benefits coverage for the severance period or a cash payment in lieu thereof. The employment agreement provides that the Corporation may at any time assign Dr. Young to perform other functions that are consistent with her skills, experience and position within the Corporation. Dr. Young reports directly to the Board. The bonus and options allocation of the President and Chief Executive Officer is determined by the Board and is awarded based 100% on achievement of corporate objectives. Dr. Young is entitled to five weeks’ annual vacation prorated to reflect a period of employment less than a full calendar year.
Under the employment agreement with Director of Finance of the Corporation, Ms. Elizabeth Williams, dated May 31, 2004, Ms. Williams’ salary for fiscal 2011 was $67,000. Ms Williams currently provides services on a part-time basis. This agreement provides for a notice period equal to the greater of one month and the applicable notice entitlement under employment legislation in the event of termination. Ms. Williams reports to the Chief Executive Officer. The bonus and options allocation of the Director of Finance is as recommended to the Board by the Chief Executive Officer. Ms Williams is entitled to four weeks of paid vacation, prorated to reflect a period of employment less than a full
calendar year.
Under the employment agreement with Vice President of Research of the Corporation, Dr. Yoon Lee, dated May 5, 2008, Dr. Lee’s salary of for fiscal 2011 was $135,000. This agreement provides for a notice period equal to 4 months plus one additional month for each year of employment, to a maximum of 12 months. Dr. Lee reports to the Chief Executive Officer. The bonus and options allocation of the Vice President of Research is as recommended to the Board by the Chief Executive Officer. Dr. Lee is entitled to five weeks of paid vacation, prorated to reflect a period of employment less than a full calendar year.
Salary and bonus amounts for each of the Named Executive Officers paid during the fiscal year 2011 were as set out in the Summary Compensation Table above.
54
Equity Compensation Plans
The following table sets forth certain details as at the end of the fiscal year ended May 31, 2011 and at October 28, 2011 with respect to compensation plans pursuant to which equity securities of the Company are authorized for issuance.
|
Number of Shares to be
issued upon exercise of
outstanding options
(a)
|
Weighted-
average
exercise price of
outstanding options
(b)
|
Number of Common shares
remaining available for
future issuance under the
equity compensation plans
(Excluding Securities
reflected in Column (a))
(c)
|
Total Stock Options
outstanding and
available for Grant
(a) + (c)
|
||||
|
Plan Category
|
Number
|
% of Common
shares
outstanding
|
Number
|
% of Common
shares
outstanding
|
Number
|
% of Common
shares
outstanding
|
|
|
Equity compensation plans approved by Shareholders
|
1,185,578
|
7.6
%
|
$
1.58
|
1,161,734
|
7.4
%
|
2,347,312
|
15%
|
|
Stock Option Plans
|
The stock option plans were established to advance the interests of Lorus by:
|
|
•
|
Providing Eligible Persons (as defined below) with additional incentives;
|
|
|
•
|
Encouraging stock ownership by Eligible Persons;
|
|
|
•
|
Increasing the interest of Eligible Persons in the success of Lorus;
|
|
|
•
|
Encouraging Eligible Persons to remain loyal to Lorus; and
|
|
|
•
|
Attracting new Eligible Persons to Lorus.
|
Our original stock option plan was established in 1993 pursuant to our 1993 Stock Option Plan (the “
1993 Plan
”); however, due to significant developments in the laws relating to share option plans and our then-future objectives, in November 2003 we created the 2003 Stock Option Plan (the “
2003 Plan
”), ratified by our shareholders, pursuant to which all future grants of stock options would be made.
The Compensation Committee, as authorized by the Board, administers our stock option plans (collectively, the “
Stock Option Plans
”).
|
The 1993 Plan
|
Under the 1993 Plan, options were granted to directors, officers, consultants and employees of the Corporation or its subsidiaries (“
Eligible Persons
”). The total number of options issued under the 1993 Plan is 2,749. This represents 0.00% of the Company’s issued and outstanding capital as at October 28, 2011. There were no further option grants made under the 1993 Plan after November 2003. Therefore, no further options are issuable under the 1993 Plan. The total number of common shares issuable under actual grants pursuant to the 1993 Plan is 2,749, being0.00% of the Company’s issued and outstanding capital as at October 28,
2011.
The number of common shares issuable to insiders, at any time, under the 1993 Plan and any other compensation arrangement of the Corporation cannot exceed 10% of the issued and outstanding common shares of the Corporation. The number of shares issued to insiders, within any one-year period, under the 1993 Plan and any other compensation arrangement of the Corporation cannot exceed 10% of the issued and outstanding common shares of the Corporation. The maximum percentage of common shares reserved for issuance to any one person is 5% of the issued and outstanding common shares of the Corporation. The exercise price of options granted under the 1993 Plan was established by the Board on the basis of the closing
market price of common shares of the Corporation on the TSX on the last trading day preceding the date of grant. If such a price was not available, the exercise price was to be determined on the basis of the average of the bid and ask for the common shares on the TSX on the date preceding the date of grant. The Board determined the vesting period of options at the time of granting the option. The term of options granted under the 1993 Plan and outstanding as of October 7, 2004 is 10 years from the date of grant.
55
If an option holder ceases to be an officer, director, continuing consultant or employee of the Corporation or a subsidiary, each unexpired, vested option may be exercised within three months of the date of cessation. In the event of the death of an optionee, each unexpired, vested option may be exercised within nine months of the option holder’s date of death.
Options granted under the 1993 Plan are not transferable. Currently, the 1993 Plan may be amended by the Board subject to regulatory approval in certain circumstances.
|
The 2003 Plan
|
Under the 2003 Plan, options may be granted to Eligible Persons. At October 28, 2011, the total number of options outstanding under the 2003 Plan is 1,167,096, representing 5.5% of the Corporation’s issued and outstanding capital. Options to purchase up to an additional 2,005,460 common shares, being 9.5% of common shares issued and outstanding, remain available for grant under the 2003 Plan. The total number of common shares issuable under the 2003 Plan is 3,172,556. This represents 15% of the Corporation’s issued and outstanding capital as at October 28, 2011. The total number of options issued under the 2003 Plan combined with those issued under the 1993 Plan and shares issued under the
Alternative Compensation Plan (discussed below) will not exceed 15% of the common shares issued and outstanding at any time.
The maximum number of common shares reserved for issuance to insiders, at any time, under the 2003 Plan and any other compensation arrangement of the Corporation is 10% of the issued and outstanding common shares of the Corporation. The maximum number of common shares that may be issued to insiders, at any time, under the 2003 Plan and any other compensation arrangement of the Corporation within a 12 month period is 10% of the issued and outstanding common shares of the Corporation. The maximum number of common shares reserved for issuance to any one person is 5% of the issued and outstanding common shares of the Corporation. The exercise price of options granted under the 2003 Plan is established by the
Board and will be equal to the closing market price of the common shares on the TSX on the last trading day preceding the date of grant. If there is no trading on that date, the exercise price will be the average of the bid and ask on the TSX on the last trading date preceding the date of grant. If not otherwise determined by the Board, an option granted under the 2003 Plan will vest as to 50% on the first anniversary of the date of grant of the option and an additional 25% on the second and third anniversaries after the date of grant. The Board fixes the term of each option when granted, but such term may not be greater than 10 years from the date of grant.
If an option holder is terminated without cause, resigns or retires, each option that has vested will cease to be exercisable three months after the option holder’s termination date. Any portion of an option that has not vested on or prior to the termination date will expire immediately. If an option holder is terminated for cause, each option that has vested will cease to be exercisable immediately upon the Corporation’s notice of termination. Any portion of an option that has not vested on or prior to the termination date will expire immediately.
Options granted under the 2003 Plan are not assignable.
Currently, the Board may amend the 2003 Plan subject to regulatory approval, provided that the Board may not make the following amendments without the approval of Shareholders:
|
|
•
|
an amendment to the maximum number of common shares reserved for issuance under the 2003 Plan and under any other security based compensation arrangement of the Corporation;
|
56
|
|
•
|
a reduction in the exercise price for options held by insiders;
|
|
|
•
|
an extension to the term of options held by insiders; and
|
|
|
•
|
an increase in the 10% limits on grants to insiders.
|
During the period June 1, 2010 to May 31, 2011, options to purchase 1,049,700 common shares were granted under the 2003 Plan at exercise prices between $0.89 and $1.05 per common share. During the year ended May 31, 2011, we granted options to employees, other than executive officers of the Corporation, to purchase 78,500 common shares, being 7% of the total incentive stock options granted during the year to employees, executive officers and directors.
Alternative Compensation Plan
In November 2009, after receiving shareholder approval, the Company adopted an alternate compensation plan (the “
ACP
”), which enables Lorus to meet its obligations to pay directors’ fees, salary and performance bonuses to certain employees in the form of common shares. The ACP permits the Corporation to, in circumstances considered appropriate by the board of directors (the “
Board
”), encourage the ownership of equity of the Corporation by its directors and senior employees (“
Participants
”), enhance the
Corporation’s ability to retain key personnel and reward significant performance achievements while preserving the cash resources of the Corporation.
Under the ACP, Participants have the option of receiving director’s fees, salary, bonuses or other remuneration, as applicable (“
Remuneration
”), by the allotment and issuance from treasury of such number of common shares as will be equivalent to the cash value of the Remuneration determined by dividing the Remuneration by the weighted average closing common share price for the five (5) trading days prior to payment date (the “
5-day VWAP
”). The issue price of common shares issued under the ACP is the 5-day VWAP.
The maximum number of common shares reserved for issuance under the ACP, when combined with the Stock Option Plans described under “Equity Compensation Plan Information” section, will not exceed 15% of the Corporation’s issued and outstanding common shares at any given time.
There have been no shares issued under the ACP.
Employee Share Purchase Plan
We have an Employee Share Purchase Plan (the “
ESPP
”), with the purpose of the ESPP to assist the Corporation to retain the services of its employees, to secure and retain the services of new employees and to provide incentives for such persons to exert maximum efforts for the success of the Corporation. The ESPP provides a means by which employees of the Corporation and its affiliates may purchase common shares at a 15% discount through accumulated payroll deductions. Eligible participants in the ESPP include all employees, including executive officers, who work at least 20 hours per week and are customarily employed by the Corporation or an
affiliate of the Corporation for at least six months per calendar year. Generally, each offering is of three months’ duration with purchases occurring every quarter. Participants may authorize payroll deductions of up to 15% of their base compensation for the purchase of common shares under the ESPP.
For the year fiscal ended May 31, 2011, a total of 6,652 common shares had been purchased by employees under the ESPP at prices per share between $1.27 and $0.68 per common share and a weighted average purchase price of $0.83. During the year ended May 31, 2011, under the ESPP, Named Executive Officers, as a group, did not purchase any shares pursuant to the ESPP.
Directors’ and Officers’ Deferred Share Unit Plan
We have a deferred share unit plan for directors and officers (the “
Deferred Share Unit Plan
”). Under the Deferred Share Unit Plan, participating directors (“
Participating Directors
”) may elect to receive either a portion or all of their annual fees for acting as a director (“
Annual Fees
”) from us in deferred share units. Under the Deferred Share Unit Plan, the Compensation Committee may at any time during the period between the annual meetings of our Shareholders, in its discretion recommend the Corporation
credit to each participating director who has elected under the terms of the Deferred Share Unit Plan, the number of units equal to the gross amount of the Annual Fees to be deferred divided by the fair market value of the common shares. The fair market value of the common shares is determined as the closing price of the common shares on the TSX on the day immediately preceding such recommendation by the Compensation Committee or such other amount as determined by the Board and permitted by the stock exchanges or other market(s) upon which the common shares are from time to time listed for trading and by any other applicable regulatory authority (collectively, the “
Regulatory Authorities
”).
57
In addition, the Participating Directors may elect under the Deferred Share Unit Plan to receive deferred share units in satisfaction for meeting fees earned by the Participating Directors as a result of attendance at meetings of the Board held between the annual meetings of our Shareholders by the credit to each Participating Director of the number of units equal to the gross amount of the meeting fees to be deferred divided by the fair market value of the common shares, being the closing price of the common shares on the TSX on the day immediately preceding the recommendation by the Compensation Committee or such other amount as determined by the Board and permitted by the Regulatory
Authorities.
The Deferred Share Unit Plan is administered by the Board (in consultation with the Compensation Committee) and, subject to regulatory requirements, may be amended by the Board without Shareholder approval. When a Participating Director ceases to hold the position of director and is no longer otherwise employed by us, the Participating Director receives either (a) a lump sum cash payment equal to the number of deferred share units held multiplied by the then fair market value of the common shares on the date of termination, or (b) the number of common shares that can be acquired in the open market with the amount described in (a), either case being subject to withholding for income tax. The Board may
terminate the Deferred Share Unit Plan any time before or after any allotment or accrediting of deferred share units thereunder.
Option Grants During Fiscal Year 2011
The following tables set forth the options granted to and exercised by each of the Named Executive Officers during the fiscal year ended May 31, 2011:
Option/SAR Grants During the Most Recently Completed Financial Year
|
Name and Principal Position
|
Securities Under
Options/SARs
Granted
(#)
|
% of Total Options/SARs
Granted to
Employees in
Financial
Year
(%)
|
Exercise or
Base Price
($/Security)
|
Market Value of
Securities Underlying
Options/SARs
on the Date
of Grant
($/Security)
|
Expiration
Date
|
|
Dr. Aiping Young
President and Chief Executive Officer
|
531,500
252,900
|
51%
24%
|
$1.05
$0.89
|
$1.03
$0.86
|
December 20, 2020
April 6, 2021
|
|
Ms. Elizabeth Williams
Director of Finance, Acting Chief Financial Officer
|
78,500
(1)
|
7%
|
$1.05
|
$1.03
|
December 20, 2020
|
|
Dr. Yoon Lee
Vice President, Research
|
78,500
(1)
|
7%
|
$1.05
|
$1.03
|
December 20, 2020
|
|
(1)
|
These options to purchase common shares are incentive options. The options only vest upon the attainment of specific undertakings based on certain corporate performance objectives; failing to achieve the undertakings will result in forfeiture on the specified deadline. Upon achieving the specific undertakings, 50% of the options vest followed by 25% on the first anniversary and 25% on the second anniversary of the date of granting.
|
58
Incentive Compensation Plans
|
Outstanding Share-Based Awards and Option-Based Awards
|
The following table shows all awards outstanding to each Named Executive Officer as at May 31, 2010:
|
Option-based Awards
|
||||
|
Name
|
Number of securities
underlying unexercised
options
(#)
|
Option exercise price
($)
|
Option expiration date
|
Value of unexercised
in-the-money
options
($)
(1)
|
|
Dr. Aiping Young
|
531,500
252,900
|
1.05
0.89
|
December 20, 2020
April 6, 2021
|
Nil
Nil
|
|
Ms. Elizabeth Williams
|
62,015
|
1.05
|
December 20, 2020
|
Nil
|
|
Dr. Yoon Lee
|
66,725
|
1.05
|
December 20, 2020
|
Nil
|
|
(1)
|
These amounts are calculated based on the difference between the market value of the securities underlying the options at the end of the fiscal year ($0.68), and the exercise price of the options.
|
The options granted to the Named Executive Officers during the year ended May 31, 2011 vest contingently upon the achievement of corporate objectives that the Compensation Committee has deemed to be the value drivers of shareholder value. These stock options vest 50% upon the achievement of the stated objectives, 25% on the next anniversary and 25% on the second anniversary.
Aggregated Option/SAR Exercises During the Most Recently Completed
Financial Year and Financial Year-End Option/SAR Values
|
Name
|
Securities
Acquired on
Exercise
(#)
|
Aggregate
Value
Realized
($)
|
Unexercised
Options/SARs at
May 31, 2011
(#)
Exercisable/Unexercisable
|
Value of Unexercised
in-the-Money
Options/SARs at
May 31, 2011
($)
Exercisable/Unexercisable
|
|
Dr. Aiping Young
President and Chief Executive Officer Former Chief Operating Officer
|
Nil
|
Nil
|
392,100/392,100
|
nil/nil
|
|
Ms. Elizabeth Williams
Director of Finance, Acting Chief Financial Officer
|
Nil
|
Nil
|
31,008/31,008
|
nil/nil
|
|
Dr. Yoon Lee
Vice President, Research
|
Nil
|
Nil
|
33,363/33,363
|
nil/nil
|
59
C. Board Practices
Lorus is authorized to have a board of at least one director and no more than ten. Lorus currently has six directors. Directors are elected for a term of approximately one year, from annual meeting to annual meeting, or until an earlier resignation, death or removal. For the dates our current directors assumed their directorships, see Item 6.A. - “Directors and Senior Management” above.
Each officer serves at the discretion of the Board or until an earlier resignation or death. There are no family relationships among any of our directors or officers.
Our non-management directors have no service contracts with us or our subsidiaries that provide for benefits upon termination of employment. See “-- Management Contracts” above for a summary of Dr. Young’s employment agreement.
Committees of the Board of Directors
The Company has an Audit Committee, a Nominating and Corporate Governance Committee and a Compensation Committee.
The members of these committees currently and during the 2011 fiscal year are as follows:
|
Audit Committee:
|
Denis Burger, Herbert Abramson, Warren Whitehead
(1)
|
|
Nominating and Corporate Governance Committee:
|
Herbert Abramson, Mark Vincent
|
|
Compensation Committee:
|
Denis Burger, Jim Wright
|
(1) Mr. Whitehead joined the Audit Committee in April 2011.
Compensation Committee
Composition of the Compensation Committee
The Board, upon the advice of the Compensation Committee, determines executive compensation. From October 2, 2008 to present, the Compensation Committee is comprised of Mr. Burger and Mr. Wright. Mr. Burger is chair of the Compensation Committee. The Compensation Committee met four times during the fiscal year ended May 31, 2011.
Compensation Objectives and Philosophy
The Compensation Committee’s mandate is to review and advise the Board on the recruitment, appointment, performance, compensation, benefits and termination of executive officers. The Compensation Committee also administers and reviews procedures and policies with respect to our 1993 Plan and 2003 Plan, employee benefit programs, pay equity and employment equity and reviews executive compensation disclosure where it is publicly disclosed.
The market for biotechnology companies in the development phase has been extremely challenging throughout fiscal 2011 and it has been negatively impacted further by the deterioration of the capital markets late in calendar 2008 and continuing to the present. The Compensation Committee has taken these factors into consideration when recommending the compensation for Named Executive Officers and focuses the assessment on achievement of the corporate objectives described below as being the key value drivers of the Corporation.
Lorus’ executive compensation program is designed to:
|
|
•
|
attract and retain qualified, motivated and achievement-oriented individuals by offering compensation that is competitive in the industry and marketplace;
|
|
|
•
|
align executive interests with the interests of shareholders; and
|
60
|
|
•
|
ensure that individuals continue to be compensated in accord with their personal performance and responsibilities and their contribution to the overall objectives of the Company.
|
These objectives are achieved by offering executives and employees a compensation package that is competitive and rewards the achievement of both short-term and long-term objectives of the Company. As such, our compensation package consists of three key elements:
|
|
•
|
base salary and initial stock options;
|
|
|
•
|
short-term compensation incentives to reward corporate and personal performance through potential annual cash bonuses;
|
|
|
•
|
long-term compensation incentives related to long-term increase in share value through participation in the 2003 Plan.
|
|
Base Salary - Initial Stock Options
|
In establishing base salaries, the objective of the Compensation Committee is to establish levels that will enable Lorus to attract and retain executive officers who can effectively contribute to the long-term success of Lorus. Base salary for each executive officer is a function of the individual’s skills, abilities, experience, past performance and anticipated future contribution to the success of Lorus. The Compensation Committee uses private and public compensation surveys and their knowledge of industry trends to assist with the determination of an appropriate compensation package for each executive officer. In certain cases, the Compensation Committee may recommend inclusion
of automobile allowances, fitness allowances and the payment of certain professional dues as a component of an overall remuneration package for executives.
In certain cases, executive officers may be granted stock options on the commencement of employment with Lorus in accordance with the responsibility delegated to each executive officer for achieving corporate objectives and enhancing shareholder value in accordance with those objectives.
|
Short-Term Compensation Incentives
|
The role of short-term compensation incentives at Lorus is to reward corporate and personal performance. Each year, the Board approves the annual corporate objectives encompassing scientific, clinical, regulatory, business and corporate development and financial criteria. The annual cash bonus for the President and Chief Executive Officer and the other executive offices is based, at least in part, on the level of achievement of these annual objectives. One hundred percent of the President and Chief Executive Officer’s and seventy-five percent of the other executive officers’ cash bonus is based on the level of achievement of corporate objectives. The balance of the
other executive officers’ bonus is based on achievement of individual/departmental objectives.
All corporate and executive officer objectives are reviewed by the Compensation Committee and approved by the Board. The Compensation Committee recommends to the Board the awarding of bonuses, payable in cash, stock or stock options, to reward extraordinary individual performance.
For each executive officer, during the fiscal year ended May 31, 2011, the potential annual cash bonuses range from 15% to 40% of base salary when all corporate and individual executive officer objectives were achieved.
Cash bonuses are determined as soon as practicable after the end of the fiscal year and, for the Named Executive Officers, are included in the Summary Compensation Table in the year in respect of which they are earned.
|
Long-Term Incentive Plan
|
The role of long-term compensation incentives at Lorus is to reward an executive’s contribution to the attainment of Lorus’ long-term objectives, align an executive’s performance with the long-term performance of Lorus and to provide an additional incentive for an executive to enhance shareholder value. Long-term incentive compensation for directors, officers, employees and consultants is reviewed annually and is accomplished through the grant of stock options under our 2003 Plan.
61
The number options granted for executives of Lorus for the 2011 fiscal year was based on achievement of both corporate and executive officer objectives. The Compensation Committee approves the allocation of options and options are priced using the closing market price of the common shares on the TSX on the last trading day prior to the date of grant. Options to purchase common shares expire ten years from the date of grant and vest over a term determined by the Compensation Committee. The granting of options to purchase common shares for Named Executive Officers is included in the Summary Compensation Table in the year that they are earned.
|
Performance Metrics
|
The performance of the President and Chief Executive Officer and other Named Executive Officers for the 2011 financial year was measured in the following areas:
|
|
1.
|
Maximizing the value of LOR-2040;
|
|
|
2.
|
Maximizing the value of LOR-253;
|
|
|
3.
|
Establishing at least one corporate partnership; and
|
|
|
4.
|
Equity financing to establish at least one year of cash.
|
Each of the above is weighted at 25% in relation to assessment of satisfaction of overall corporate objective and determination of any general corporate bonuses. Based on these criteria the Board assigned an achievement of 70.25%. Incentive compensation related to the attainment of these objectives will be paid in fiscal 2012. Similar performance metrics were established for the year ending May 31, 2012 based on the approved business plan for the current year.
Audit Committee
The current members of the Audit Committee are Herb Abramson, Denis Burger and Warren Whitehead. Mr. Warren Whitehead is the Chairman of the Audit Committee and has been appointed as the Financial Expert. Pursuant to Canadian securities laws, our board of directors has determined that Messrs. Abramson, Burger and Whitehead are financially literate as all have experience in reviewing and analysing the financial reports and ascertaining the financial position of a corporation. Mr. Abramson is the chairman and portfolio manager of two investment management companies and is educated and experienced in reading and analyzing financial statements. Mr. Burger, in his
previous position as Chairman and CEO of AVI Biopharma, is educated and experienced in reading and analyzing financial statements. Mr. Abramson sits on the Audit Committee of a publicly listed mining company. Mr. Burger has also served on the audit committee of three other publicly listed biotechnology companies. Mr. Whitehead is a Certified Management Accountant and has served as the Chief Financial Officer of Arius Research Inc. and Labopharm Inc.
Audit Committee Mandate
The Audit Committee’s mandate is to assist the board of directors in fulfilling its oversight responsibilities. In particular, the Audit Committee:
|
|
(a)
|
serves as an independent and objective party to monitor the integrity of our financial reporting process and systems of internal controls regarding finance, accounting, and legal compliance, including the review of our Consolidated Financial Statements, MD&A and annual and interim results;
|
|
|
(b)
|
identifies and monitors the management of the principal risks that could impact our financial reporting;
|
|
|
(c)
|
monitors the independence and performance of our independent auditors, including the pre-approval of all audit fees and all permitted non-audit services;
|
62
|
|
(d)
|
provides an avenue of communication among the independent auditors, management, and our board of directors; and
|
|
|
(e)
|
encourages continuous improvement of, and foster adherence to, our policies, procedures and practices at all levels.
|
The Audit Committee is also responsible for implementing and overseeing our whistle-blowing procedures.
D. Employees
As at May 31, 2011, we employed 13 full-time persons and four part-time people in research and drug development and administration activities. Of our employees, six hold Ph.D.s. All employees work at the Company’s primary location. To encourage a focus on achieving long-term performance, employees and members of the board of directors have the ability to acquire an ownership interest in the Company through Lorus’ stock option and alternative compensation plans and employees can participate in the employee share purchase plan.
Our ability to develop commercial products and to establish and maintain our competitive position in light of technological developments will depend, in part, on our ability to attract and retain qualified personnel. There is a significant level of competition in the marketplace for such personnel. We believe that to date we have been successful in attracting and retaining the highly skilled personnel critical to our business. We have also chosen to outsource activities where skills are in short supply or where it is economically prudent to do so.
None of our employees are unionized, and we consider our relations with our employees to be good.
E. Share Ownership
The following table sets forth information regarding beneficial ownership of our common shares as of November 25, 2011, by our executive officers and directors individually and as a group.
|
Options to Purchase Shares
|
|||||||
|
Number of
Shares
|
Warrants
(1)
|
Total Number
of Shares
Beneficially Owned
|
Percentage of
Shares Outstanding
|
Number of
Underlying
Shares
(#)
|
Exercise
Price (Range)
($)
|
Expiry Date
(Range-Year)
|
|
|
Dr. Aiping H. Young
|
192,584
|
170,000
|
362,584
|
1.32%
|
784,200
|
$0.89-$1.05
|
2020-2021
|
|
Ms. Elizabeth Williams
|
427
|
142
|
569
|
0.00%
|
62,015
|
$1.05
|
2020
|
|
Dr. Yoon Lee
|
Nil
|
Nil
|
Nil
|
Nil
|
66,725
|
$1.05
|
2020
|
|
Dr. Jim A. Wright
(3)
|
213,300
|
2,000
|
215,300
|
0.79%
|
21,665
|
$1.05-$9.00
|
2016-2020
|
|
Mr. Herbert Abramson
(2)
|
9,436,041
|
6,044,759
|
15,480,800
|
56.53%
|
19,999
|
$1.05-$6.60
|
2017-2020
|
|
Dr. Denis Burger
|
51,987
|
Nil
|
51,987
|
0.19%
|
39,999
|
$1.05-$6.60
|
2017-2020
|
|
Dr. Mark Vincent
|
Nil
|
Nil
|
Nil
|
Nil
|
19,999
|
$1.05-$6.60
|
2017-2020
|
|
Mr. Warren Whitehead
|
Nil
|
Nil
|
Nil
|
Nil
|
5,000
|
$0.89
|
2021
|
|
All directors and executive officers as a group
|
9,894,339
|
6,216,901
|
16,111,240
|
58.83%
|
1,019,602
|
$0.89-$9.00
|
2016-2021
|
|
|
(1)
|
Warrants to purchase common shares were acquired pursuant to a rights offering completed on November 8, 2010 and a unit offering completed in August 2011. Each warrant represents the right to acquire a common share at an exercise price of $1.33 or $0.45. These warrants will expire on May 8, 2012 and August 2016. Of the warrants held by insiders 3,647,401 related to the November 2010 rights offing and 2,569,500 to the August 2011 financing.
|
|
|
(2)
|
In addition to shares held personally, Mr. Abramson is deemed to control the shares held by Technifund Inc. in his capacity as sole owner of Technifund.
|
|
|
(3)
|
Of the shares owned by Dr. Wright 56,141 are registered in the name of Calliope Investments Limited.
|
63
See Item 6.B for a description of arrangements pursuant to which employees may become involved in the capital of Lorus.
A. Major Shareholders
To the knowledge of our directors and officers, as of the date hereof, no person or company beneficially owns, directly or indirectly, or exercises control or direction over, 5% or more of the outstanding common shares, other than those discussed below.
Approximately 90% of our ordinary shares are held in Canada, and there are 67 record holders of our common shares in Canada. All of our shareholders have equal voting rights.
|
Name of Beneficial Owner(s)
|
Amount and Nature
of Beneficial Ownership
|
Percent of Class
(1)
|
|
Herbert Abramson
|
15,500,799
(2)
|
55.9%
|
|
William Richard Hermon
|
1,388,644
(3)
|
5.0%
|
|
High Tech Beteiligungen GmbH & Co. KG
High Tech Private Equity GmbH
ConPharm Anstalt
Georg Ludwig
|
1,212,083
(4) (5)
|
4.4%
|
|
The Erin Mills Investment Corporation
|
720,932
(4) (6)
|
2.6%
|
(1) Based on 21,168,746 common shares outstanding as of November 25, 2011.
(2) As reported in a Schedule 13D, dated August 15, 2011, filed jointly by Herbert Abramson and Technifund Inc., Mr. Abramson, a director of the Company, may be deemed to beneficially own 15,500,799 common shares, of which 13,643,601 common shares (including warrants exercisable into 5,718,892 common shares and options exercisable into 19,999 common shares) were held by Mr. Abramson directly and 1,857,198 common shares (including warrants exercisable into 325,867 common shares) were held by Technifund Inc. directly. According to the Schedule 13D, Mr. Abramson exercises sole voting and dispositive power over the shares held by him and Technifund Inc., and Technifund Inc. exercises sole voting and
dispositive power over the shares held by it. For a further discussion of transactions involving Mr. Abramson and his affiliated group, see Item 7.B - “Related Party Transactions” below.
(3) As reported in a Schedule 13G, dated February 7, 2011, filed by William Richard Hermon, Mr. Hermon may be deemed to beneficially own 1,388,644 common shares (including an aggregate of 478,704 common shares eissuable upon the exercise of common share purchase warrants), of which 699,966 ordinary shares were held by Mr. Hermon directly; 24,185 ordinary shares were held by Mr. Hermon’s father, John Herman; 50,250 ordinary shares were held by Gullrock Investments Inc. (“
Gullrock
”) directly; 6,000 ordinary shares were held by Globus Precision Inc. (“
Globus
”) directly;
and 607,973 ordinary shares were held by Ficor Resources Inc. (“
Ficor
”) directly. According to the Schedule 13G, Mr. Hermon exercises sole voting and dispositive power over shares held by each of himself, his father, Gullrock, Globus and Ficor.
64
(4) Share figure derived from publicly available sources has been adjusted in this table to reflect the impact of the 1-for-30 share consolidation.
(5) As reported in a Schedule 13D, dated July 13, 2006 and amended August 30, 2006, May 4, 2007, July 10, 2007, August 8, 2008 and March 3, 2010 (the “
High Tech 13D
”), filed jointly by High Tech Beteiligungen GmbH & Co. KG (“
High Tech
”), High Tech Private Equity Group GmbH (“
HTPE
”), ConPharm Anstalt (“
ConPharm
”) and Georg Ludwig, each of High Tech, HTPE, ConPharm, Mr. Ludwig may be deemed to beneficially own 39,998,750 ordinary shares
(or, after the 1-for-30 share consolidation, approximately, 1,333,291 shares). According to the High Tech 13D, DEWB AG (“
DEWB
”) and Triginta Capital GmbH (“
Triginta
”), through their control of HTPE, may be deemed to control such ordinary shares. The High Tech 13D states that (i) each of High Tech, HTPE, ConPharm and Mr. Ludwig has shared voting and dispositive power over such ordinary shares, and none of them has sole voting or dispositive power over the ordinary shares; and (ii) each of DEWB and Triginta may be deemed to have shared voting and dispositive power over such ordinary shares.
In July 2006, Lorus entered into a share purchase agreement with High Tech to issue 28.8 million common shares (pre-consolidation) at $0.36 per share (pre-consolidation) for gross proceeds of $10.4 million. Subsequent to that transaction, High Tech indirectly acquired an additional 290,000 common shares (pre-consolidation). High Tech also acquired 7.3 million common shares (pre-consolidation) and 3.6 million warrants (pre-consolidation) to purchase common shares at an exercise price of $0.18 (pre-consolidation) pursuant to the August 2008 rights offering; the warrants expired on August 7, 2010.
For disclosure purposes the Company has removed the expired 3.6 million warrants (pre-consolidation) from the holdings of High Tech.
(6) As reported in a Schedule 13G, dated March 3, 2009, filed by The Erin Mills Investment Corporation, such corporation may be deemed to beneficially own 21,627,978 ordinary shares (or, after the 1-for-30 share consolidation, approximately, 720,932 shares) over which it exercises sole voting and dispositive power.
B. Related Party Transactions
Herbert Abramson and Affiliates
In connection with the Equity Offering, Mr. Abramson, a director of the Company, entered into an irrevocable commitment letter on June 20, 2011, amended on July 11, 2011, to purchase common shares and common share purchase warrants having an aggregate subscription price equal to the difference, if any, between (a) the sum of (i) the gross proceeds realized by Lorus in the Equity Offering and (ii) the gross proceeds received by Lorus in respect of all financings completed by Lorus from the date of the final short form prospectus, which was filed on July 22, 2011, to November 30, 2011 and (b) $4.0 million. On August 15, 2011, Mr. Abramson acquired 2,444,500 units at $0.40 per unit in connection with
the Equity Offering. Each unit is comprised of one common share and one common share purchase warrant. Each warrant has an exercise price of $0.45, exercisable for a period of five years following the closing of the Equity Offering. See Item 4.B. - “Business Overview - Financial Strategy - Equity Offering and Financing Commitment.”
Previously, in October 2009, the Company received a loan by way of a promissory note from Mr. Abramson. The principal amount of $1.0 million bore interest at a rate of 10% per annum. In November 2009, the loan was repaid as part of a private placement, whereby Mr. Abramson acquired 17.0 million common shares (pre-consolidation) and 8.5 million warrants to purchase common shares (pre-consolidation) of the Company at an exercise price of $0.08 (pre-consolidation); the warrants expired on May 27, 2011.
In April 2010, the Company entered into a loan agreement with Trapeze Capital Corporation, a corporation affiliated with Mr. Abramson, to borrow $1 million. The loan amount, which was received in April 2010, is unsecured, evidenced by a promissory note and bears interest at an annual rate of 10%. The funds were used for general working capital purposes. In addition, in August 2010, the Company obtained interim financing from Mr. Abramson by way of three $500 thousand six-month loans, the first of which was advanced in August 2010 and the second and third in September and October 2010, respectively.
65
In August 2010, in connection with the rights offering, the Company secured a standby purchase arrangement of $4 million by Mr. Abramson, pursuant to which Mr. Abramson agreed to make an investment such that the minimum gross proceeds of the rights offering would be $4 million. No fee was payable to Mr. Abramson for this commitment. In accordance with the terms of the standby purchase agreement, Mr. Abramson subscribed at a price of $1.11 per unit for 3.6 million units, resulting in $4 million in gross proceeds to the Company. With the proceeds of the rights offering, the Company repaid the $1 million promissory note outstanding to Trapeze Capital Corporation and the interim
financing promissory notes outstanding to Mr. Abramson. For further information regarding the rights offering, see “Business Overview - Financial Strategy - November 2010 Rights Offering.”
On August 7, 2008, Technifund Inc., a corporation affiliated with Mr. Abramson, acquired 15.2 million common shares (pre-consolidation) and 7.6 million warrants (pre-consolidation) to purchase common shares at an exercise price of $0.18 (pre-consolidation) pursuant to the 2008 rights offering. The warrants expired on August 9, 2010.
C. Interests of Experts and Counsel
Not applicable.
A. Consolidated Financial Statements and Other Financial Information
See Item 18 for our Consolidated Financial Statements and other financial information.
Dividends on our common shares are declared at the discretion of our board of directors. To date, we have not paid any dividends and do not expect to do so in the foreseeable future.
B. Significant Changes
None.
Not applicable, except for Item 9.A.4. and Item 9.C.
A. Offer and Listing Details
Price Range of Common Stock and Trading Markets
Our common shares, without par value, are currently listed on the TSX under the symbol “LOR”. Until October 31, 2008, our common shares were also listed on the American Stock Exchange (now the NYSE Amex) (“
AMEX
”) under the symbol “LRP”. The following table sets out the price ranges and trading volumes of our common shares on the TSX and AMEX for the periods indicated below. Effective October 31, 2008, we voluntarily delisted from the AMEX. Therefore, no prices are provided for periods after that date.
|
AMEX
(US$)
|
TSX
(CDN$)
*
|
|||
|
Five most recent full fiscal years:
|
High
|
Low
|
High
|
Low
|
|
Year ended May 31, 2011
|
-
|
-
|
2.55
|
0.68
|
|
Year ended May 31, 2010
|
-
|
-
|
3.90
|
1.80
|
|
Year ended May 31, 2009
|
-
|
-
|
0.16
|
0.03
|
|
Year ended May 31, 2008
|
0.27
|
0.11
|
0.26
|
0.14
|
|
Year ended May 31, 2007
|
0.34
|
0.14
|
0.39
|
0.22
|
|
Year ended May 31, 2011
|
||||
|
Quarter ended May 31, 2011
|
-
|
-
|
1.02
|
0.68
|
|
Quarter ended February 28, 2011
|
-
|
-
|
1.18
|
0.95
|
|
Quarter ended November 30, 2010
|
-
|
-
|
1.40
|
0.95
|
|
Quarter ended August 31, 2010
|
-
|
-
|
2.55
|
1.25
|
|
Year ended May 31, 2010
|
||||
|
Quarter ended May 31, 2010
|
-
|
-
|
3.60
|
2.40
|
|
Quarter ended February 28, 2010
|
-
|
-
|
3.90
|
2.10
|
|
Quarter ended November 30, 2009
|
-
|
-
|
3.00
|
1.80
|
|
Quarter ended August 31, 2009
|
-
|
-
|
2.70
|
1.80
|
|
November 2011 (through November
25)
|
- | - | 0.28 | 0.20 |
|
October 2011
|
-
|
-
|
0.31
|
0.24
|
|
September 2011
|
-
|
-
|
0.37
|
0.26
|
|
August 2011
|
-
|
-
|
0.41
|
0.35
|
|
July 2011
|
-
|
-
|
0.50
|
0.41
|
|
June 2011
|
-
|
-
|
0.72
|
0.45
|
|
May 2011
|
-
|
-
|
0.80
|
0.68
|
|
April 2011
|
-
|
-
|
0.89
|
0.70
|
66
* Effective May 31, 2010, the Company consolidated its shares on a 1:30 basis. Share prices for fiscal 2010 have been restated to show the impact of the consolidation.
B. Plan of Distribution
Not applicable.
C. Markets
See Item 9.A.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expense of the Issue
Not applicable.
A. Share Capital
Not applicable.
B. Articles of Incorporation and By-laws
We are incorporated pursuant to the laws of Canada. Our Articles of Incorporation (“
Articles
”) and by-laws provide no restrictions as to the nature of our business operations. Under Canadian law, a director must inform us, at a meeting of the board of directors, of any interest in a material contract or proposed material contract with us. Directors may not vote in respect of any such contracts made with us or in any such contract in which a director is interested, and such directors shall not be counted for purposes of determining a quorum. However, these provisions do not apply to (i) a contract relating primarily to their remuneration
as a director, officer, employee or agent of the Corporation or affiliate, (ii) a contract for their indemnity or insurance as permitted under the
Canada Business Corporations Act
, or (iii) a contract with an affiliate.
67
We are authorized to issue an unlimited number of common shares. Our shareholders have no rights to share in our profits, are subject to no redemption or sinking fund provisions, have no liability for further capital calls and are not subject to any discrimination due to number of shares owned. By not more than 50 days nor less than seven days in advance of a dividend, the board of directors may establish a record date for the determination of the persons entitled to such dividend.
The rights of holders of our common shares can be changed at any time in a shareholder meeting where the modifications are approved by 66 2/3% of the shares represented by proxy or in person at a meeting at which a quorum exists.
All holders of our common shares are entitled to vote at annual or special meetings of shareholders, provided that they were shareholders as of the record date. The record date for shareholder meetings may precede the meeting date by no more than 50 days and not less than 21 days, provided that notice by way of advertisement is given to shareholders at least seven days before such record date. Notice of the time and place of meetings of shareholders may not be less than 21 nor greater than 50 days prior to the date of the meeting. There are no:
|
|
•
|
limitations on share ownership;
|
|
|
•
|
provisions of the Articles or by-laws that would have the effect of delaying, deferring or preventing a change of control of our company;
|
|
|
•
|
by-law provisions that govern the ownership threshold above which shareholder ownership must be disclosed; and
|
|
|
•
|
conditions imposed by the Articles or by-laws governing changes in capital, but Canadian Corporate law requires any changes to the terms of share capital be approved by 66.66% of the shares represented by proxy or in person at a shareholders’ meeting convened for that purpose at which a quorum exists.
|
Common Shares
Each holder of record of common shares, without par value, is entitled to one vote for each share held on all matters properly submitted to the shareholders for their vote, except matters which are required to be voted on as a particular class or series of stock. Cumulative voting for directors is not permitted.
Holders of outstanding common shares are entitled to those dividends declared by the board of directors out of legally available funds. In the event of liquidation, dissolution or winding up our affairs, holders of common shares are entitled to receive, pro rata, our net assets available after provision has been made for the preferential rights of the holders of preferred stock. Holders of outstanding common shares have no pre-emptive, conversion or redemption rights. All of the issued and outstanding common shares are, and all unissued common shares, when offered and sold will be, duly authorized, validly issued, fully paid and non-assessable. To the extent that additional common shares may be issued in the
future, the relative interests of the then existing shareholders may be diluted. There were 15,684,746 common shares issued and outstanding at May 31, 2011.
Secured Convertible Debentures
On October 6, 2004, we entered into a subscription agreement with TEMIC to issue an aggregate of $15.0 million of secured convertible debentures issuable in three tranches of $5.0 million each, in each of October 2004, January 2005 and April 2005. The debentures were due on October 6, 2009. On June 22, 2009, we reached a settlement with TEMIC with respect to the purchase and settlement of the $15.0 million of debentures.
68
Under the settlement agreement, we purchased all of the debentures from TEMIC for a cash payment of $3.3 million, the assignment of the rights under the license agreement with ZOR, sale of intellectual property associated with Virulizin
®
and sale of the shares in our wholly owned subsidiary, Pharma Immune Inc., which holds an equity interest in ZOR. Under the agreement, we are entitled to 50% of any royalties received under the ZOR license agreement and 50% of the deal value of any transaction completed in territories not covered by the ZOR license agreement. We also retain a perpetual, royalty free
license for the animal use of Virulizin
®
. TEMIC will be fully responsible for all clinical and regulatory costs associated with commercialization of Virulizin
®
in territories not covered by the ZOR license agreement. We will assist TEMIC with certain agreed upon services.
For receipt of the intellectual property associated with Virulizin
®
and all of our shares in Pharma Immune, TEMIC has released all security interests in the assets of Lorus.
As a result of the transaction, we recognized a gain on the repurchase of the debentures of $11.0 million reflecting the difference between the carrying value of the debentures at the repurchase date, net of transaction costs of approximately $221 thousand, and the cash payment amount of $3.3 million. In addition, as a result of extinguishing the debentures, the equity portion of the debentures in the amount of $3.8 million was transferred to contributed surplus. The gain on repurchase of the debentures does not result in income taxes payable as the we have sufficient capital loss and non-capital loss carryforwards to shelter this gain.
Shares Eligible for Future Sale
Future sales of substantial amounts of our common shares in the public market or even the perception that such sales may occur, could adversely affect the market price for our common shares and could impair our future ability to raise capital through an offering of our equity securities.
At May 31, 2011, there were 1,185,578 options outstanding under our stock option plans to purchase an equal number of common shares. The outstanding options are exercisable at a weighted average price per share of $1.58.
Indemnification of Executive Officers and Directors
We have agreed to indemnify our executive officers and directors for all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by them in respect of any civil, criminal or administrative action or proceeding to which they are made a party by reason of being or having been a director or officer, if (a) they acted honestly and in good faith with a view to our best interests, and (b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, they had reasonable grounds for believing that their conduct was lawful.
C. Material Contracts
Other than the agreements described below, we have not, in the two years preceding the date hereof, entered into any material agreements other than contracts in the ordinary course of business.
|
1.
|
Share Purchase Warrant Indenture dated August 15, 2011 between the Company and Computershare Trust Company of Canada regarding the provision for issuance of common share purchase warrants.
|
|
2.
|
Agency Agreement dated July 20, 2011 in connection with an offering of units between the Company and Euro Pacific Canada Inc.
|
|
3.
|
Commitment Letter for minimum $4 million equity investment dated June 20, 2011 and subsequently amended July 11, 2011 from Mr. Abramson.
|
|
4.
|
Form of Subscription Agreement used in connection with December 2010 private placement.
|
|
5.
|
Form of Warrant issued in connection with December 2010 private placement.
|
|
6.
|
Share Purchase Warrant Indenture dated October 4, 2010 between the Company and Computershare Trust Company of Canada regarding the provision for issuance of common share purchase warrants.
|
69
|
7.
|
First Supplemental Indenture dated October 18, 2010 to the Share Purchase Warrant Indenture dated October 4, 2010.
|
|
8.
|
Standby Purchase Agreement dated September 16, 2010 between the Company and Herbert Abramson in connection with the November 2010 rights offering.
|
|
9.
|
Standby Purchase Agreement Amendment dated September 27, 2010.
|
|
10.
|
Form of Canadian Subscription Agreement used in connection with November 2009 private placement.
|
|
11.
|
Form of Canadian Warrant issued in connection with November 2009 private placement.
|
|
12.
|
Form of United States Subscription Agreement used in connection with November 2009 private placement.
|
|
13.
|
Form of United States Warrant Agreement issued in connection with November 2009 private placement.
|
|
14.
|
Promissory Note dated October 6, 2009 between the Company and Herbert Abramson regarding a loan to the Company of $1,000,000.
|
|
15.
|
Promissory Note dated April 14, 2010 between the Company and Herbert Abramson regarding a loan to the Company of $1,000,000.
|
|
16.
|
Settlement Agreement dated June 19, 2009 between the Company and The Erin Mills Investment Corporation with respect to the purchase and settlement of $15 million of secured convertible debentures.
|
|
17.
|
Asset Purchase Agreement dated June 19, 2009 between the Company and The Erin Mills Investment Corporation under which the Company sold the intellectual property associated with Virulizin
®
.
|
|
18.
|
Supply and Services Agreement dated June 19, 2009 between the Company and Erin Mills Biotech Inc. under which the Company agreed to provide certain business development services associated with the Virulizin intellectual property sold.
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19.
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Share Purchase Agreement dated June 19, 2009 between the Company and The Erin Mills Investment Corporation under which the Company sold the sale of Lorus’ shares in its wholly owned subsidiary Pharma Immune Inc.
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20.
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Animal Rights License Agreement dated June 19, 2009 between the Company and Erin Mills Biotech Inc. under which the Company is granted certain rights to develop and market Virulizin
®
for use in animals.
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21.
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Amendment, Assignment, Assumption, Novation and Consent Agreement dated June 19, 2009 between the Company, ZOR Pharmaceuticals, LLC, Erin Mills Biotech Inc. and The Erin Mills Investment Corporation under which the Company assigned its rights under the licence agreement with ZOR Pharmaceuticals, LLC.
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Please refer to Item 4 - “Business Overview” for further details on certain agreements referred to above.
D. Exchange Controls
There is no law or governmental decree or regulation in Canada that restricts the export or import of capital, or affects the remittance of dividends, interest or other payments to non-resident holders of our voting shares, other than withholding tax requirements.
There is no limitation imposed by Canadian law or by our Articles or our other charter documents on the right of a non-resident to hold or vote voting shares, other than as provided by the
Investment Canada Act
, the
North American Free Trade Agreement Implementation Act
(Canada) and the
World Trade Organization Agreement Implementation Act
.
The
Investment Canada Act
requires notification and, in certain cases, advance review and approval by the government of Canada of the acquisition by a non-Canadian of control of a Canadian business, all as defined in the
Investment Canada Act.
Generally, the threshold for review will be higher in monetary terms for a member of the World Trade Organization or North American Free Trade Agreement.
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E. Taxation
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of certain U.S. federal income tax considerations applicable to a U.S. Holder (as defined below) arising from and relating to the acquisition, ownership, and disposition of common shares.
This summary is for general information purposes only and does not purport to be a complete analysis or listing of all potential U.S. federal income tax considerations that may apply to a U.S. Holder arising from and relating to the acquisition, ownership, and disposition of common shares. In addition, this summary does not take into account the individual facts and circumstances of any particular U.S. Holder that may affect the U.S. federal income tax consequences to such U.S. Holder, including specific tax consequences to a U.S. Holder under an applicable tax treaty. Accordingly, this summary is not intended to be, and should not be construed as, legal or U.S. federal income tax advice
with respect to any U.S. Holder. This summary does not address the U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax consequences to U.S. Holders of the acquisition, ownership, and disposition of common shares. Each U.S. Holder should consult its own tax advisor regarding the U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax consequences of the acquisition, ownership, and disposition of common shares.
No legal opinion from U.S. legal counsel or ruling from the Internal Revenue Service (the “
IRS
”) has been requested, or will be obtained, regarding the U.S. federal income tax consequences of the acquisition, ownership, and disposition of common shares. This summary is not binding on the IRS, and the IRS is not precluded from taking a position that is different from, and contrary to, the positions taken in this summary. In addition, because the authorities on which this summary is based are subject to various interpretations, the IRS and the U.S. courts could disagree with one or more of the positions taken in this
summary.
Scope of this Summary
Authorities
This summary is based on the Internal Revenue Code of 1986, as amended (the “
Code
”), Treasury Regulations (whether final, temporary, or proposed), published rulings of the IRS, published administrative positions of the IRS, the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital, signed September 26, 1980, as amended (the “
Canada-U.S. Tax Convention
”), and U.S. court decisions that are applicable and, in each case, as in effect and available, as of the date of this document. Any of the authorities on which this
summary is based could be changed in a material and adverse manner at any time, and any such change could be applied on a retroactive or prospective basis which could affect the U.S. federal income tax considerations described in this summary. This summary does not discuss the potential effects, whether adverse or beneficial, of any proposed legislation that, if enacted, could be applied on a retroactive or prospective basis.
U.S. Holders
For purposes of this summary, the term “
U.S. Holder
” means a beneficial owner of common shares that is for U.S. federal income tax purposes:
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•
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an individual who is a citizen or resident of the U.S.;
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•
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a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the U.S., any state thereof or the District of Columbia;
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•
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an estate whose income is subject to U.S. federal income taxation regardless of its source; or
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•
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a trust that (a) is subject to the primary supervision of a court within the U.S. and the control of one or more U.S. persons for all substantial decisions or (b) has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person.
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Non-U.S. Holders
For purposes of this summary, a “
non-U.S. Holder
” is a beneficial owner of common shares that is not a U.S. Holder. This summary does not address the U.S. federal income tax consequences to non-U.S. Holders arising from and relating to the acquisition, ownership, and disposition of common shares. Accordingly, a non-U.S. Holder should consult its own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax consequences (including the potential application of and operation of any income tax treaties) relating to the acquisition, ownership,
and disposition of common shares.
U.S. Holders Subject to Special U.S. Federal Income Tax Rules Not Addressed
This summary does not address the U.S. federal income tax considerations applicable to U.S. Holders that are subject to special provisions under the Code, including the following: (a) U.S. Holders that are tax-exempt organizations, qualified retirement plans, individual retirement accounts, or other tax-deferred accounts; (b) U.S. Holders that are financial institutions, underwriters, insurance companies, real estate investment trusts, or regulated investment companies; (c) U.S. Holders that are broker-dealers, dealers, or traders in securities or currencies that elect to apply a mark-to-market accounting method; (d) U.S. Holders that have a “functional currency” other than the U.S.
dollar; (e) U.S. Holders that own common shares as part of a straddle, hedging transaction, conversion transaction, constructive sale, or other arrangement involving more than one position; (f) U.S. Holders that acquired common shares in connection with the exercise of employee stock options or otherwise as compensation for services; (g) U.S. Holders that hold common shares other than as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment purposes); or (h) U.S. Holders that own or have owned (directly, indirectly, or by attribution) 10% or more of the total combined voting power of the outstanding shares of the Company. This summary also does not address the U.S. federal income tax considerations applicable to U.S. Holders who are: (a) U.S. expatriates or former long-term residents of the U.S.; (b)
persons that have been, are, or will be a resident or deemed to be a resident in Canada for purposes of the
Income Tax Act
(Canada) (the “
ITA
”); (c) persons that use or hold, will use or hold, or that are or will be deemed to use or hold common shares in connection with carrying on a business in Canada; (d) persons whose common shares constitute “taxable Canadian property” under the ITA; or (e) persons that have a permanent establishment in Canada for the purposes of the Canada-U.S. Tax Convention. U.S. Holders that are subject to special provisions under the Code, including U.S. Holders described immediately above, should consult their own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and
gift, U.S. state and local, and foreign tax consequences relating to the acquisition, ownership and disposition of common shares.
If an entity that is classified as a partnership (or “pass-through” entity) for U.S. federal income tax purposes holds common shares, the U.S. federal income tax consequences to such partnership and the partners of such partnership generally will depend on the activities of the partnership and the status of such partners (or owners). Partners of entities that are classified as partnerships for U.S. federal income tax purposes should consult their own tax advisor regarding the U.S. federal income tax consequences arising from and relating to the acquisition, ownership, and disposition of common shares.
Passive Foreign Investment Company Rules
If the Company were to constitute a “passive foreign investment company” under the meaning of Section 1297 of the Code (a “
PFIC
”, as defined below) for any year during a U.S. Holder’s holding period, then certain different and potentially adverse rules will effect the U.S. federal income tax consequences to a U.S. Holder resulting from the acquisition, ownership and disposition of common shares.
PFIC Status of the Company
The Company generally will be a PFIC if, for a tax year, (a) 75% or more of the gross income of the Company for such tax year is passive income (the “
income test
”) or (b) 50% or more of the value of the Company’s assets either produce passive income or are held for the production of passive income, based on the quarterly average of the fair market value of such assets (the “
asset test
”). “Gross income” generally includes all sales revenues less the cost of goods sold, and “passive income” generally includes, for example, dividends,
interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions.
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For purposes of the PFIC income test and asset test described above, if the Company owns, directly or indirectly, 25% or more of the total value of the outstanding shares of another corporation, the Company will be treated as if it (a) held a proportionate share of the assets of such other corporation and (b) received directly a proportionate share of the income of such other corporation. In addition, for purposes of the PFIC income test and asset test described above, “passive income” does not include any interest, dividends, rents, or royalties that are received or accrued by the Company from a “related person” (as defined in Section 954(d)(3) of the Code), to the extent
such items are properly allocable to the income of such related person that is not passive income.
In addition, under certain attribution rules, if the Company is a PFIC, U.S. Holders will be deemed to own their proportionate share of the stock of any subsidiary of the Company which is also a PFIC (a ‘‘Subsidiary PFIC’’), and will be subject to U.S. federal income tax on their proportionate share of (a) a distribution on the stock of a Subsidiary PFIC and (b) a disposition or deemed disposition of the stock of a Subsidiary PFIC, both as if such U.S. Holders directly held the stock of such Subsidiary PFIC.
The Company believes that it was classified as a PFIC during the tax year ended May 31, 2011, and based on current business plans and financial expectations, the Company believes that it will be a PFIC for the current tax year. The determination of whether any corporation was, or will be, a PFIC for a tax year depends, in part, on the application of complex U.S. federal income tax rules, which are subject to differing interpretations. In addition, whether any corporation will be a PFIC for any tax year depends on the assets and income of such corporation over the course of each such tax year and, as a result, cannot be predicted with certainty as of the date of this
document. Accordingly, there can be no assurance that the IRS will not challenge any determination made by the Company (or a Subsidiary PFIC) concerning its PFIC status or that the Company (and each Subsidiary PFIC) was not, or will not be, a PFIC for any tax year. Each U.S. Holder should consult its own tax advisor regarding the PFIC status of the Company and each Subsidiary PFIC.
In addition, in any year in which the Company is classified as a PFIC, such holder would be required to file an annual report with the IRS containing such information as Treasury Regulations and/or other IRS guidance may require. This new filing requirement is in addition to pre-existing reporting obligations that may apply to a U.S. Holder if the Company were classified as a PFIC. Pursuant to recent IRS guidance, this new filing requirement has been temporarily suspended in certain (but not all) cases pending release of revised IRS Form 8621. Additional guidance is also expected regarding the specific information that will be required to be reported on revised IRS Form
8621. U.S. Holders should consult their own tax advisors regarding the requirements of filing such information returns under these rules, including the requirement to file a revised IRS Form 8621 (after such form is released) for prior taxable years in which the obligation to file such form was suspended.
Default PFIC Rules Under Section 1291 of the Code
If the Company is a PFIC, the U.S. federal income tax consequences to a U.S. Holder of the acquisition, ownership, and disposition of common shares will depend on whether such U.S. Holder makes an election to treat the Company and each Subsidiary PFIC as a “qualified electing fund” or “QEF” under Section 1295 of the Code (a “
QEF Election
”) or a mark-to-market election under Section 1296 of the Code (a “
Mark-to-Market Election
”). A U.S. Holder that does not make either a QEF Election or a Mark-to-Market Election will be referred to in this
summary as a “Non-Electing U.S. Holder.”
A Non-Electing U.S. Holder will be subject to the rules of Section 1291 of the Code with respect to (a) any gain recognized on the sale or other taxable disposition of common shares and (b) any excess distribution received on the common shares. A distribution generally will be an “excess distribution” to the extent that such distribution (together with all other distributions received in the current tax year) exceeds 125% of the average distributions received during the three preceding tax years (or during a U.S. Holder’s holding period for the common shares, if shorter).
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Under Section 1291 of the Code, any gain recognized on the sale or other taxable disposition of common shares, and any “excess distribution” received on common shares, must be ratably allocated to each day in a Non-Electing U.S. Holder’s holding period for the respective common shares. The amount of any such gain or excess distribution allocated to the tax year of disposition or distribution of the excess distribution and to years before the entity became a PFIC, if any, would be taxed as ordinary income. The amounts allocated to any other tax year would be subject to U.S. federal income tax at the highest tax applicable to ordinary income in each such year, and an
interest charge would be imposed on the tax liability for each such year, calculated as if such tax liability had been due in each such year. A Non-Electing U.S. Holder that is not a corporation must treat any such interest paid as “personal interest,” which is not deductible.
If the Company is a PFIC for any tax year during which a Non-Electing U.S. Holder holds common shares, the Company will continue to be treated as a PFIC with respect to such Non-Electing U.S. Holder, regardless of whether the Company ceases to be a PFIC in one or more subsequent tax years. A Non-Electing U.S. Holder may terminate this deemed PFIC status by electing to recognize gain (which will be taxed under the rules of Section 1291 of the Code discussed above) as if such common shares were sold on the last day of the last tax year for which the Company was a PFIC.
QEF Election
A U.S. Holder that makes a timely and effective QEF Election for the first tax year in which its holding period of its common shares begins, generally, will not be subject to the rules of Section 1291 of the Code discussed above with respect to its common shares. However, a U.S. Holder that makes a timely and effective QEF Election will be subject to U.S. federal income tax on such U.S. Holder’s pro rata share of (a) the net capital gain of the Company, which will be taxed as long-term capital gain to such U.S. Holder, and (b) the ordinary earnings of the Company, which will be taxed as ordinary income to such U.S. Holder. Generally, “net capital gain” is the excess of
(a) net long-term capital gain over (b) net short-term capital loss, and “ordinary earnings” are the excess of (a) “earnings and profits” over (b) net capital gain. A U.S. Holder that makes a QEF Election will be subject to U.S. federal income tax on such amounts for each tax year in which the Company is a PFIC, regardless of whether such amounts are actually distributed to such U.S. Holder by the Company. However, for any tax year in which the Company is a PFIC and has no net income or gain, U.S. Holders that have made a QEF Election would not have any income inclusions as a result of the QEF Election. If a U.S. Holder that made a QEF Election has an income inclusion, such a U.S. Holder may, subject to certain limitations, elect to defer payment of current U.S. federal income tax on such amounts, subject to an interest
charge. If such U.S. Holder is not a corporation, any such interest paid will be treated as “personal interest,” which is not deductible.
A U.S. Holder that makes a QEF Election generally (a) may receive a tax-free distribution from the Company to the extent that such distribution represents “earnings and profits” of the Company that were previously included in income by the U.S. Holder because of such QEF Election and (b) will adjust such U.S. Holder’s tax basis in the common shares to reflect the amount included in income or allowed as a tax-free distribution because of such QEF Election. In addition, a U.S. Holder that makes a QEF Election generally will recognize capital gain or loss on the sale or other taxable disposition of common shares.
The procedure for making a QEF Election, and the U.S. federal income tax consequences of making a QEF Election, will depend on whether such QEF Election is timely. A QEF Election will be treated as “timely” if such QEF Election is made for the first year in the U.S. Holder’s holding period for the common shares in which the Company was a PFIC. A U.S. Holder may make a timely QEF Election by filing the appropriate QEF Election documents at the time such U.S. Holder files a U.S. federal income tax return for such year.
A timely QEF Election will apply to the tax year for which such QEF Election is made and to all subsequent tax years, unless such QEF Election is invalidated or terminated or the IRS consents to revocation of such QEF Election. If a U.S. Holder makes a QEF Election and, in a subsequent tax year, the Company ceases to be a PFIC, the QEF Election will remain in effect (although it will not be applicable) during those tax years in which the Company is not a PFIC. Accordingly, if the Company becomes a PFIC in another subsequent tax year, the QEF Election will be effective and the U.S. Holder will be subject to the QEF rules described above during any subsequent tax year in which the Company
qualifies as a PFIC.
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U.S. Holders should be aware that there can be no assurances that the Company will satisfy the record keeping requirements that apply to a QEF, or that the Company will supply U.S. Holders with information that such U.S. Holders require to report under the QEF rules, in the event that the Company is a PFIC. Thus, U.S. Holders may not be able to make a QEF Election with respect to their common shares. Each U.S. Holder should consult its own tax advisor regarding the availability of, and procedure for making, a QEF Election.
Mark-to-Market Election
A U.S. Holder may make a Mark-to-Market Election only if the common shares are marketable stock. The common shares generally will be “marketable stock” if the common shares are regularly traded on (a) a national securities exchange that is registered with the SEC, (b) the national market system established pursuant to section 11A of the Securities and Exchange Act of 1934, or (c) a foreign securities exchange that is regulated or supervised by a governmental authority of the country in which the market is located, provided that (i) such foreign exchange has trading volume, listing, financial disclosure, and other requirements and the laws of the country in which such foreign exchange is
located, together with the rules of such foreign exchange, ensure that such requirements are actually enforced and (ii) the rules of such foreign exchange ensure active trading of listed stocks. If such stock is traded on such a qualified exchange or other market, such stock generally will be “regularly traded” for any calendar year during which such stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter.
A U.S. Holder that makes a Mark-to-Market Election with respect to its common shares generally will not be subject to the rules of Section 1291 of the Code discussed above with respect to such common shares. However, if a U.S. Holder does not make a Mark-to-Market Election beginning in the first tax year of such U.S. Holder’s holding period for the common shares or such U.S. Holder has not made a timely QEF Election, the rules of Section 1291 of the Code discussed above will apply to certain dispositions of, and distributions on, the common shares.
A U.S. Holder that makes a Mark-to-Market Election will include in ordinary income, for each tax year in which the Company is a PFIC, an amount equal to the excess, if any, of (a) the fair market value of the common shares, as of the close of such tax year over (b) such U.S. Holder’s tax basis in such common shares. A U.S. Holder that makes a Mark-to-Market Election will be allowed a deduction in an amount equal to the excess, if any, of (a) such U.S. Holder’s adjusted tax basis in the common shares, over (b) the fair market value of such common shares (but only to the extent of the net amount of previously included income as a result of the Mark-to-Market Election for prior tax
years).
A U.S. Holder that makes a Mark-to-Market Election generally also will adjust such U.S. Holder’s tax basis in the common shares to reflect the amount included in gross income or allowed as a deduction because of such Mark-to-Market Election. In addition, upon a sale or other taxable disposition of common shares, a U.S. Holder that makes a Mark-to-Market Election will recognize ordinary income or ordinary loss (not to exceed the excess, if any, of (a) the amount included in ordinary income because of such Mark-to-Market Election for prior tax years over (b) the amount allowed as a deduction because of such Mark-to-Market Election for prior tax years).
A Mark-to-Market Election applies to the tax year in which such Mark-to-Market Election is made and to each subsequent tax year, unless the common shares cease to be “marketable stock” or the IRS consents to revocation of such election. Each U.S. Holder should consult its own tax advisor regarding the availability of, and procedure for making, a Mark-to-Market Election.
Although a U.S. Holder may be eligible to make a Mark-to-Market Election with respect to the common shares, no such election may be made with respect to the stock of any Subsidiary PFIC that a U.S. Holder is treated as owning, because such stock is not marketable. Hence, the Mark-to-Market Election will not be effective to eliminate the interest charge described above with respect to deemed dispositions of Subsidiary PFIC stock or distributions from a Subsidiary PFIC.
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Other PFIC Rules
Under Section 1291(f) of the Code, the IRS has issued proposed Treasury Regulations that, subject to certain exceptions, would cause a U.S. Holder that had not made a timely QEF Election to recognize gain (but not loss) upon certain transfers of common shares that would otherwise be tax-deferred (e.g., gifts and exchanges pursuant to corporate reorganizations). However, the specific U.S. federal income tax consequences to a U.S. Holder may vary based on the manner in which common shares are transferred.
Certain additional adverse rules will apply with respect to a U.S. Holder if the Company is a PFIC, regardless of whether such U.S. Holder makes a QEF Election. For example under Section 1298(b)(6) of the Code, a U.S. Holder that uses common shares as security for a loan will, except as may be provided in Treasury Regulations, be treated as having made a taxable disposition of such common shares.
Special rules also apply to the amount of foreign tax credit that a U.S. Holder may claim on a distribution from a PFIC. Subject to such special rules, foreign taxes paid with respect to any distribution in respect of stock in a PFIC are generally eligible for the foreign tax credit. The rules relating to distributions by a PFIC and their eligibility for the foreign tax credit are complicated, and a U.S. Holder should consult with their own tax advisor regarding the availability of the foreign tax credit with respect to distributions by a PFIC.
The PFIC rules are complex, and each U.S. Holder should consult its own tax advisor regarding the PFIC rules and how the PFIC rules may affect the U.S. federal income tax consequences of the acquisition, ownership, and disposition of common shares.
Ownership, and Disposition of Shares
The following discussion is subject to the rules described above under the heading “Passive Foreign Investment Company Rules.”
Distributions on Shares
Subject to the PFIC rules discussed above, a U.S. Holder that receives a distribution, including a constructive distribution, with respect to a common share will be required to include the amount of such distribution in gross income as a dividend (without reduction for any Canadian income tax withheld from such distribution) to the extent of the current or accumulated “earnings and profits” of the Company, as computed for U.S. federal income tax purposes. A dividend generally will be taxed to a U.S. Holder at ordinary income tax rates. To the extent that a distribution exceeds the current and accumulated “earnings and profits” of the Company, such distribution
will be treated first as a tax-free return of capital to the extent of a U.S. Holder’s tax basis in the common shares and thereafter as gain from the sale or exchange of such common shares. (See “ Sale or Other Taxable Disposition of Shares” below). However, the Company may not maintain the calculations of earnings and profits in accordance with U.S. federal income tax principles, and each U.S. Holder should therefore assume that any distribution by the Company with respect to the common shares will constitute ordinary dividend income. Dividends received on common shares generally will not be eligible for the “dividends received deduction”. In addition, the Company does not anticipate that its distributions will be eligible for the preferential tax rates applicable to long-term capital gains. The
dividend rules are complex, and each U.S. Holder should consult its own tax advisor regarding the application of such rules.
Sale or Other Taxable Disposition of Shares
Subject to the PFIC rules discussed above, upon the sale or other taxable disposition of common shares, a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between the amount of cash plus the fair market value of any property received and such U.S. Holder’s tax basis in such common shares sold or otherwise disposed of. Subject to the PFIC rules discussed above, gain or loss recognized on such sale or other disposition generally will be long-term capital gain or loss if, at the time of the sale or other disposition, the common shares have been held for more than one year.
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Preferential tax rates apply to long-term capital gain of a U.S. Holder that is an individual, estate, or trust. There are currently no preferential tax rates for long-term capital gain of a U.S. Holder that is a corporation. Deductions for capital losses are subject to significant limitations under the Code.
Additional Tax on Passive Income
For tax years beginning after December 31, 2012, certain individuals, estates and trusts whose income exceeds certain thresholds will be required to pay a 3.8% Medicare surtax on “net investment income” including, among other things, dividends and net gain from disposition of property (other than property held in a trade or business). U.S. Holders should consult with their own tax advisors regarding the effect, if any, of this tax on their ownership and disposition of common shares.
Additional Considerations
Receipt of Foreign Currency
The amount of any distribution paid to a U.S. Holder in foreign currency, or on the sale, exchange or other taxable disposition of common shares, generally will be equal to the U.S. dollar value of such foreign currency based on the exchange rate applicable on the date of receipt (regardless of whether such foreign currency is converted into U.S. dollars at that time). If the foreign currency received is not converted into U.S. dollars on the date of receipt, a U.S. Holder will have a basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Any U.S. Holder who receives payment in foreign currency and engages in a subsequent conversion or other disposition of
the foreign currency may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss, and generally will be U.S. source income or loss for foreign tax credit purposes. Each U.S. Holder should consult its own U.S. tax advisor regarding the U.S. federal income tax consequences of receiving, owning, and disposing of foreign currency.
Foreign Tax Credit
Subject to the PFIC rules discussed above, a U.S. Holder that pays (whether directly or through withholding) Canadian income tax with respect to dividends paid on the common shares generally will be entitled, at the election of such U.S. Holder, to receive either a deduction or a credit for such Canadian income tax paid. Generally, a credit will reduce a U.S. Holder’s U.S. federal income tax liability on a dollar-for-dollar basis, whereas a deduction will reduce a U.S. Holder’s income subject to U.S. federal income tax. This election is made on a year-by-year basis and applies to all foreign taxes paid (whether directly or through withholding) by a U.S. Holder during a
year.
Complex limitations apply to the foreign tax credit, including the general limitation that the credit cannot exceed the proportionate share of a U.S. Holder’s U.S. federal income tax liability that such U.S. Holder’s “foreign source” taxable income bears to such U.S. Holder’s worldwide taxable income. In applying this limitation, a U.S. Holder’s various items of income and deduction must be classified, under complex rules, as either “foreign source” or “U.S. source.” Generally, dividends paid by a foreign corporation should be treated as foreign source for this purpose, and gains recognized on the sale of stock of a foreign
corporation by a U.S. Holder should be treated as U.S. source for this purpose, except as otherwise provided in an applicable income tax treaty, and if an election is properly made under the Code. However, the amount of a distribution with respect to the common shares that is treated as a “dividend” may be lower for U.S. federal income tax purposes than it is for Canadian federal income tax purposes, resulting in a reduced foreign tax credit allowance to a U.S. Holder. In addition, this limitation is calculated separately with respect to specific categories of income. The foreign tax credit rules are complex, and each U.S. Holder should consult its own U.S. tax advisor regarding the foreign tax credit rules.
Backup Withholding and Information Reporting
Under U.S. federal income tax law and Treasury regulations, certain categories of U.S. Holders must file information returns with respect to their investment in, or involvement in, a foreign corporation. For example, recently enacted legislation generally imposes new U.S. return disclosure obligations (and related penalties) on U.S. Holders that hold certain specified foreign financial assets in excess of $50,000. The definition of specified foreign financial assets includes not only financial accounts maintained in foreign financial institutions, but also, unless held in accounts maintained by a financial institution, any stock or security issued by a non-U.S. person, any financial
instrument or contract held for investment that has an issuer or counterparty other than a U.S. person and any interest in a foreign entity. U.S. Holders may be subject to these reporting requirements unless their common shares are held in an account at a domestic financial institution. However, pursuant to recent IRS guidance, these new reporting requirements have been temporarily suspended pending release of IRS Form 8938. Additional guidance is also expected regarding the specific information that will be required to be reported on IRS Form 8938. Penalties for failure to file certain of these information returns are substantial. U.S. Holders should consult with their own tax advisors regarding the requirements of filing information returns under these rules, including the requirement to file an IRS Form 8938 (after such form is
released) for prior tax years in which the obligation to file such form was suspended.
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Payments made within the U.S. or by a U.S. payor or U.S. middleman, of dividends on, and proceeds arising from the sale or other taxable disposition of, common shares generally may be subject to information reporting and backup withholding tax, at the rate of 28% (increasing to 31% for payments made after December 31, 2012), if a U.S. Holder (a) fails to furnish such U.S. Holder’s correct U.S. taxpayer identification number (generally on Form W-9), (b) furnishes an incorrect U.S. taxpayer identification number, (c) is notified by the IRS that such U.S. Holder has previously failed to properly report items subject to backup withholding tax, or (d) fails to certify, under penalty of perjury,
that such U.S. Holder has furnished its correct U.S. taxpayer identification number and that the IRS has not notified such U.S. Holder that it is subject to backup withholding tax. However, certain exempt persons generally are excluded from these information reporting and backup withholding rules. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a credit against a U.S. Holder’s U.S. federal income tax liability, if any, or will be refunded, if such U.S. Holder furnishes required information to the IRS in a timely manner. Each U.S. Holder should consult its own tax advisor regarding the information reporting and backup withholding rules.
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is, as of the date hereof, a summary of the principal Canadian federal income tax considerations under the
Income Tax Act
(Canada) (the “
Tax Act
”) generally applicable to a holder of common shares of the Corporation (“
Common Shares
”) and who, for purposes of the Tax Act and at all relevant times, is neither resident in Canada nor deemed to be resident in Canada for purposes of the Tax Act and any applicable income tax treaty or convention, and who does not use or hold (and is not deemed to use or hold) the
Common Shares in carrying on a business in Canada, deals at arm’s length with and is not affiliated with the Corporation and holds the Common Shares as capital property (a “
Holder
”). Generally, the Common Shares will be considered to be capital property to a Holder thereof provided that the Holder does not hold the Common Shares in the course of carrying on a business of buying and selling securities and such Holder has not acquired them in one or more transactions considered to be an adventure or concern in the nature of trade.
This summary does not apply to a Holder (i) that is a “financial institution” for purposes of the mark-to-market rules contained in the Tax Act; (ii) that is a “specified financial institution” as defined in the Tax Act; (iii) an interest in which is a “tax shelter investment” as defined in the Tax Act; or (iv) that has elected to report its tax results in a functional currency other than Canadian currency. Special rules, which are not discussed in this summary, may apply to a Holder that is an “authorized foreign bank” within the meaning of the Tax Act or an insurer carrying on business in Canada and elsewhere. Such Holders should
consult their own tax advisors.
This summary is based upon the provisions of the Tax Act (including the regulations (“
Regulations
”) thereunder) in force as of the date hereof and our understanding of the current administrative policies and assessing practices of the Canada Revenue Agency (the “
CRA
”) published in writing by the CRA prior to the date hereof. This summary takes into account all specific proposals to amend the Tax Act (and the Regulations) publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof (the
“
Tax Proposals
”) and assumes that the Tax Proposals will be enacted in the form proposed, although no assurance can be given that the Tax Proposals will be enacted in their current form or at all. This summary does not otherwise take into account any changes in law or in the administrative policies or assessing practices of the CRA, whether by legislative, governmental or judicial decision or action. This summary is not exhaustive of all possible Canadian federal income tax considerations, and does not take into account other federal or any provincial, territorial or foreign income tax legislation or considerations, which may differ materially from those described in this summary.
This summary is of a general nature only and is not, and is not intended to be, and should not be construed to be, legal or tax advice to any particular Holder, and no representations concerning the tax consequences to any particular Holder are made.
Holders should consult their own tax advisors regarding the income tax considerations applicable to them having regard to their particular circumstances.
78
Dividends
Dividends paid or credited (or deemed to be paid or credited) to a Holder by the Corporation are subject to Canadian withholding tax at the rate of 25% unless reduced by the terms of an applicable tax treaty. For example, under the Canada-United States Income Tax Convention (1980) (the “
US
Treaty
”), as amended, the dividend withholding tax rate is generally reduced to 15% in respect of a dividend paid or credited to a Holder beneficially entitled to the dividend who is resident in the U.S. for purposes of the US Treaty and whose entitlement to the benefits of the US Treaty is not limited
by the limitation of benefits provisions of the US Treaty. Holders are urged to consult their own tax advisors to determine their entitlement to relief under the US Treaty or any other applicable tax treaty as well as their ability to claim foreign tax credits with respect to any Canadian withholding tax, based on their particular circumstances.
Disposition of Common Shares
A Holder generally will not be subject to tax under the Tax Act in respect of a capital gain realized on the disposition or deemed disposition of a Common Share, unless the Common Share constitutes or is deemed to constitute “taxable Canadian property” to the Holder thereof for purposes of the Tax Act, and the gain is not exempt from tax pursuant to the terms of an applicable tax treaty.
In general, provided the Common Shares are listed on a “designated stock exchange” (which currently includes the TSX) at the date of the disposition, the Common Shares will only constitute “taxable Canadian property” of a Holder where, at any time within the 60-month period preceding the disposition: (i) such Holder has, either alone or in combination with persons with whom the holder does not deal at arm's length, owned 25% or more of the issued shares of any class or series of the Corporation’s capital stock, and (ii) more than 50% of the fair market value of the Common Shares was derived directly or indirectly from one or any combination of (A) real or immovable property
situated in Canada, (B) Canadian resource properties, (C) timber resource properties, and (D) options in respect of, or interests in, or for civil law rights in, property described in any of subparagraphs (ii)(A) to (C), whether or not the property exists. However, and despite the foregoing, in certain circumstances the Common Shares may be deemed to be “taxable Canadian property” under the Tax Act.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended (the “
Exchange Act
”), and file periodic reports and other information with the SEC. However, as a foreign private issuer, we are exempt from the rules and regulations under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. Our reports and other information filed with the SEC may be inspected at the public
reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. Copies of these materials may be obtained at prescribed rates from the SEC at that address. Our reports and other information can also be inspected at no charge on the SEC’s website at www.sec.gov.
79
We are also subject to the information and reporting requirements of the
Securities Act
(Ontario) and the
Canada Business Corporations Act
. Such reports and information can be inspected at no charge on the website www.sedar.com.
If you are a shareholder, you may request a copy of these filings at no cost by contacting us at:
Director of Finance
Lorus Therapeutics Inc.
2 Meridian Road
Toronto, Ontario M9W 4Z7
Canada
Phone (416) 798-1200
Fax (416) 798-2200
I. Subsidiary Information
Lorus currently has one subsidiary, NuChem Pharmaceuticals Inc., a corporation incorporated under the laws of Ontario, of which Lorus owns 80% of the issued and outstanding voting share capital and 100% of the issued and outstanding non-voting preference share capital.
On May 31, 2009, GeneSense Technologies Inc., of which Lorus owned 100% of the issued and outstanding share capital, was wound up into Lorus and subsequently dissolved. Until June 22, 2009, Lorus owned 100% of the issued and outstanding share capital of Pharma Immune Inc., a corporation incorporated under the laws of Delaware, at which time it disposed of these shares. (See Item 4.B. - Business Overview - Financial Strategy - Secured Convertible Debentures.)
Refer to notes 8 and 9 to the Consolidated Financial Statements contained in Item 18.
We are not exposed to significant market risks. We do not currently have significant interest, credit or foreign currency risk.
We do not utilize derivative financial instruments to hedge our interest rate or foreign currency rate risks.
Interest Rate Risk
The Company invests its cash resources in liquid government and corporate debt instruments. We do 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 our investments, owing to the relative short-term nature of the investments.
Credit Risk
Financial instruments potentially exposing the Company to a concentration of credit risk consist principally of cash and cash equivalents and marketable securities. The Company manages this credit risk by maintaining bank accounts with Schedule I banks and investing only in highly rated Canadian securities that are traded on active markets and are capable of prompt liquidation.
Exchange Rate Sensitivity
The functional currency of the Company is the Canadian dollar. The Company does not have significant cash balances in any foreign currencies, does not generally invest in marketable securities denominated in currencies other than Canadian dollars and does not have significant ongoing supply contracts or revenue sources denominated in foreign currencies. Any foreign exchange gains and losses are included in the determination of gain or loss for the relevant period.
80
Limitations
The above discussion includes only those exposures that exist as of May 31, 2011, and as a result, does not consider exposures or positions that could arise after that date. The Company’s ultimate realized gain or loss with respect to interest rate and exchange rate fluctuations would depend on the exposures that arise during the period.
Risk Factors
See Item 3.D.
Not applicable.
81
Not applicable.
Not applicable.
(a) Disclosure Controls and Procedures
As of the end of our fiscal year ended May 31, 2011, an evaluation of the effectiveness of our “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), was carried out by our management under the supervision of and with the participation of the principal executive officer and principal financial officer. Based upon on that evaluation, our principal executive officer and principal financial officer have concluded that as of the end of that fiscal year, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i)
recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
It should be noted that while our principal executive officer and principal financial officer believe that our disclosure controls and procedures are effective and provide a reasonable level of assurance, they do not expect that the disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
(b) Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over our financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control system was designed to provide reasonable assurance that all transactions are accurately recorded, that transactions are recorded as necessary to permit preparation of financial statements in accordance with Canadian GAAP and reconciled to U.S. GAAP, and that our assets are safeguarded.
Management has assessed the effectiveness of our internal control over financial reporting as at May 31, 2011. In management’s opinion, our internal control over financial reporting is effective as at May 31, 2011. In making its assessment, management used the Committee of Sponsoring Organizations of the Treadway Commission framework in Internal Control - Integrated Framework to evaluate the effectiveness of our internal control over financial reporting. As part of its assessment, management has identified the following two areas of concern described below, but believes that our limited number of transactions, day-to-day management involvement in operations and reporting and access
to third-party experts are sufficient compensating controls to limit the risk of material misstatement in our Consolidated Financial Statements.
Segregation of Duties
Given our limited staff, certain duties within the accounting and finance department cannot be properly segregated. We believe that none of the segregation of duty deficiencies has resulted in a misstatement in our Consolidated Financial Statements as we rely on certain compensating controls, including substantive periodic review of the Consolidated Financial Statements by our Chief Executive Officer and Audit Committee. This weakness is considered to be a common area of deficiency for many smaller listed companies in Canada. We continue to evaluate whether additional accounting staff should be hired to deal with this weakness.
82
Complex and Non-Routine Transactions
As required, we record complex and non-routine transactions in our Consolidated Financial Statements. These transactions are extremely technical in nature and require an in-depth understanding of Canadian GAAP and, to the extent applicable, U.S. GAAP. Our accounting staff has only a fair and reasonable knowledge of the rules related to Canadian GAAP and U.S. GAAP, and there is a risk that these transactions may not be recorded correctly, potentially resulting in material misstatement of our Consolidated Financial Statements.
To address this risk, we consult with our third-party expert advisors as needed in connection with the identification, recording and reporting of complex and non-routine transactions. At a future date, we may consider expanding the technical expertise within our accounting function. In the meantime, we will continue to work closely with our third-party advisors.
(c) Attestation Report of the Registered Public Accounting Firm
Because we are a non-accelerated filer under the rules of the SEC, this Annual Report is not required to include, and does not include, an attestation report of our registered public accounting firm with respect to our internal control over financial reporting.
(d) Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the fiscal year ended May 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Our board of directors has determined that Mr. Warren Whitehead, a director of the Company and the chairman of the Audit Committee, possesses the attributes required of an “audit committee financial expert,” and is “independent,” under applicable NYSE Amex rules.
We have adopted a code of ethics, as such term is defined in Form 20-F, which applies to all of our officers, directors, employees and consultants. A copy of the code of ethics is available, without charge, upon written request from our Director of Finance at our offices located at 2 Meridian Road, Toronto, Ontario M9W 4Z7, Canada. There were no amendments to, or waivers granted under, our code of ethics during our fiscal year ended May 31, 2011.
KPMG LLP has served as our principal independent external auditor since October 1994. The total fees billed to us for professional services provided by KPMG LLP for the fiscal years ended May 31, 2011 and 2010 are as follows:
|
2011
|
2010
|
|||||||
|
Audit Fees
|
$ | 159,250 | $ | 218,000 | ||||
|
Audit-Related Fees
|
$ | 153,606 | $ | 161,500 | ||||
|
Tax Fees
|
$ | 8,800 | $ | 19,150 | ||||
|
All Other Fees
|
$ | 26,885 | $ | 36,638 | ||||
|
Total
|
$ | 348,541 | $ | 435,288 | ||||
83
Audit fees consist of the fees paid with respect to the audit of our annual Consolidated Financial Statements, quarterly reviews, the 20-F filing and accounting assistance. Audit-related fees in 2011 related to translation services and services associated with the filing of a rights offering prospectus. In 2010 audit-related fees consisted of fees for services associated with the filing of a registration statement on Form F-1 with the SEC and a Canadian prospectus with the Canadian securities regulatory authorities. Tax fees relate to assistance provided with review of tax returns and assistance with specific tax issues. All Other fees consist of CPAB fees and
expenses.
Pre-Approval Policies and Procedures
The Audit Committee of our board of directors has, pursuant to the Audit Committee charter, adopted specific responsibilities and duties regarding the provision of services by our external auditor, currently KPMG LLP. Our charter requires Audit Committee pre-approval of all permitted audit, audit-related and tax services.
Subject to the charter, the Audit Committee may establish fee thresholds for a group of pre-approved services. The Audit Committee then recommends to the board of directors approval of the fees and other significant compensation to be paid to the independent auditors.
No services were provided by KPMG LLP under a
de minimus
exemption for our fiscal year ended May 31, 2011.
Not applicable.
Not applicable.
Not applicable.
Not applicable.
84
We have responded to Item 18 in lieu of responding to this Item.
The Consolidated Financial Statements of Lorus Therapeutics Inc. are attached as follows:
|
Page
|
||||
|
Managements Responsibility for Financial Reporting
|
F-1 | |||
|
Report of Independent Registered Public Accounting Firm
|
F-2 | |||
|
Consolidated Balance Sheets as of May 31, 2011 and 2010
|
F-3 | |||
|
Consolidated Statements of Operations and Comprehensive Income for the years ended May 31, 2011, 2010 and 2009
|
F-4 | |||
|
Consolidated Statement of Deficit for the years ended May 31, 2011, 2010 and 2009
|
F-5 | |||
|
Consolidated Statements of Cash Flows for the years ended May 31, 2011, 2010 and 2009
|
F-6 | |||
|
Notes to Consolidated Financial Statements
|
F-7 | |||
|
Supplementary Information: Reconciliation of Canadian and United States Generally Accepted Accounting Principles
|
F-46 | |||
85
See the Exhibit Index hereto.
86
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
|
LORUS THERAPEUTICS INC.
|
|
|
By:
|
/s/ Aiping H. Young |
|
Name: Aiping H. Young
Title: President and Chief Executive Officer
Date: November 28, 2011
|
|
|
By:
|
/s/ Elizabeth Williams |
|
Name: Elizabeth Williams
Title: Director of Finance and Acting Chief Financial Officer
Date: November 28, 2011
|
87
EXHIBIT INDEX
|
Number
|
Exhibit
|
|
|
1.1 *
|
Articles of Arrangement.
|
|
|
1.2 *
|
By-law #2 of the Registrant.
|
|
|
2.1**
|
Share Purchase Agreement dated as of July 13, 2006 between Lorus and High Tech Beteiligungen GmbH & Co. KG.
|
|
|
2.2**
|
Registration Rights Agreement dated as of August 30, 2006 between Lorus and High Tech Beteiligungen GmbH & Co. KG.
|
|
|
2.3**
|
Share Purchase Agreement dated as of July 24, 2006 between Lorus and Technifund Inc.
|
|
|
2.4 ***
|
Subscription Agreement entered into with The Erin Mills Investment Corporation dated October 6, 2004.
|
|
|
2.5**
|
Convertible Secured Debentures issued to The Erin Mills Investment Corporation on April 15, 2005, January 14, 2005 and October 6, 2004.
|
|
|
2.6****
|
Arrangement Agreement dated May 1, 2007, as amended, between the Company, Old Lorus, 6707157 Canada Inc., NuChem Pharmaceuticals Inc., GeneSense Technologies Inc. and Pinnacle International Lands Inc., as amended May 14, 2007 and July 4, 2007.
|
|
|
2.7*****
|
Warrant Repurchase Agreement dated May 1, 2007 between the Company and The Erin Mills Investment Corporation.
|
|
|
2.8*****
|
Assignment, Novation and Amendment Agreement and Consent dated May 1, 2007 among the Company, Old Lorus, GeneSense Technologies Inc. and The Erin Mills Investment Corporation as amended June 28, 2007.
|
|
|
2.9+
|
Tangible Business Assets Transfer Agreement dated July 10, 2007 between Old Lorus and GeneSense Technologies Inc.
|
|
|
2.10+
|
Antisense Patent Transfer Agreement dated July 10, 2007 between the Company and GeneSense Technologies Inc.
|
|
|
2.11+
|
Virulizin
®
and Small Molecule Patent Assets Transfer Agreement dated July 10, 2007 between Old Lorus and GeneSense Technologies Inc.
|
|
|
2.12+
|
Prepaid Expenses and Receivables Transfer Agreement dated July 10, 2007 between Old Lorus and GeneSense Technologies Inc.
|
|
|
2.13+
|
NuChem Pharmaceuticals Inc. Share Purchase Agreement dated July 10, 2007 between Old Lorus and GeneSense Technologies Inc.
|
|
|
2.14+
|
GeneSense Technologies Inc. Share Purchase Agreement dated July 10, 2007 between Old Lorus and New Lorus.
|
|
|
2.15*****
|
Pinnacle Share Purchase Agreement dated July 10, 2007 between Old Lorus and 6707157 Canada Inc.
|
|
|
2.16+
|
Indemnification Agreement dated July 10, 2007 between Old Lorus and the Company.
|
|
|
2.17+
|
Escrow Agreement between 6707157 Canada Inc, the Company and Equity Transfer & Trust Company dated July 10, 2007.
|
|
|
2.18+
|
Amended and Restated Guarantee and Indemnity between GeneSense Technologies Inc. and The Erin Mills Investment Corporation dated July 10,
|
|
|
2.19+
|
Amended and Restated Share Pledge Agreement between the Company and The Erin Mills Investment Corporation dated July 10, 2007.
|
|
|
2.20##
|
Form of Canadian Subscription Agreement used in connection with November 2009 private placement.
|
|
|
2.21##
|
Form of Canadian Warrant Agreement issued in connection with November 2009 private placement.
|
|
|
2.22##
|
Form of United States Subscription Agreement used in connection with November 2009 private placement.
|
|
|
2.23##
|
Form of United States Warrant issued in connection with November 2009 private placement.
|
|
|
2.24##
|
Promissory note dated October 6, 2009 between the Company and Herbert Abramson.
|
|
2.25#
|
Share Purchase Warrant Indenture dated June 27, 2008 between the Company and Computershare Trust Company of Canada.
|
|
|
2.26#
|
Settlement Agreement dated June 19. 2009 between the Company and The Erin Mills Investment Corporation with respect to the purchase and settlement of $15 million secured convertible debentures.
|
|
|
2.27#
|
Asset Purchase Agreement dated June 19, 2009 between the Company and The Erin Mills Investment Corporation under which the Company sold the intellectual property associated with Virulizin
®
.
|
|
|
2.28#
|
Supply and Services Agreement dated June 19, 2009 between the Company and Erin Mills Biotech Inc.
|
|
|
2.29#
|
Share Purchase Agreement regarding sale of Pharma Immune Inc dated June 19, 2009 between the Company and The Erin Mills Investment Corporation.
|
|
|
2.30#
|
Animal Rights License Agreement dated June 19, 2009 between the Company and Erin Mills Biotech Inc.
|
|
|
2.31#
|
Amendment, Assignment, Assumption, Novation and Consent Agreement dated June 19, 2009 between the Company, ZOR Pharmaceuticals, LLC, Erin Mills Biotech Inc. and The Erin Mills Investment Corporation.
|
|
|
2.32###
|
Promissory note dated April 14, 2010 between the Company and Herbert Abramson.
|
|
|
2.33##
|
List of subsidiaries.
|
|
|
2.34##
|
Code of Business Conduct and Ethics.
|
|
|
2.35###
|
Share Purchase Warrant Indenture dated October 4, 2010 between the Company and Computershare Trust Company of Canada regarding the provision for issuance of common share purchase warrants.
|
|
|
2.36###
|
First Supplemental Indenture dated as of October 18, 2010.
|
|
|
2.37###
|
Standby Purchase Agreement dated September 16, 2010 between the Company and Herman Abramson in connection with the November 2010 rights offering.
|
|
|
2.38###
|
Standby Purchase Agreement Amendment dated September 27, 2010.
|
|
|
2.39####
|
Form of Subscription Agreement used in connection with December 2010 private placement.
|
|
|
2.41
|
Share Purchase Warrant Indenture dated August 15, 2011 between the Company and Computershare Trust Company of Canada regarding the provision for issuance of common share purchase warrants.
|
|
|
2.42
|
Agency Agreement dated July 20, 2011 in connection with an offering of units between the Company and Euro Pacific Canada Inc.
|
|
|
2.43
|
Commitment Letter for minimum $4 million equity investment dated June 20, 2011 and subsequently amended July 11, 2011 from Mr. Abramson.
|
|
|
4.1+++
|
Stock Option Plans.
|
|
|
4.2+++
|
Form of Officer and Director Indemnity Agreement.
|
|
|
4.3 ++
|
Amalgamation Agreement dated August 23, 1991, among the Company, Mint Gold Resources Ltd., Harry J. Hodge and Wayne Beach.
|
|
|
4.4 ++++
|
Exclusive License Agreement dated April 8, 2008 between the Company and ZOR Pharmaceuticals, LLC Pharmaceuticals LLC.
|
|
|
4.5++++
|
Independent Contractor Services Agreement dated April 8, 2008 between the Company and ZOR Pharmaceuticals, LLC Pharmaceuticals LLC.
|
|
|
4.6++++
|
Limited Liability Company Agreement dated April 8, 2008 between the Company and ZBV I, LLC.
|
|
|
12.1
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
|
|
|
12.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
|
|
|
13.1
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
|
|
|
13.2
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
|
|
*
|
Incorporated by reference to File 0-32001, Form 6-K, dated November 19, 2007.
|
|
|
**
|
Incorporated by reference to File 1-32001, Form 20 F, Annual Report, dated November 21, 2006.
|
|
|
***
|
Incorporated by reference to File 1-32001, Form 6-K, dated February 10, 2005.
|
|
|
****
|
Incorporated by reference to File 1-32001, Form 6-K, dated May 30, 2007.
|
|
|
*****
|
Incorporated by reference to File 1-32001, Form 6-K, dated November 20, 2007.
|
|
|
+
|
Incorporated by reference to File 1-32001, Form 6-K, dated September 4, 2007.
|
|
|
++
|
Incorporated by reference to File 0-19763, Registration Statement on Form 20-FR, dated March 4, 1992.
|
|
|
+++
|
Incorporated by reference to File 1-32001, Form 20-F, Annual Report, dated November 29, 2007.
|
|
|
++++
|
Incorporated by reference to File 1-32001, Form 6-K, dated April 21, 2008.
|
|
|
#
|
Incorporated by reference to File 1-32001, Form 6-K, dated November 16, 2009.
|
|
|
##
|
Incorporated by reference to File 1-32001, Form 20-F, Annual Report, dated November 30, 2009.
|
|
|
###
|
Incorporated by reference to File 1-32001, Form 20-F/A, Annual Report, dated December 1, 2010.
|
|
|
####
|
Incorporated by reference to File 1-32001, Form 6-K, dated December 1, 2010.
|
Management’s Responsibility for Financial Reporting
The accompanying consolidated financial statements of Lorus Therapeutics Inc. and other financial information contained in this annual report are the responsibility of Management and have been approved by the Board of Directors of the Company.
The consolidated financial statements have been prepared in conformity with Canadian generally accepted accounting principles and reconciled to United States generally accepted accountin principles, using Management’s best estimates and judgments where appropriate. In the opinion of Management, these consolidated financial statements reflect fairly the financial position and the results of operations and cash flows of the Company within reasonable limits of materiality. The financial information contained elsewhere in this annual report has been reviewed to ensure consistency with that in the consolidated financial statements. The integrity and objectivity of data in the financial statements and elsewhere
in this annual report are the responsibility of Management.
In discharging its responsibility for the integrity and fairness of the financial statements, management maintains a system of internal controls designed to provide reasonable assurance, at appropriate cost, that transactions are authorized, assets are safeguarded and proper records are maintained. Management believes that the internal controls provide reasonable assurance that financial records are reliable and form a proper basis for the preparation of the consolidated financial statements, and that assets are properly accounted for and safeguarded. The internal control process includes management’s communication to employees of policies that govern ethical business conduct.
The Board of Directors, through an Audit Committee, oversees management’s responsibilities for financial reporting. This committee, which consists of three independent directors, reviews the audited consolidated financial statements and recommends the financial statements to the Board for approval. Other key responsibilities of the Audit Committee include reviewing the adequacy of the Company’s existing internal controls, audit process and financial reporting with management and the external auditors.
The consolidated financial statements have been audited by KPMG LLP, Chartered Accountants, who are independent auditors appointed by the shareholders of the Company upon the recommendation of the Audit Committee. Their report follows. The independent auditors have free and full access to the Audit Committee.
|
|
|
|
Aiping Young
|
Elizabeth Williams
|
|
|
President and Chief Executive Officer
|
Director of Finance (Acting Chief Financial Officer)
|
F-1
|
KPMG LLP
Chartered Accoun
tants
Adelaide Centre
333 Bay Street Suite 4600
Toronto ON M5H 2S5
Canada
|
Telephone
(416) 777-8500
Fax (416) 777-8818
Internet www.kpmg.ca
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
We have audited the accompanying consolidated
balance sheets of Lorus Therapeutics Inc. as at May 31, 2011
and May 31, 2010 and the related consolidated statements of operations and comprehensive income, deficit, and cash flows for each of the years in the three-year period ended May 31, 2011, and for the period from inception on September 5, 1986 to May 31, 2011. These consolidated financial statements are the responsibility of Lorus Therapeutics Inc.'s management. Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lorus Therapeutics Inc. as of May 31, 2011
and May 31, 2010 and its consolidated results of operations and its consolidated cash flows for each of the years in the 3
-
year period ended May 31, 2011, and for the period from inception on September 5, 1986 to May 31, 2011, in conformity with Canadian
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 1(a) to the consolidated financial statements, the Company has significant doubt about its ability to continue as a going concern. Management’s plan in regard to these matters is also described in note 1(a). The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The supplementary information included in the "Reconciliation of Canadian and United States Generally Accepted Accounting Principle" is presented for purposes of additional analysis and requirements under securities legislation. Such supplementary information has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements
and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated
financial statements taken as a whole.
Chartered Accountants , Licensed Public Accountants
August 25, 2011, except as to note 17 which is as of October 28, 2011, except for the Reconciliation of Canadian and United States Generally Accepted Accounting Principle which is as of November 25, 2011
Toronto, Canada
|
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity.
KPMG Canada provides services to KPMG LLP.
|
F-2
LORUS THERAPEUTICS INC.
Consolidated Balance Sheets
(Expressed in thousands of Canadian dollars)
May 31, 2011 and 2010
|
2011
|
2010
|
|||||||
|
Assets
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents (note 9)
|
$ | 911 | $ | 667 | ||||
|
Short-term investments (notes 4 and 9)
|
– | 247 | ||||||
|
Prepaid expenses and other assets
|
388 | 636 | ||||||
| 1,299 | 1,550 | |||||||
|
Fixed assets (note 5)
|
99 | 147 | ||||||
|
Goodwill
|
606 | 606 | ||||||
| $ | 2,004 | $ | 2,303 | |||||
|
Liabilities and Shareholders' Equity (Deficiency)
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$ | 215 | $ | 387 | ||||
|
Accrued liabilities
|
944 | 1,458 | ||||||
|
Promissory note payable (note 16)
|
– | 1,000 | ||||||
| 1,159 | 2,845 | |||||||
|
Shareholders' equity (deficiency):
|
||||||||
|
Share capital (note 6):
|
||||||||
|
Common shares
|
168,787 | 163,920 | ||||||
|
Stock options
|
1,156 | 3,704 | ||||||
|
Contributed surplus
|
18,988 | 14,875 | ||||||
|
Warrants
|
1,032 | 1,039 | ||||||
|
Deficit accumulated during development stage
|
(189,118 | ) | (184,080 | ) | ||||
| 845 | (542 | ) | ||||||
|
Basis of presentation (note 1)
|
||||||||
|
Contingencies, commitments and guarantees (note 14)
|
||||||||
|
Subsequent events (note 17)
|
||||||||
| $ | 2,004 | $ | 2,303 | |||||
See accompanying notes to consolidated financial statements.
On behalf of the Board:
"Denis R. Burger"
Director
"Aiping H. Young"
Director
F-3
LORUS THERAPEUTICS INC.
Consolidated Statements of Operations and Comprehensive Income
(Expressed in thousands of Canadian dollars, except for per common share data)
|
Period from
|
||||||||||||||||
|
inception on
|
||||||||||||||||
|
September 5,
|
||||||||||||||||
|
1986 to
|
||||||||||||||||
| Years ended May 31, |
May 31,
|
|||||||||||||||
|
2011
|
2010
|
2009
|
2011
|
|||||||||||||
|
Revenue
|
$ | – | $ | 131 | $ | 184 | $ | 1,171 | ||||||||
|
Expenses:
|
||||||||||||||||
|
Research and development (note 11)
|
2,298 | 2,517 | 3,757 | 128,812 | ||||||||||||
|
General and administrative
|
2,101 | 2,964 | 2,958 | 62,940 | ||||||||||||
|
Stock-based compensation (note 7)
|
526 | 176 | 446 | 9,120 | ||||||||||||
|
Depreciation and amortization of fixed assets
|
56 | 86 | 189 | 9,873 | ||||||||||||
|
Cost of sales
|
– | – | – | 105 | ||||||||||||
| 4,981 | 5,743 | 7,350 | 210,850 | |||||||||||||
|
Other expenses (income):
|
||||||||||||||||
|
Interest
|
71 | 54 | 707 | 4,093 | ||||||||||||
|
Accretion in carrying value of
convertible debentures (note 13)
|
– | 80 | 1,707 | 4,983 | ||||||||||||
|
Amortization of deferred financing
costs (note 13)
|
– | – | – | 412 | ||||||||||||
|
Interest
|
(14 | ) | (21 | ) | (270 | ) | (12,271 | ) | ||||||||
| 57 | 113 | 2,144 | (2,783 | ) | ||||||||||||
|
Loss from operations
|
(5,038 | ) | (5,725 | ) | (9,310 | ) | (206,896 | ) | ||||||||
|
|
||||||||||||||||
|
Gain on repurchase of convertible
debentures and transfer of assets (note 13)
|
– | 11,006 | – | 11,006 | ||||||||||||
|
Gain on sale of shares (notes 1(b)
and 14)
|
– | 50 | 450 | 6,799 | ||||||||||||
|
Net (loss) earnings for the period and
other comprehensive (loss) income
|
$ | (5,038 | ) | $ | 5,331 | $ | (8,860 | ) | $ | (189,091 | ) | |||||
|
Basic and diluted (loss) earnings
per common share
|
$ | (0.38 | ) | $ | 0.57 | $ | (1.08 | ) | ||||||||
|
Weighted average number of common
shares outstanding used in the
calculation of (in thousands):
|
||||||||||||||||
|
Basic (loss) earnings per share
|
13,157 | 9,364 | 8,236 | |||||||||||||
|
Diluted (loss) earnings per share
|
13,157 | 9,379 | 8,236 | |||||||||||||
See accompanying notes to consolidated financial statements.
F-4
LORUS THERAPEUTICS INC.
Consolidated Statements of Deficit
(Expressed in thousands of Canadian dollars)
|
Period from
|
||||||||||||||||
|
inception on
|
||||||||||||||||
|
September 5,
|
||||||||||||||||
|
1986 to
|
||||||||||||||||
| Years ended May 31, |
May 31,
|
|||||||||||||||
|
2011
|
2010
|
2009
|
2011
|
|||||||||||||
|
Deficit, beginning of period, as
previously reported
|
$ | (184,080 | ) | $ | (189,411 | ) | $ | (180,551 | ) | $ | – | |||||
|
Change in accounting policy
|
– | – | – | (27 | ) | |||||||||||
|
Deficit, beginning of period,
as restated
|
(184,080 | ) | (189,411 | ) | (180,551 | ) | (27 | ) | ||||||||
|
Net (loss) earnings for the period
|
(5,038 | ) | 5,331 | (8,860 | ) | (189,091 | ) | |||||||||
|
Deficit, end of period
|
$ | (189,118 | ) | $ | (184,080 | ) | $ | (189,411 | ) | $ | (189,118 | ) | ||||
See accompanying notes to consolidated financial statements.
F-5
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian dollars)
|
Period from
|
||||||||||||||||
|
inception on
|
||||||||||||||||
|
September 5,
|
||||||||||||||||
|
1986 to
|
||||||||||||||||
|
Years ended May 31,
|
May 31,
|
|||||||||||||||
|
2011
|
2010
|
2009
|
2011
|
|||||||||||||
|
Cash flows from operating activities:
|
||||||||||||||||
|
Net (loss) earnings for the period
|
$ | (5,038 | ) | $ | 5,331 | $ | (8,860 | ) | $ | (189,091 | ) | |||||
|
Items not involving cash:
|
||||||||||||||||
|
Gain on repurchase of convertible
debentures and transfer of assets (note 13)
|
– | (11,006 | ) | – | (11,006 | ) | ||||||||||
|
Gain on sale of shares (notes 1(b) and 14)
|
– | (50 | ) | (450 | ) | (6,799 | ) | |||||||||
|
Stock-based compensation
|
526 | 176 | 446 | 9,120 | ||||||||||||
|
Interest on convertible debentures
|
– | 15 | 707 | 3,983 | ||||||||||||
|
Accretion in carrying value of
convertible debentures
|
– | 80 | 1,707 | 4,983 | ||||||||||||
|
Amortization of deferred financing costs
|
– | – | – | 412 | ||||||||||||
|
Depreciation and amortization of
fixed assets and acquired patents and licenses
|
56 | 86 | 189 | 22,434 | ||||||||||||
|
Other
|
– | (8 | ) | (10 | ) | 437 | ||||||||||
|
Change in non-cash operating working
capital (note 12)
|
(1,438 | ) | 1,655 | (942 | ) | (237 | ) | |||||||||
|
Cash used in operating activities
|
(5,894 | ) | (3,721 | ) | (7,213 | ) | (165,764 | ) | ||||||||
|
Cash flows from financing activities:
|
||||||||||||||||
|
Issuance of debentures, net of
|
||||||||||||||||
|
issuance costs
|
– | – | – | 12,948 | ||||||||||||
|
Payment on settlement of convertible debentures,
including transaction costs (note 13)
|
– | (3,521 | ) | – | (3,521 | ) | ||||||||||
|
Proceeds on sale of shares, net of
arrangement costs (note 14(d))
|
– | – | 600 | 6,899 | ||||||||||||
|
Issuance of common shares and warrants,
net of issuance costs (note 6)
|
5,899 | 2,287 | 3,207 | 157,571 | ||||||||||||
|
Cash provided by (used in) financing activities
|
5,899 | (1,234 | ) | 3,807 | 173,897 | |||||||||||
|
Cash flows from investing activities:
|
||||||||||||||||
|
Maturity (purchase) of investments, net
|
247 | 250 | 6,304 | (3 | ) | |||||||||||
|
Business acquisition, net of cash received
|
– | – | – | (539 | ) | |||||||||||
|
Acquired patents and licenses
|
– | – | – | (715 | ) | |||||||||||
|
Additions to fixed assets
|
(8 | ) | (2 | ) | (176 | ) | (6,313 | ) | ||||||||
|
Proceeds on sale of fixed assets
|
– | – | – | 348 | ||||||||||||
|
Cash provided by (used in) investing activities
|
239 | 248 | 6,128 | (7,222 | ) | |||||||||||
|
Increase (decrease) in cash and cash equivalents
|
244 | (4,707 | ) | 2,722 | 911 | |||||||||||
|
Cash and cash equivalents, beginning of period
|
667 | 5,374 | 2,652 | – | ||||||||||||
|
Cash and cash equivalents, end of period
|
$ | 911 | $ | 667 | $ | 5,374 | $ | 911 | ||||||||
Supplemental cash flow information (note 12)
See accompanying notes to consolidated financial statements.
F-6
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
1.
|
Basis of presentation:
|
|
|
(a)
|
Going concern:
|
Lorus Therapeutics Inc. (the "Company") has not earned substantial revenue from its drug candidates and, is therefore, considered to be in the development stage. The continuation of the Company's research and development activities is dependent upon the Company's ability to successfully fund its cash requirements through a combination of equity financing and payments from strategic partners. The Company has no current sources of significant payments from strategic partners and has not earned any revenue in the past year.
These consolidated financial statements have been prepared on a going concern basis in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"). The going concern basis of presentation assumes that the Company will continue in operation for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of business. There is significant doubt about the appropriateness of the use of the going concern basis because management has forecasted that the Company's current level of cash and cash equivalents and short-term investments, including the funds available by way of the financing and
commitment letter described in note 17, will only be sufficient to execute its current planned expenditures for the next 10 to 12 months without further financing. The Company is actively pursuing financing alternatives to provide additional funding. Management believes that it will complete one or more arrangements in sufficient time to continue to execute its planned expenditures without interruption. However, there can be no assurance that the capital will be available as necessary to meet these continuing expenditures, or if the capital is available, that it will be on terms acceptable to the Company. The issuance of common shares by the Company could result in significant dilution in the equity interest of existing shareholders. There can be no assurance that the Company will be able to obtain sufficient financing to meet
future operational needs. As a result, there is a significant doubt as to whether the Company will be able to continue as a going concern and realize its assets and pay its liabilities as they fall due.
The consolidated 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 consolidated financial statements, then adjustments would be necessary in the carrying value of the assets and liabilities, the reported revenue and expenses and the balance sheets classifications used.
F-7
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
1.
|
Basis of presentation (continued):
|
|
|
(b)
|
Reorganization:
|
On November 1, 2006, the Company was incorporated as 6650309 Canada Inc. pursuant to the provisions of the Canada Business Corporations Act and did not carry out any active business from the date of incorporation to July 10, 2007. From its incorporation to July 10, 2007, the Company was a wholly owned subsidiary of 4325231 Canada Inc., formerly Lorus Therapeutics Inc. ("Old Lorus").
On July 10, 2007, the Company and Old Lorus completed a plan of arrangement and corporate reorganization (the "Arrangement"). As part of the Arrangement, all of the assets and liabilities of Old Lorus (including all of the shares of its subsidiaries held by it), with the exception of certain future tax assets were transferred, directly or indirectly, from Old Lorus to the Company. Securityholders in Old Lorus exchanged their securities in Old Lorus for equivalent securities in the Company (the "Exchange") and the Board of Directors and management of Old Lorus continued as the Board of Directors and management of the Company.
In connection with the Arrangement, the Company received cash consideration of approximately $8.5 million less an escrowed amount of $600 thousand related to the indemnification (received in July 2008), before transaction costs. After completion of the Arrangement, the Company is not related to Old Lorus, which was subsequently renamed Global Summit Real Estate Inc.
Under the Arrangement, the Company and its subsidiaries 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 various matters discussed in note 14(d).
As part of the Arrangement, the Company changed its name to Lorus Therapeutics Inc. and continued as a biopharmaceutical company, specializing in the research and development of pharmaceutical products and technologies for the management of cancer as a continuation of the business of Old Lorus.
F-8
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
1.
|
Basis of presentation (continued):
|
The Arrangement has been accounted for on a continuity of interest basis and, accordingly, the consolidated financial statements of the Company reflect the financial position, results of operations and cash flows as if the Company has always carried on the business formerly carried on by Old Lorus. Consequently, all comparative figures presented in these consolidated financial statements include those of Old Lorus.
|
|
(c)
|
Share consolidation:
|
The Company's Board of Directors approved a 1-for-30 share consolidation which became effective May 25, 2010. The share consolidation affected all of the Company's common shares, stock options and warrants outstanding at the effective time. Fractional shares were not issued. Prior to consolidation, the Company had approximately 298 million shares outstanding. Following the share consolidation, the Company had approximately 9.9 million common shares outstanding. In these consolidated financial statements, all references to number of shares, stock options and warrants in the current and past periods have been adjusted to reflect the
impact of the consolidation. All amounts based on the number of shares, stock options or warrants, unless otherwise specified, such as earnings (loss) per share and weighted average issuance price in the case of stock options have been adjusted to reflect the impact of 1-for-30 share consolidation.
|
2.
|
Changes in accounting policies:
|
There were no new accounting policies adopted in the year ended May 31, 2011.
F-9
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
3.
|
Significant accounting policies:
|
|
|
(a)
|
Principles of consolidation:
|
The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP").
The consolidated financial statements include the accounts of the Company and its 80% owned subsidiary, NuChem Pharmaceuticals Inc. ("NuChem"). On May 31, 2009, its wholly owned subsidiary, GeneSense Technologies Inc. ("GeneSense") was wound up and its operations and net assets assumed by Lorus Therapeutics, the parent company. On June 19, 2009, the Company disposed of its shares of Pharma Immune Inc. ("Pharma Immune") (note 13). The results of operations for acquisitions are included in these consolidated financial statements from the date of acquisition. All significant intercompany balances and transactions have been eliminated on
consolidation.
|
|
(b)
|
Revenue recognition:
|
Revenue includes product sales, service, license and royalty revenue.
The Company recognizes revenue from product sales and provision of services when persuasive evidence of an arrangement exists, delivery has occurred, the Company's price to the customer is fixed or determinable and collectability is reasonably assured. The Company allows customers to return product. Provisions for these returns are estimated based on historical return and exchange levels, and third-party data with respect to inventory levels in the Company's distribution channels.
Revenue from multiple element arrangements consisting of non-refundable license fees, receipt of milestone payments, royalty and delivery of services over a defined term are recognized in accordance with Emerging Issues Committee Abstract No. 142, Revenue Arrangements with Multiple Deliverables. The Company recognizes the non-refundable license fee as revenue when the technology license is delivered, the fee is fixed or determinable, collection of the amount was probable and there is no continuing involvement or obligation to perform under the arrangement. Any milestone payment subsequently received from the customer is recognized when the customer acknowledges
achievement of the milestone, when the fee is fixed or determinable and collection of the amount is probable. If the multiple deliverables in an arrangement do not meet the criteria for separation, the proceeds from the entire arrangement are deferred and recognized as revenue on a proportionate performance basis, or over the term of the arrangement.
F-10
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
3.
|
Significant accounting policies (continued):
|
|
|
(c)
|
Financial instruments:
|
Financial instrument classification:
Management determines the classification of financial assets and financial liabilities at initial recognition and, except in very limited circumstances, the classification is not changed subsequent to initial recognition. The classification depends on the purpose for which the financial instruments were acquired, their characteristics and/or management's intent. Transaction costs with respect to instruments not classified as held-for-trading are recognized as an adjustment to the cost of the underlying instruments and amortized using the effective interest method.
The Company's financial instruments were classified in the following categories:
|
|
(i)
|
Cash and cash equivalents:
|
Cash and cash equivalents are classified as held-for-trading investments and measured at fair value. By virtue of the nature of these assets, fair value is generally equal to cost plus accrued interest. Where applicable, any significant change in market value would result in a gain or loss being recognized in the consolidated statements of operations and comprehensive income.
The Company considers unrestricted cash on hand and in banks, term deposits and guaranteed investment certificates with original maturities of three months or less as cash and cash equivalents.
|
|
(ii)
|
Short-term investments:
|
Short-term investments are liquid Canadian government or corporate instruments having original maturity dates greater than three months and less than one year and are classified as held-to-maturity investments, except where the Company does not intend to, or cannot reasonably expect to hold the investment to maturity, in which case, the investment is designated as held-for-trading. Held-to-maturity investments are measured at amortized cost using the effective interest rate method, while held-for-trading investments are measured at fair value and the resulting gain or loss is recognized in the consolidated statements of operations and comprehensive income.
F-11
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
3.
|
Significant accounting policies (continued):
|
Upon adoption of CICA Handbook Section 3855, Financial Instruments - Recognition and Measurement ("Section 3855"), on June 1, 2007, the Company designated certain corporate instruments then having maturities greater than one year previously carried at amortized cost as held-for-trading investments. This change in accounting policy resulted in a decrease in the carrying amount of these investments of $27 thousand and a corresponding increase in the opening deficit at June 1, 2007. The Company recognized a net unrealized gain in the consolidated statements of operations and comprehensive income for the year ended May 31, 2011 of nil (2010 - $8 thousand, 2009 - $10
thousand).
The Company invests in high-quality fixed income government and corporate investments with low credit risk.
|
|
(iii)
|
Accounts payable and accrued liabilities:
|
Accounts payable and accrued liabilities and promissory note payable are typically short-term in nature and classified as other financial liabilities. These liabilities are carried at amortized cost.
|
|
(iv)
|
Secured convertible debentures:
|
The secured convertible debentures, prior to their repurchase in June 2009, were classified as other financial liabilities and accounted for at amortized cost using the effective interest method. The deferred financing charges related to the secured convertible debentures for the periods presented were included as part of the carrying value of the secured convertible debentures and were amortized using the effective interest method.
|
|
(v)
|
Embedded derivatives:
|
Where applicable, the Company separates embedded derivatives from a related host contract and measures those embedded derivatives at fair value. Subsequent changes in fair value of embedded derivatives are recognized in the consolidated statements of operations and comprehensive income in the period in which the change occurs. In the periods presented, the Company did not identify any embedded derivatives that require separation from the related host contract.
F-12
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
3.
|
Significant accounting policies (continued):
|
|
|
(vi)
|
Transaction costs:
|
Transaction costs directly attributable to the acquisition or issuance of financial assets or liabilities are accounted for as part of the respective asset or liability's carrying value at inception except for held-for-trading securities where the costs are expensed immediately.
|
|
(vii) Fair value hierarchy:
|
All financial instruments are required to be measured at fair value on initial recognition, except for certain related party transactions. Financial instruments are required to be measured at fair value at each reporting. Financial instruments have been ranked using a three-level hierarchy that reflects the significance of the inputs used in making the fair value measurements:
|
|
•
|
Level 1 - applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 - applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
|
|
|
•
|
Level 3 - applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
|
See note 9 for a breakdown of these financial instruments.
F-13
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
3.
|
Significant accounting policies (continued):
|
|
|
(d)
|
Fixed assets:
|
Fixed assets are recorded at cost less accumulated depreciation and amortization. The Company records depreciation and amortization at rates that charge operations with the cost of the assets over their estimated useful lives on a straight-line basis as follows:
|
Furniture and equipment
|
Over 3 to 5 years
|
|
|
(e)
|
Research and development:
|
Research costs are charged to expense as incurred. Development costs, including the cost of drugs for use in clinical trials, are expensed as incurred unless they meet the criteria under Canadian GAAP for deferral and amortization. No development costs have been deferred to date.
|
|
(f)
|
Goodwill:
|
Goodwill represents the excess of the purchase price over the fair value of net identifiable assets acquired in the GeneSense business combination. Goodwill acquired in a business combination is tested for impairment on an annual basis and at any other time if an event occurs or circumstances change that would indicate that impairment may exist. The impairment test is carried out in two steps.
In the first step, the carrying amount of the reporting unit including goodwill is compared with its fair value. When the fair value of a reporting unit including goodwill exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired and the second step of the impairment test is unnecessary.
The second step is carried out when the carrying amount of a reporting unit exceeds its fair value, in which case, the implied fair value of the reporting unit's goodwill is compared with its carrying amount to measure the amount of the impairment loss if any. The implied fair value of goodwill is determined in the same manner as the value of goodwill is determined in a business combination.
The Company has identified no impairment relating to goodwill for 2011, 2010 and 2009.
F-14
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
3.
|
Significant accounting policies (continued):
|
|
|
(g)
|
Impairment of long-lived assets:
|
The Company reviews long-lived assets which include fixed assets and intangible assets with finite useful lives for impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the undiscounted expected future cash flows expected to result from the use and eventual disposition of an asset is less than its carrying amount, it is considered to be impaired. An impairment loss is measured at the amount by which the carrying amount of the asset exceeds its fair value, which is estimated as the expected future cash flows discounted at a rate proportionate with the risks
associated with the recovery of the asset.
The Company has identified no impairment relating to long-lived assets for 2011, 2010 and 2009.
|
|
(h)
|
Stock-based compensation:
|
The Company has a stock-based compensation plan (the "Plan") available to officers, directors, employees and consultants with grants under the Plan approved by the Company's Board of Directors. Under the Plan, the exercise price of each option equals the closing trading price of the Company's stock on the day prior to the grant. Vesting is provided for at the discretion of the Board of Directors and the expiration of options is to be no greater than 10 years from the date of grant.
The Company uses the fair value based method of accounting for employee awards granted under the Plan. The Company calculates the fair value of each stock option grant using the Black-Scholes Option Pricing model at the grant date. The stock-based compensation cost of the options is recognized as stock-based compensation expense over the relevant vesting period of the stock options. Actual forfeitures are accounted for as they occur.
Stock options awarded to non-employees are accounted for using the fair value method and expensed as the service or product is received. The Company calculates the fair value of each stock option grant using the Black-Scholes Option Pricing model at the grant date. Consideration paid on the exercise of stock options and warrants is credited to common shares.
F-15
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
3.
|
Significant accounting policies (continued):
|
The Company has a deferred share unit plan that provides directors the option of receiving payment for their services in the form of share units rather than common shares or cash. Share units entitle the director to elect to receive, on termination of his or her services with the Company, an equivalent number of common shares, or the cash equivalent of the market value of the common shares at that future date. For units issued under this plan, the Company records an expense and a liability equal to the market value of the shares issued. The accumulated liability is adjusted for market fluctuations on a quarterly basis. There are currently no units
issued under this plan.
The Company has an alternate compensation plan ("2009 ACP") that provides directors and senior management ("participants") with the option of receiving director's fees, salary, bonuses or other remuneration ("Remuneration") in common shares rather than cash. Under the plan, the participant receives an allotment from treasury of such number of shares as will be equivalent to the cash value of the Remuneration determined by dividing the Remuneration by the weighted average closing common share price for the five trading days prior to payment date (the "5-day VWAP"). The issue price of the shares is the 5-day VWAP. There are currently no shares allotted for
issuance under this plan.
|
|
(i)
|
Investment tax credits:
|
The Company is entitled to Canadian federal and provincial investment tax credits, which are earned as a percentage of eligible research and development expenditures incurred in each taxation year. Investment tax credits are accounted for as a reduction of the related expenditure for items of a current nature and a reduction of the related asset cost for items of a long-term nature, provided that the Company has reasonable assurance that the tax credits will be realized. Investment tax credits receivable at May 31, 2011 of $196 thousand are classified as prepaid expenses and other assets (2010 - $400 thousand).
F-16
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
3.
|
Significant accounting policies (continued):
|
|
|
(j)
|
Income taxes:
|
Income taxes are accounted for using the asset and liability method. Under this method, future tax assets and liabilities are recorded for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, and operating loss and research and development expenditure carryforwards. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability is settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the year that
enactment or substantive enactment occurs. A valuation allowance is recorded if it is not more likely than not that some portion of or all of a future tax asset will be realized.
|
|
(k)
|
(Loss) earnings per share:
|
Basic (loss) earnings per common share is calculated by dividing the (loss) earnings for the year by the weighted average number of common shares outstanding during the year. Diluted (loss) earnings per common share is calculated by dividing the loss for the year by the sum of the weighted average number of common shares outstanding and the dilutive common equivalent shares outstanding during the year. Common equivalent shares consist of the shares issuable upon exercise of stock options and warrants as applicable, calculated using the treasury stock method. Common equivalent shares are not included in the calculation of the weighted average number of shares
outstanding for diluted loss per common share when the effect would be anti-dilutive.
|
|
(l)
|
Segmented information:
|
The Company is organized and operates as one operating segment, the research and development of anti-cancer therapies. Substantially all of the Company's identifiable assets as at May 31, 2011 and 2010 are located in Canada.
|
|
(m)
|
Foreign currency translation:
|
Foreign currency transactions are translated into Canadian dollars at rates prevailing on the transaction dates. Monetary assets and liabilities are translated into Canadian dollars at the rates in effect on the balance sheets dates. Gains or losses resulting from these transactions are accounted for in the loss for the period and are not significant.
F-17
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
3.
|
Significant accounting policies (continued):
|
|
|
(n)
|
Use of estimates:
|
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates and assumptions. Significant areas requiring the use of management estimates include the historical valuation of the convertible debentures, fair value of guarantees, fair value of the obligation for indemnifications provided on the Arrangement between the Company and Old Lorus, the fair value of
long-lived assets and the determination of impairment thereon, the economic lives of intangible assets, the recoverability of future income tax assets, the determination of fair values of financial instruments, as well as the determination of stock-based compensation and the fair value of warrants issued.
|
|
(o)
|
Recent Canadian accounting pronouncements not yet adopted:
|
The Canadian Accounting Standards Board requires all Canadian publicly accountable entities to adopt International Financial Reporting Standards ("IFRS") for years beginning on or after January 1, 2011. The Company's first annual filing under IFRS will be for the year ended May 31, 2012; its first quarterly filing under IFRS will be for the quarter ending August 31, 2011 and will include IFRS comparative figures for the period ended August 31, 2010. Accordingly, the Company's adoption date for IFRS is June 1, 2011, but its transition date is June 1, 2010 in order to present IFRS comparative figures in the Company's 2011 consolidated financial
statements.
IFRS uses a conceptual framework similar to Canadian GAAP, however, there are significant differences in recognition, measurement and disclosure. Given the nature of the Company's business and the make-up of its current balance sheets, IFRS could have an impact on its reported financial statements. The Company's implementation of IFRS will require the Company to make and disclose certain policy choices and increase the amount of disclosure necessary to fulfill its IFRS reporting obligations.
F-18
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
4.
|
Short-term investments:
|
|
Less than
|
Greater than
|
|||||||||||||||
|
one year
|
one year
|
Yield to
|
||||||||||||||
|
2011
|
maturities
|
maturities
|
Total
|
maturity
|
||||||||||||
|
|
||||||||||||||||
|
Corporate investments
(guaranteed investment certificates)
|
$ | – | $ | – | $ | – | – | |||||||||
|
Less than
|
Greater than
|
|||||||||||||||
|
one year
|
one year
|
Yield to
|
||||||||||||||
|
2010
|
maturities
|
maturities
|
Total
|
maturity
|
||||||||||||
|
|
||||||||||||||||
|
Corporate investments
(guaranteed investment
certificates)
|
$ | 247 | $ | – | $ | 247 | – | |||||||||
Certain corporate investments, totalling $247 thousand at May 31, 2010, have been designated as held-for-trading investments, and have been classified as short-term investments on the consolidated balance sheets. These investments were carried at fair value. The net increase in fair value for the year ended May 31, 2010 amounted to $8 thousand (2009 - $10 thousand) and has been included in the consolidated statements of operations and comprehensive income in interest income.
F-19
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
5.
|
Fixed assets:
|
|
Accumulated
|
||||||||||||
|
depreciation
|
||||||||||||
|
and
|
Net book
|
|||||||||||
|
2011
|
Cost
|
amortization
|
value
|
|||||||||
|
Furniture and equipment
|
$ | 2,914 | $ | 2,815 | $ | 99 | ||||||
|
Accumulated
|
||||||||||||
|
depreciation
|
||||||||||||
|
and
|
Net book
|
|||||||||||
|
2010
|
Cost
|
amortization
|
value
|
|||||||||
|
Furniture and equipment
|
$ | 2,907 | $ | 2,760 | $ | 147 | ||||||
F-20
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
6.
|
Share capital:
|
|
|
(a)
|
Continuity of common shares and warrants:
|
|
Common shares
|
Warrants
|
|||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
|||||||||||||
|
(In thousands)
|
(In thousands)
|
|||||||||||||||
|
Balance, May 31, 2008
|
7,255 | $ | 158,743 | – | $ | – | ||||||||||
|
Interest payments (note 13)
|
354 | 707 | – | – | ||||||||||||
|
Issuance of units (b)
|
951 | 2,790 | 571 | 417 | ||||||||||||
|
Balance, May 31, 2009
|
8,560 | 162,240 | 571 | 417 | ||||||||||||
|
Interest payments (note 13)
|
7 | 15 | – | – | ||||||||||||
|
Issuance of units (b)
|
1,366 | 1,665 | 755 | 622 | ||||||||||||
|
Balance, May 31, 2010
|
9,933 | 163,920 | 1,326 | 1,039 | ||||||||||||
|
Expiry of warrants (c)
|
– | – | (571 | ) | (417 | ) | ||||||||||
|
Issuance of units (b)
|
4,170 | 3,226 | 4,170 | 1,032 | ||||||||||||
|
Issuance of units (b)
|
1,582 | 1,641 | – | – | ||||||||||||
|
Expiry of warrants (c)
|
– | – | (755 | ) | (622 | ) | ||||||||||
|
Balance, May 31, 2011
|
15,685 | $ | 168,787 | 4,170 | $ | 1,032 | ||||||||||
|
|
(b)
|
Share issuances:
|
December 2010 Private Placement:
On December 1, 2010, pursuant to a private placement, the Company issued 1.6 million common shares in exchange for gross cash consideration of $1.66 million. The total costs associated with the transaction were approximately $20 thousand. Mr. Herbert Abramson, a director of the Corporation, subscribed for 1,410,000 common shares, representing approximately 89% of the total number of common shares issued through the private placement. No commission was paid in connection with the private placement.
F-21
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
6.
|
Share capital (continued):
|
November 2010 Rights Offering:
On August 27, 2010 the Company announced a proposed rights offering as described below including a $4 million standby purchase agreement from a director of the Company, Mr. Herbert Abramson. Mr. Abramson also provided the Company with interim financing by way of three $500 thousand monthly loans, advanced on August 11, 2010, September 13, 2010 and October 5, 2010. The loans were unsecured, had a six-month term (or the earlier of the closing of the rights issue) and bore interest at the annual rate of 10%. All three notes were repaid upon the close of the rights offering described below.
On September 27, 2010, Lorus filed a final short-form prospectus in each of the provinces of Canada in connection with a distribution to its shareholders in eligible jurisdictions outside the United States of rights exercisable for units of the Company (the "Rights Offering").
Under the Rights Offering, holders of common shares of the Company as of October 12, 2010, the record date, received one right for each common share held as of the record date. Each two rights entitled the holder thereof to purchase a unit of the Company at a price of $1.11 per unit. Each unit consisted of one common share of the Company and one warrant to purchase an additional common share of the Company at a price of $1.33 until May 2012.
A total of 4.2 million units of the Company at a price of $1.11 per unit were issued in connection with the Rights Offering. As a result of the Rights Offering, Lorus issued 4.2 million common shares and 4.2 million common share purchase warrants for net proceeds of $4.2 million.
In connection with the Rights Offering, the Company secured a standby purchase arrangement of $4 million by Mr. Abramson, one of the Company's directors. Mr. Abramson agreed to make an investment such that the minimum gross proceeds of the proposed Rights Offering would be $4 million. No fee was payable to Mr. Abramson for this commitment. In accordance with the terms of the standby purchase agreement, Mr. Abramson subscribed for 3.6 million of the 4.2 million units of the Rights Offering for $4.0 million.
F-22
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
6.
|
Share capital (continued):
|
The total costs associated with the transaction were approximately $370 thousand. The Company has allocated the net proceeds of the Rights Offering to the common shares and the common share purchase warrants based on their estimated relative fair values. Based on relative fair values, $3.2 million of the net proceeds were allocated to the common shares and $1.0 million to the common share purchase warrants.
November 2009 Private Placement:
On November 27, 2009, pursuant to a private placement, the Company issued 1.366 million common shares and 683 thousand common share purchase warrants in exchange for cash consideration of $2.5 million. This amount includes the principal amount of $1.0 million originally received by way of a loan from a director on October 6, 2009, which was applied to subscribe for units of the Company ("Units") as part of the private placement. In addition, the Company issued 72 thousand brokers' warrants to purchase an equivalent number of common shares at $2.40 until May 27, 2011. The total costs associated with the transaction were approximately
$250 thousand which included the $77 thousand which represented the fair value of the brokers' warrants. The Company has allocated the net proceeds of the private placement to the common shares and the common share purchase warrants based on their relative fair values. Based on relative fair values, $1.7 million of the net proceeds was allocated to the common shares and $622 thousand to the common share purchase warrants.
F-23
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
6.
|
Share capital (continued):
|
August 2008 Rights Offering:
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. Each Unit consists of one common share of the Company at $3.90 and a one-half common share purchase warrant to purchase additional common shares of the Company at $4.53 until August 7, 2010. All unexercised rights expired on August 7, 2008. Pursuant to the Rights Offering, the Company issued 951
thousand common shares and 571 thousand common share purchase warrants in exchange for cash consideration of $3.7 million. The total costs associated with the transaction were approximately $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 resulting allocation based on relative fair values resulted in the allocation of $2.8 million to the common shares and $417 thousand to the common share purchase warrants.
|
|
(c)
|
Expiry of warrants:
|
The warrants issued on August 7, 2008 expired unexercised on August 10, 2010. This expiry resulted in a transfer of the value attributed to the expired warrants of $417 thousand to contributed surplus.
The warrants issued on November 27, 2009 expired unexercised on May 27, 2011. This expiry resulted in a transfer of the value attributed to the expired warrants of $622 thousand to contributed surplus.
F-24
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
6.
|
Share capital (continued):
|
|
|
(d)
|
Contributed surplus:
|
|
2011
|
2010
|
2009
|
||||||||||
|
Balance, beginning of year
|
$ | 14,875 | $ | 10,744 | $ | 9,181 | ||||||
|
Cancellation and forfeiture of
stock options (note 7)
|
3,074 | 317 | 1,563 | |||||||||
|
Expiry of warrants
|
1,039 | – | – | |||||||||
|
Equity portion of secured convertible
debenture (note 13)
|
– | 3,814 | – | |||||||||
|
Balance, end of year
|
$ | 18,988 | $ | 14,875 | $ | 10,744 | ||||||
|
|
(e)
|
Continuity of stock options:
|
|
2011
|
2010
|
2009
|
||||||||||
|
Balance, beginning of the year
|
$ | 3,704 | $ | 3,845 | $ | 4,961 | ||||||
|
Stock option expense
|
526 | 176 | 446 | |||||||||
|
Cancellation and forfeiture of
stock options (note 7)
|
(3,074 | ) | (317 | ) | (1,562 | ) | ||||||
|
Balance, end of year
|
$ | 1,156 | $ | 3,704 | $ | 3,845 | ||||||
|
|
(f)
|
Alternate compensation plans:
|
The Company did not issue any share units under its deferred share unit plan or allot any shares for issuance under its 2009 ACP.
F-25
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
6.
|
Share capital (continued):
|
|
|
(g)
|
Employee share purchase plan:
|
The Company' has an employee share purchase plan ("ESPP"). The purpose of the ESPP is to assist the Company in retaining the services of its employees, to secure and retain the services of new employees and to provide incentives for such persons to exert maximum efforts for the success of the Company. The ESPP provides a means by which employees of the Company may purchase common shares of the Company at a discount through accumulated payroll deductions with each offering having a three-month duration. Participants may authorize payroll deductions of up to 15% of their base compensation for the purchase of common shares under the ESPP. For the
year ended May 31, 2011, 6,652 (2010 - 3,159; 2009 - 7,966) common shares have been purchased under the ESPP, and the Company has recognized an expense of $1 thousand (2010 - $2 thousand; 2009 - $3 thousand) related to this plan in these consolidated financial statements.
|
|
(h)
|
Earnings per share:
|
For the year ended May 31, 2010, the determination of diluted earnings per share includes in the calculation all common shares potentially issuable upon the exercise of stock options and share purchase warrants, using the treasury stock method. Diluted earnings per share, using the treasury stock method, assumes outstanding stock options and share purchase warrants are exercised at the beginning of the period, and the Company's common shares are purchased at the average market price during the period from the funds derived on the exercise of these outstanding options and share purchase warrants. Stock options and share purchase warrants with a strike price above the
average market price for the period were excluded from the calculation of fully diluted earnings per share as to include them would have increased the earnings per share.
F-26
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
7.
|
Stock-based compensation:
|
Stock option plan:
Under the Company's stock option plan, options may be granted to directors, officers, employees and consultants of the Company to purchase up to a maximum of 15% of the total number of outstanding common shares, currently estimated at 2,352,000 options. Options are granted at the fair market value of the common shares on the date immediately preceding the date of the grant. Options vest at various rates (immediate to three years) and have a term of 10 years. Stock option transactions for the three years ended May 31, 2011 are summarized as follows:
|
2011
|
2010
|
2009
|
||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||
|
average
|
average
|
average
|
||||||||||||||||||||||
|
exercise
|
exercise
|
exercise
|
||||||||||||||||||||||
|
Options
|
price
|
Options
|
price
|
Options
|
price
|
|||||||||||||||||||
|
Outstanding,
beginning of year
|
672,901 | $ | 6.60 | 562,358 | $ | 8.66 | 547,874 | $ | 13.52 | |||||||||||||||
|
Granted
|
1,049,700 | 1.01 | 189,406 | 2.41 | 170,807 | 3.39 | ||||||||||||||||||
|
Forfeited
|
(537,023 | ) | 6.76 | (78,863 | ) | 11.24 | (156,323 | ) | 19.94 | |||||||||||||||
|
Outstanding, end of year
|
1,185,578 | 1.58 | 672,901 | 6.60 | 562,358 | 8.66 | ||||||||||||||||||
|
Exercisable, end of year
|
662,316 | $ | 1.99 | 439,452 | $ | 8.54 | 323,555 | $ | 11.39 | |||||||||||||||
F-27
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
7.
|
Stock-based compensation (continued):
|
The following table summarizes information about stock options outstanding at May 31, 2011:
|
Options outstanding
|
Options exercisable
|
|||||||||||||||
|
Weighted
|
||||||||||||||||
|
average
|
Weighted
|
Weighted
|
||||||||||||||
|
remaining
|
average
|
average
|
||||||||||||||
|
Range of
|
contractual
|
exercise
|
exercise
|
|||||||||||||
|
exercise prices
|
Options
|
life (years)
|
price
|
Options
|
price
|
|||||||||||
| $ 0.89 - $ 1.05 | 1,005,740 | 9.6 | $ | 1.00 | 502,870 | $ | 1.00 | |||||||||
| $ 1.06 - $ 4.99 | 103,329 | 7.7 | 2.61 | 82,937 | 2.62 | |||||||||||
| $ 5.00 - $18.00 | 76,509 | 5.5 | 7.74 | 76,509 | 7.74 | |||||||||||
| 1,185,578 | 9.2 | 1.58 | 662,316 | 1.99 | ||||||||||||
For the year ended May 31, 2011, stock option expense comprised $186 thousand (2010 - $83 thousand; 2009 - $127 thousand) related to
research
and development and $340 thousand (2010 - $93 thousand; 2009 - $319 thousand) related to general and administrative expenses.
The following assumptions were used in the Black-Scholes option pricing model to determine the fair value of stock options granted during the year:
|
2011
|
2010
|
2009
|
|
|
Risk-free interest rate
|
1.50% - 1.85%
|
2.44% - 2.60%
|
2.00% - 3.50%
|
|
Expected volatility
|
117% - 119%
|
82% - 124%
|
76%
|
|
Expected dividend yield
|
–
|
–
|
–
|
|
Expected life of options
|
5 years
|
5 years
|
5 years
|
|
Weighted average fair value of options
granted or modified during the year
|
$0.83
|
$1.43
|
$2.16
|
The Company has assumed no forfeiture rate as adjustments for actual forfeitures are made in the year they occur.
F-28
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
8.
|
Capital risk management:
|
The Company's objectives when managing capital are to:
|
|
(a)
|
maintain its ability to continue as a going concern in order to provide returns to shareholders and benefits to other stakeholders;
|
|
|
(b)
|
maintain a flexible capital structure which optimizes the cost of capital at acceptable risk; and
|
|
|
(c)
|
ensure sufficient cash resources to fund its research and development activity, to pursue partnership and collaboration opportunities and to maintain ongoing operations.
|
At May 31, 2011, the capital structure of the Company consisted of equity comprised of share capital, warrants, 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 investment balances or by undertaking other activities as deemed appropriate under the specific circumstances. The Company has forecasted that its current capital resources will not be sufficient
to carry its research and development plans and operations for more than the next twelve months (note 1(a)) without additional financing.
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, 2010.
F-29
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
9.
|
Financial instruments and risk management:
|
|
|
(a)
|
Financial instruments:
|
The Company has classified its financial instruments as follows:
|
2011
|
2010
|
|||||||
|
Financial assets:
|
||||||||
|
Cash and cash equivalents, consisting of term deposits and guaranteed investment certificates at fair value
|
$ | 911 | $ | 667 | ||||
|
Short-term investments, held-for-trading,
recorded at fair value
|
– | 247 | ||||||
|
Financial liabilities:
|
||||||||
|
Accounts payable, measured at amortized cost
|
215 | 387 | ||||||
|
Accrued liabilities, measured at amortized cost
|
944 | 1,458 | ||||||
|
Promissory note payable, measured at amortized cost
|
– | 1,000 | ||||||
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Cash and cash equivalents, short-term investments, other assets, accounts payable, accrued liabilities and promissory note payable:
Due to the short period to maturity of the financial instruments, the carrying values as presented in the consolidated balance sheets are reasonable estimates of fair value.
Financial instruments potentially exposing the Company to a concentration of credit risk consist principally of short-term investments. The Company mitigates this risk by investing in high grade fixed income securities.
F-30
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
9.
|
Financial instruments and risk management (continued):
|
Assets measured at fair value on a recurring basis as of May 31, 2011 and May 31, 2010 were as follows:
|
2011
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Cash and cash equivalents
|
$ | 911 | $ | – | $ | – | $ | 911 | ||||||||
|
Short-term investments, consisting of guaranteed investment certificates
|
– | – | – | – | ||||||||||||
| $ | 911 | $ | – | $ | – | $ | 911 | |||||||||
|
2010
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Cash and cash equivalents
|
$ | 667 | $ | – | $ | – | $ | 667 | ||||||||
|
Short-term investments,
consisting of guaranteed investment certificates
|
247 | – | – | 247 | ||||||||||||
| $ | 914 | $ | – | $ | – | $ | 914 | |||||||||
|
|
(b)
|
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.
|
|
(i)
|
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.
F-31
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
9.
|
Financial instruments and risk management (continued):
|
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 the Company invests only in highly rated Canadian corporations with debt securities that are traded on active markets and are capable of prompt liquidation.
|
|
(ii)
|
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. Refer to note 1(a) for further discussion on the Company's ability to continue as a going concern.
|
|
(iii)
|
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. 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 Company does not have any material interest bearing liabilities subject to interest rate fluctuations.
F-32
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
9.
|
Financial instruments and risk management (continued):
|
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. dollar denominated cash, purchasing on an as needed basis to cover U.S. dollar denominated payments. At May 31, 2011, U.S. dollar denominated accounts payable and accrued liabilities amounted to $254 thousand (2010 - $270 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 loss for the year and comprehensive loss of $25 thousand (2010 - $27
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.
|
10.
|
Income taxes:
|
Income tax recoveries attributable to losses from operations differ from the amounts computed by applying the combined Canadian federal and provincial income tax rates to pre-tax income from operations primarily as a result of the provision of a valuation allowance on net future income tax benefits.
Significant components of the Company's future tax assets are as follows:
|
2011
|
2010
|
|||||||
|
Non-capital loss carryforwards
|
$ | 2,918 | $ | 2,197 | ||||
|
Research and development expenditures
|
4,596 | 4,237 | ||||||
|
Fixed assets book over tax depreciation
|
529 | 529 | ||||||
|
Intangible asset
|
3,139 | 3,115 | ||||||
|
Ontario harmonization tax credit
|
302 | 347 | ||||||
|
Ontario Research and Development Tax Credit
|
228 | 172 | ||||||
|
Future tax assets
|
11,712 | 10,597 | ||||||
|
Valuation allowance
|
(11,712 | ) | (10,597 | ) | ||||
| $ | – | $ | – | |||||
F-33
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
10.
|
Income taxes (continued):
|
During the year ended May 31, 2010, the Company reached a settlement with the convertible debenture holders (note 13) which resulted in an accounting gain of $11.0 million. For tax purposes, this transaction resulted in a taxable capital gain of $5.7 million. There are no taxes payable on this gain as the Company has sufficient capital and non-capital losses to offset the gain.
In assessing the realizable benefit from future tax assets, management considers whether it is more likely than not that some portion or all of the future tax assets will not be realized. The ultimate realization of future tax assets is dependent on the generation of future taxable income during the years in which those temporary differences become deductible. Management considers projected future taxable income, uncertainties related to the industry in which the Company operates and tax planning strategies in making this assessment. Due to the Company's stage of development and operations, and uncertainties related to the industry in which the Company
operates, the tax benefit of the above amounts has been completely offset by a valuation allowance.
The Company has undeducted research and development expenditures, totalling $18.4 million that can be carried forward indefinitely. In addition, the Company has non-capital loss carryforwards of $11.7 million. To the extent that the non-capital loss carryforwards are not used, they expire as follows:
|
2015
|
$ | 10 | ||
|
2026
|
11 | |||
|
2027
|
4 | |||
|
2028
|
4,994 | |||
|
2029
|
3,753 | |||
|
2030
|
16 | |||
|
2031
|
2,883 | |||
| $ | 11,671 | |||
F-34
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
10.
|
Income taxes (continued):
|
Income tax rate reconciliation:
|
2011
|
2010
|
2009
|
||||||||||
|
Income tax expense (recovery)
based on statutory rate of 29.5%
(2010 - 32.6%, 2009 - 33.3%)
|
$ | (1,488 | ) | $ | 1,738 | $ | (2,950 | ) | ||||
|
Expiry of losses
|
– | 46 | 247 | |||||||||
|
Change in valuation allowance
|
1,116 | (1,552 | ) | 3,068 | ||||||||
|
Non-deductible accretion, stock-based
compensation and capital gains
|
164 | (1,694 | ) | 582 | ||||||||
|
Ontario harmonization tax credit
|
– | – | (260 | ) | ||||||||
|
Change in substantively enacted tax rates
|
199 | 1,643 | 299 | |||||||||
|
Adjustment of prior year research and
development expenditures
|
– | – | (856 | ) | ||||||||
|
Other
|
9 | (181 | ) | (130 | ) | |||||||
| $ | – | $ | – | $ | – | |||||||
|
11.
|
Research and development programs:
|
The Company has product candidates in three classes of anticancer therapies:
|
|
•
|
small molecule therapies based on anti-angiogenic, anti-proliferative and anti-metastatic agents;
|
|
|
•
|
RNA-targeted (antisense and siRNA) therapies, based on synthetic segments of DNA or RNA designed to bind to the messenger RNA that is responsible for the production of proteins over-expressed in cancer cells; and
|
|
|
•
|
immunotherapy, based on macrophage-stimulating biological response modifiers.
|
F-35
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
11.
|
Research and development programs (continued):
|
|
|
(a)
|
Small Molecule Program:
|
The Company has small molecule drug screening technologies and preclinical scientific expertise, which it is using to create a drug candidate pipeline. The Company's proprietary group of small molecule compounds includes lead drug LOR-253 which entered into a Phase I clinical trial in January of 2011 and LOR-500 which is in the pre-clinical stage of development.
|
|
(b)
|
RNA-Targeted Therapies:
|
The Company's lead RNA-targeted drug candidate is LOR-2040. The Company has reported Phase II clinical results, completed to the end-of-stage assessment time point, of LOR-2040 in combination with cytarabine in relapsed and refractory acute myeloid leukemia ("AML") patient population. Based on these data, the Company is seeking a partnership or collaboration for future development.
|
|
(c)
|
Immunotherapy:
|
The Company's immunotherapy product candidates are Virulizin® and Interleukin-17E ("IL-17E"). IL-17E is a protein-based therapeutic that the Company is seeking a partnership or collaboration for future development.
In June 2009, as part of the consideration for the repurchase of the secured convertible debentures from The Erin Mills Investment Corporation ("TEMIC"), the Company assigned to TEMIC its rights under the license agreement with Zor Pharmaceuticals, LLC ("ZOR"), and sold to TEMIC its intellectual property rights associated with Virulizin®. In return, the Company will be entitled to 50% of the deal value of any transaction completed in ZOR and non-ZOR territories.
F-36
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
11.
|
Research and development programs (continued):
|
|
Period from
|
||||||||||||||||
|
inception on
|
||||||||||||||||
|
September 5,
|
||||||||||||||||
|
1986 to
|
||||||||||||||||
| Years ended May 31, |
May 31,
|
|||||||||||||||
|
2011
|
2010
|
2009
|
2011
|
|||||||||||||
|
Small molecules:
|
||||||||||||||||
|
Expensed
|
$ | 1,672 | $ | 1,572 | $ | 2,634 | $ | 16,085 | ||||||||
|
Acquired
|
– | – | – | 1,228 | ||||||||||||
|
RNA-Targeted Therapies:
|
||||||||||||||||
|
Expensed
|
626 | 945 | 1,123 | 37,530 | ||||||||||||
|
Acquired
|
– | – | – | 11,000 | ||||||||||||
|
Immunotherapy:
|
||||||||||||||||
|
Expensed
|
– | – | – | 75,197 | ||||||||||||
|
Total expensed
|
$ | 2,298 | $ | 2,517 | $ | 3,757 | $ | 128,812 | ||||||||
|
Total acquired
|
$ | – | $ | – | $ | – | $ | 12,228 | ||||||||
Amortization of the acquired patents and licenses is included in the expensed line of the table.
F-37
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
12.
|
Supplemental cash flow and other information:
|
Cash and cash equivalents consist of only cash.
Change in non-cash operating working capital is summarized as follows:
|
Period from
|
||||||||||||||||
|
inception on
|
||||||||||||||||
|
September 5,
|
||||||||||||||||
|
1986 to
|
||||||||||||||||
| Years ended May 31, |
May 31,
|
|||||||||||||||
|
2011
|
2010
|
2009
|
2011
|
|||||||||||||
|
Prepaid expenses and
other assets
|
$ | 248 | $ | 190 | $ | (105 | ) | $ | 188 | |||||||
|
Accounts payable
|
(172 | ) | 88 | (624 | ) | (1,029 | ) | |||||||||
|
Accrued liabilities
|
(514 | ) | 377 | (213 | ) | 604 | ||||||||||
|
Promissory note payable
|
(1,000 | ) | 1,000 | – | – | |||||||||||
| $ | (1,438 | ) | $ | 1,655 | $ | (942 | ) | $ | (237 | ) | ||||||
During the year ended May 31, 2011, the Company received interest of $14 thousand (2010 -$139 thousand; 2009 - $367 thousand).
During the year ended May 31, 2011, the Company paid $71 thousand in cash interest on promissory notes from Mr. Abramson and Mr. Abramson's related company that were repaid during the year. During the year ended May 31, 2010, the Company paid $27 thousand (2009 - nil) in cash interest related to the convertible debentures settled on June 22, 2009.
During the year ended May 31, 2011, the Company paid $3 thousand (2010 - nil; 2009 - nil) in income taxes.
|
13.
|
Convertible debentures:
|
On October 6, 2004, the Company entered into a Subscription Agreement (the "Agreement") to issue an aggregate of $15.0 million of secured convertible debentures (the "debentures") to TEMIC (the "debenture holder"). The debentures were secured by a first charge over all of the assets of the Company.
F-38
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
13.
|
Convertible debentures (continued):
|
The Company received three tranches of $5.0 million on each of October 6, 2004, January 14 and April 15, 2005. All debentures issued under the Agreement were due on October 6, 2009 and subject to interest payable monthly at a rate of prime plus 1%. Interest was payable in common shares of the Company. Common shares issued in payment of interest were issued at a price equal to the weighted average trading price of such shares for the 10 trading days immediately preceding their issue in respect of each interest payment. For the year ended May 31, 2011, the Company issued nil (2010 - 7,000; 2009 - 354,000) shares in settlement of
approximately nil (2010 - $15 thousand; 2009 - $707 thousand) in interest. In addition, during the year ended May 31, 2010, the Company paid $12 thousand of interest expense in cash.
Each reporting period, the Company was 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 their face value of $15.0 million. For the year ended May 31, 2011, the Company recognized nil (2010 - $80 thousand; 2009 - $1.7 million) in accretion expense.
On June 22, 2009, the Company reached a settlement with TEMIC with respect to the purchase and settlement of the $15.0 million secured convertible debentures.
Under the Agreement, the Company purchased all of the convertible debentures from TEMIC for consideration that included a cash payment on close of the transaction of $3.3 million, the assignment of the rights under the license agreement with ZOR certain intellectual property associated with Virulizin® and all of the Company's shares in its wholly owned subsidiary, Pharma Immune, which held an equity interest in ZOR (the "Consideration"). Under the Agreement, the Company is entitled to 50% of any royalties received under the ZOR license agreement and 50% of the value of any transaction completed in territories not covered by the ZOR license agreement. The Company
also retains a perpetual royalty free license for the animal use of Virulizin®. TEMIC will be fully responsible for all clinical and regulatory costs associated with the commercialization of Virulizin® in territories not covered by the ZOR license agreement. The Company will assist TEMIC with certain agreed upon services.
For receipt of the Consideration, TEMIC released all security interest in the assets of the Company.
F-39
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
13.
|
Convertible debentures (continued):
|
As a result of the transaction, in the year ended May 31, 2010, the Company recognized a gain on the repurchase of the debentures of $11.0 million reflecting the difference between the fair value of the debentures at the repurchase date, net of transaction costs of approximately $221 thousand, and the cash payment amount of $3.3 million. In addition, as a result of extinguishing the debentures in the amount of $3.8 million, the equity portion of the debentures was transferred to contributed surplus. The gain on repurchase of the debentures did not result in income taxes payable as the Company had sufficient capital loss and non-capital loss carryforwards to shelter
these gains.
|
14.
|
Contingencies, commitments and guarantees:
|
|
|
(a)
|
Operating lease commitments:
|
The Company has entered into operating leases for premises and equipment under which it is obligated to make minimum annual payments of approximately $142 thousand in 2012, $127 thousand in 2013, $7 thousand in 2014, $7 thousand in 2015 and $5 thousand in 2016. The Company's current facility lease expires in March 2013.
During the year ended May 31, 2011, operating lease expenses were $148 thousand (2010 - $146 thousand; 2009 - $143 thousand).
|
|
(b)
|
Other contractual commitments:
|
In December 1997, the Company acquired certain patent rights and a sub-license to develop and commercialize the anticancer application of certain compounds in exchange for a 20% share interest in NuChem; a payment of US$350 thousand in shares of the Company; and up to US$3.5 million in cash.
To date, the Company has made cash payments of US$500 thousand. The remaining balance of up to US$3.0 million remains payable upon the achievement of certain milestones based on the commencement and completion of clinical trials. Additional amounts paid will be classified as acquired patents and licenses and will be amortized over the estimated useful life of the licensed asset.
F-40
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
14.
|
Contingencies, commitments and guarantees (continued):
|
The Company did not meet any of these milestones during the current year and does not currently expect to achieve any of the above milestones in fiscal years ended May 31, 2012 or 2013 and cannot reasonably predict when such milestones will be achieved, if at all.
The Company holds an exclusive world-wide license from the University of Manitoba (the "University") and Cancer Care Manitoba ("CCM") to certain patent rights to develop and sub-license certain oligonucleotide technologies. In consideration for the exclusive license of the patent rights, the University and CCM are entitled to an aggregate of 1.67% of the net sales received by the Company from the sale of products or processes derived from the patent rights and 1.67% of all monies received by the Company from sub-licenses of the patent rights. Any and all improvements to any of the patent rights derived in whole or in part by the Company after the date of the
license agreement, being June 20, 1997, are not included within the scope of the agreement and do not trigger any payment of royalties.
The Company has not yet earned any revenue from the products covered under this agreement and, therefore, has not paid any royalties thereunder and cannot reasonably predict the timing and amount of any future payment. The Company does not expect to make any royalty payments under this agreement in fiscal years ended May 31, 2012 or 2013, and cannot reasonably predict when such royalties will become payable, if at all.
|
|
(c)
|
Guarantees:
|
The Company entered into various contracts, whereby contractors perform certain services for the Company. The Company indemnifies the contractors against costs, charges and expenses in respect of legal actions or proceedings against the contractors in their capacity of servicing the Company. The maximum amounts payable from these guarantees cannot be reasonably estimated. Historically, the Company has not made significant payments related to these guarantees.
The Company indemnifies its directors and officers against any and all claims or losses reasonably incurred in the performance of their service to the Company to the extent permitted by law. The Company has acquired and maintains liability insurance for its directors and officers. The fair value of this indemnification is not determinable.
F-41
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
14.
|
Contingencies, commitments and guarantees (continued):
|
|
|
(d)
|
Indemnification on Arrangement:
|
Under the Arrangement (note 1(b)), the Company has 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 the Company 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 the Company 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.
|
Subsequent to the release of the escrowed amount of $600 thousand in July 2008, the Company recorded a liability of $150 thousand, which it believes to be a reasonable estimate of the fair value of the obligation for the indemnifications provided at that time. This liability was reduced to $100 thousand in the year ended May 31, 2010 resulting in a gain on sale of $50 thousand (2009 - $450 thousand). The reduction in liability was the result of the passage of time and related reduction in risk associated with claims under the liability as there have been no claims under this indemnification to date. There has been no change to the indemnification value for
the year ended May 31, 2011. This amount is included on the consolidated balance sheets in accrued liabilities as at May 31, 2011.
F-42
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
15.
|
License agreement:
|
Effective April 8, 2008, the Company entered into a non-exclusive multinational license agreement with ZOR, formed as a subsidiary of Zoticon Bioventures Inc., to further develop and commercialize Virulizin® for human therapeutic applications.
Under the terms of the agreement, the Company received an upfront licensing fee of $100 thousand, was eligible to receive certain milestone payments totalling approximately US$10 million based on progress through financing and clinical development, and royalties on net sales that vary from 10% to 20% depending on the level of sales of Virulizin
®
achieved in those territories covered by the license and subject to certain other adjustments. ZOR will assume all future costs for the development of the licensed technology. In 2009, the Company received an additional payment of $178
thousand (US$150 thousand).
As described in note 13, on June 22, 2009, this license agreement was assigned to TEMIC as part of the Consideration for the repayment of the convertible debentures.
The Company also entered into a service agreement with ZOR to assist in the transfer of knowledge. Under this agreement, the Company agreed to provide ZOR with 300 hours of consulting service during a period of 18 months (the agreement expired in October 2009).
The initial fee of $100 thousand and a milestone payment of $178 thousand (US$150 thousand) were deferred under this arrangement. Revenue was recognized based on the measure of progress toward completion of the technical support services under this contract based on the actual hours provided relative to the total number of hours required to be provided, applied to the total of these initial fee and non-contingent contractual payments related to the support services. At any time, the amount of cumulative revenue recognized would not exceed the cumulative amount of non-refundable payments received under the arrangement. All of the revenue received under
this agreement was recognized as of November 30, 2009.
In addition, on April 18, 2008, the Company acquired an equity interest in ZOR in exchange for a capital contribution of $3 thousand. As described in note 13, on June 22, 2009, as part of the agreement to repurchase the convertible debentures, the Company disposed of its interest in ZOR and assigned the licence agreement to TEMIC.
F-43
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
16.
|
Related party transactions:
|
In October 2009, the Company entered into a loan agreement with a member of its Board of Directors, Mr. Abramson, to borrow $1 million. The loan amount, which was received on October 6, 2009, was unsecured, evidenced by a promissory note and bears interest at the annual rate of 10%. The principal and interest were due in six months. The principal amount of $1 million was applied to subscribe for Units as part of the November 27, 2009 private placement.
In April 2010, the Company entered into a loan agreement with a company related to the same member as above of its Board of Directors to borrow $1 million. The loan amount, which was received on April 14, 2010, was unsecured, evidenced by a promissory note and bore interest at the annual rate of 10%. The principal and interest amount were due in six months and later extended a further three months. The principal amount was repaid in November 2010.
During the year ended May 31, 2011, the Company expensed consulting fees of nil to a director of the Company (2010 - nil; 2009 - $25 thousand). There was no amount payable at May 31, 2011 (2010 - nil; 2009 - nil).
These transactions were in the normal course of business and have been measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
See also notes 6(b) and 17 for additional related party transactions.
F-44
LORUS THERAPEUTICS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
17.
|
Subsequent events:
|
|
|
(a)
|
Subsequent to year end, on July 22, 2011, the Company filed a final short-form prospectus in connection with a best efforts offering (the "Offering") of a minimum of 5,000,000 units of the Corporation (the "Units") at a price of $0.40 per Unit for gross proceeds of $2,000,000 and a maximum of 10,000,000 Units for gross proceeds of $4,000,000. Each Unit consists of one common share of Lorus (a "Common Share") and one common share purchase warrant of Lorus (a "Warrant"). Each Warrant will entitle the holder to purchase one Common Share for five years after the closing of the Offering at an exercise price of $0.45 per Common Share (the "Exercise Price"). If on any date (the
"Accelerated Exercise Date") the 10-day volume weighted average trading price of the Common Shares on the Toronto Stock Exchange equals or exceeds 200% of the Exercise Price, then upon the Corporation sending the holders of Warrants written notice of such Accelerated Exercise Date and issuing a news release announcing such Accelerated Exercise Date, the Warrants shall only be exercisable for a period of 30 days following the date on which such written notice is sent to holders of Warrants.
|
|
|
|
In connection with the offering, Herbert Abramson, a director of the Corporation, entered into an irrevocable commitment letter on June 20, 2011, and amended July 11, 2011, to purchase, directly or indirectly, common shares and common share purchase warrants (or as may otherwise be agreed) in the capital of Lorus (collectively the "Securities") having an aggregate subscription price equal to the difference (the "Commitment Amount"), if any, between (a) the sum of (i) the gross proceeds realized by Lorus in the Offering and (ii) the gross proceeds received by Lorus in respect of all financings completed by Lorus from the date of the
final short-form prospectus to November 30, 2011 and (b) $4.0 million.
The Offering closed on August 15, 2011 for total gross proceeds of $2.2 million. In connection with the Offering, Lorus has issued 5.5 million Common Shares and 5.5 million Warrants.
Mr. Abramson purchased 2.4 million Units of the Offering.
|
|
|
(b)
|
The Company disclosed in its management information circular dated October 28, 2011 that it would like to amend the exercise price of the November 2010 warrants from the $1.33 current exercise price to an exercise price equal to the 5-day volume weighted average trading price of the common shares of the Corporation on the Toronto Stock Exchange on the date of the approval of the shareholders to such amendment at the annual and special meeting (to be held on November 29, 2011), plus a 10% premium (to be rounded up). The Company has not yet
determined the impact the potential re-pricing may have on the financial statements.
|
F-45
Supplementary Information
(In Canadian dollars)
LORUS THERAPEUTICS INC.
Years ended May 31, 2011, 2010 and 2009
F-46
LORUS THERAPEUTICS INC.
Supplementary Information
Reconciliation of Canadian and United States Generally Accepted Accounting Principles
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
The consolidated financial statements as at May 31, 2011 and 2010 and for each of the years in the three-year period ended May 31, 2011 have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") which differ in some respects from accounting principles generally accepted in the United States ("U.S. GAAP"). The following reconciliation identifies material differences in the Company's consolidated statements of operations and comprehensive income and consolidated balance sheets.
|
(a)
|
Consolidated statements of operations and comprehensive (loss) income:
|
|
2011
|
2010
|
2009
|
||||||||||
|
(Loss) Income for the year under Canadian GAAP
|
$ | (5,038 | ) | $ | 5,331 | $ | (8,860 | ) | ||||
|
Gain on repurchase of convertible debentures and transfer of assets (i)
|
- | 328 | - | |||||||||
|
Accretion of convertible debentures (i)
|
- | 54 | 1,222 | |||||||||
|
Amortization and write off of debt issue costs (i)
|
- | (4 | ) | (48 | ) | |||||||
|
Stock-based compensation expense (ii)
|
2 | 4 | (39 | ) | ||||||||
|
Short-term investments (iii)
|
- | (8 | ) | (10 | ) | |||||||
|
(Loss) income for the year under U.S. GAAP
|
$ | (5,036 | ) | $ | 5,705 | $ | (7,735 | ) | ||||
|
Other comprehensive loss (iii):
|
||||||||||||
|
Unrealized gain (loss) on short-term investments
|
$ | - | $ | 8 | $ | 10 | ||||||
|
(Loss) income for the year and comprehensive (loss) gain under U.S. GAAP
|
$ | (5,036 | ) | $ | 5,713 | $ | (5,546 | ) | ||||
|
Basic and diluted (loss) earnings per share per U.S. GAAP
|
$ | (0.38 | ) | $ | 0.61 | $ | (0.94 | ) | ||||
Under U.S. GAAP, the number of weighted average common shares outstanding for basic and diluted loss per share is the same as under Canadian GAAP.
F-47
LORUS THERAPEUTICS INC.
Supplementary Information (continued)
Reconciliation of Canadian and United States Generally Accepted Accounting Principles
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
(b)
|
Consolidated balance sheets:
|
|
Adjustments
|
||||||||||||||||||||
|
Canadian
|
Convertible
|
Stock
|
U.S.
|
|||||||||||||||||
|
2011
|
GAAP
|
debentures
|
options
|
Other
|
GAAP
|
|||||||||||||||
|
(i)
|
(ii)
|
|||||||||||||||||||
|
Stock options
|
$ | (1,156 | ) | $ | - | $ | 1,156 | $ | - | $ | - | |||||||||
|
Contributed surplus/additional paid-in capital
|
(18,988 | ) | 3,757 | 3,972 | - | (11,259 | ) | |||||||||||||
|
Warrants
|
(1,032 | ) | - | - | - | (1,032 | ) | |||||||||||||
|
Accumulated other comprehensive loss
|
- | - | - | 2 | 2 | |||||||||||||||
|
Deficit
|
189,118 | (3,757 | ) | (5,128 | ) | (2 | ) | 180,231 | ||||||||||||
|
Adjustments
|
||||||||||||||||||||
|
Canadian
|
Convertible
|
Stock
|
U.S.
|
|||||||||||||||||
|
2010
|
GAAP
|
debentures
|
options
|
Other
|
GAAP
|
|||||||||||||||
|
(i)
|
(ii)
|
|||||||||||||||||||
|
Stock options
|
$ | (3,704 | ) | $ | - | $ | 3,704 | $ | - | $ | - | |||||||||
|
Contributed surplus/additional paid-in capital
|
(14,875 | ) | 3,757 | 1,422 | - | (9,696 | ) | |||||||||||||
|
Warrants
|
(1,039 | ) | - | - | - | (1,039 | ) | |||||||||||||
|
Accumulated other comprehensive loss
|
- | - | - | 2 | 2 | |||||||||||||||
|
Deficit
|
184,080 | (3,757 | ) | (5,126 | ) | (2 | ) | 175,195 | ||||||||||||
F-48
LORUS THERAPEUTICS INC.
Supplementary Information (continued)
Reconciliation of Canadian and United States Generally Accepted Accounting Principles
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
|
(i)
|
Convertible debentures:
|
On June 22, 2009, the Company reached a settlement with the debenture holders with respect to the purchase and settlement of the convertible debentures.
Under the agreement, Lorus purchased all of the convertible debentures from The Erin Mills Investment Corporation (“TEMIC “) for consideration that included a cash payment on close of the transaction of $3.3 million, the assignment of the rights under the license agreement with ZOR Pharmaceuticals Inc, LLC (“ZOR”), certain intellectual property associated with Virulizin and all of Lorus' shares in its wholly owned subsidiary, Pharma Immune, which held an equity interest in ZOR (the "Consideration"). Under the agreement, Lorus is entitled to 50% of any royalties received under the ZOR license agreement and 50% of the value of any transaction completed in territories not covered
by the ZOR license agreement. Lorus also retains a perpetual royalty free license for the animal use of Virulizin. TEMIC will be fully responsible for all clinical and regulatory costs associated with the commercialization of Virulizin in territories not covered by the ZOR license agreement. Lorus will assist TEMIC with certain agreed upon services.
As a result of the transaction, the Company recognized a gain on the repurchase of the debentures of $11.0 million reflecting the difference between the fair value of the debentures at the repurchase date, net of transaction costs of approximately $221 thousand, and the cash payment amount of $3.3 million. As a result of the settlement of the convertible debentures, the deferred financing charges amounting to $52 thousand were written off in the year ended May 31, 2010. As the carrying value of the convertible debenture was different under U.S, GAAP, as explained below, the Company recognized an additional gain of $328 thousand on the repurchase of the convertible debentures and transfer of assets
including the write-down of the deferred financing charges compared to under Canadian GAAP in the year ended May 31, 2010.
F-49
LORUS THERAPEUTICS INC.
Supplementary Information (continued)
Reconciliation of Canadian and United States Generally Accepted Accounting Principles
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
Under Canadian GAAP, the conversion option embedded in the convertible debentures was presented separately as a component of shareholders' equity (deficiency). Under U.S. GAAP, the embedded conversion option was not subject to bifurcation since, as a conventional convertible debt, the holder of the debentures may have only realized the value of the conversion option by exercising the option and receiving the entire proceeds in a fixed number of shares. Accordingly, the conversion option was included in the carrying amount of the secured convertible debentures, presented as a liability resulting in a higher carrying amount of the convertible debenture than that measured under Canadian
GAAP. In accordance with U.S. GAAP, the warrants issued in connection with the convertible debentures financing were recorded as additional paid-in capital ("APIC") and a reduction to the proceeds from the issuance of convertible debentures. The warrants were presented as a separate component of shareholders' equity (deficiency) for Canadian GAAP purposes. Under U.S. GAAP, the Company allocated the total proceeds received from the issuance of the convertible debentures to the debt and warrant components based on their relative fair values. The fair value of the warrants was determined based on an option pricing model. The resulting allocation based on relative fair values on issuance of the convertible debentures resulted in the allocation of $13.9 million to the debt instrument and $1.1 million to the warrants. The
financing costs totalling $1.1 million related to the issuance of the convertible debentures were allocated on a pro rata basis to deferred financing charges of $964 thousand and to the warrants of $97 thousand. This allocation resulted in the net amount allocated to the warrants of $1.0 million. In May 2007, the Company entered into an agreement with the holder of the convertible debentures to repurchase its outstanding 3,000,000 common share purchase warrants at a purchase price of $252 thousand in connection with the Arrangement. The difference between the repurchase liability and the carrying amount of the warrants was recorded as APIC.
Each reporting period, the Company was required to accrete the carrying value of the convertible debentures such that at maturity on October 6, 2009, the carrying value of the debentures would have been their face value of $15.0 million. Up to May 31, 2009, the Company has recognized $1.0 million in accretion expense under U.S. GAAP. This accretion expense had increased the carrying value of the convertible debentures from $13.9 million to $14.9 million at May 31, 2009.
|
(ii)
|
Stock-based compensation:
|
Under Canadian GAAP, effective June 1, 2004, the Company adopted the fair value-based method of accounting for employee stock options granted on or after June 1, 2002, retroactively without restatement as allowed under the transitional provisions of The Canadian Institute of Chartered Accountants' ("CICA") Handbook Section 3870, Stock-based Compensation and Other Stock-based Payments. As a result, the opening balances of deficit and stock options were increased by $2.8 million at June 1, 2004.
F-50
LORUS THERAPEUTICS INC.
Supplementary Information (continued)
Reconciliation of Canadian and United States Generally Accepted Accounting Principles
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
Under U.S. GAAP, on June 1, 2006, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), Share-Based Payment ("SFAS 123(R)"), which requires companies to recognize in the statement of operations and comprehensive income all share-based payments to employees, including grants of employee stock options, based on their fair values. The statement eliminates the ability to account for share-based compensation transactions, as the Company formerly did, using the intrinsic value method as prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees.
The Company adopted SFAS 123(R) using the modified prospective method, which requires the application of the accounting standards as of June 1, 2006. In accordance with the modified prospective method, the consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).
Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. There was no material cumulative effect adjustment to APIC relating to estimating forfeitures on recognized stock-based compensation cost in periods prior to the adoption of SFAS 123(R).
The Company recorded stock-based compensation of $524 thousand for the year ended May 31, 2011 (2010 - $171 thousand, 2009 - $485 thousand) which is $2 thousand lower than the expense recorded in accordance with Canadian GAAP, substantially arising from the impact of estimating forfeitures as explained above. For the year ended May 31, 2011, stock-based compensation expense comprised $185 thousand (2010 - $81 thousand; 2009 - $138 thousand) related to research and development and $339 thousand (2010 - $90 thousand; 2009 - $347 thousand) related to general and administrative expenses.
The Company used the Black-Scholes
valuation model to determine the fair value of options granted and valuation assumptions are consistent with those used under Canadian GAAP.
As at May 31, 2011, the aggregate intrinsic values for options outstanding was nil and options exercisable was nil. There were no options exercised during the years ended May 31, 2011 and 2010.
The weighted average remaining contractual term of options exercisable as at May 31, 2011 is 8.92 years.
F-51
LORUS THERAPEUTICS INC.
Supplementary Information (continued)
Reconciliation of Canadian and United States Generally Accepted Accounting Principles
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
Total unrecognized compensation cost relating to unvested stock options at May 31, 2011, prior to the consideration of expected forfeitures, is approximately $373 thousand and is expected to be recognized over a weighted average period of 1.3 years.
|
|
(iii)
|
Short-term investments:
|
Effective June 1, 2007, the Company adopted the recommendations of CICA Handbook Section 3855, Financial Instruments - Recognition and Measurement, retroactively without restatement of prior periods. This section provides standards for recognition, measurement, disclosure and classification of financial assets, financial liabilities and non-financial derivatives.
As part of the adoption of the new standards on June 1, 2007, the Company designated certain short-term investments consisting of corporate instruments as "held-for-trading". This change in accounting policy under Canadian GAAP resulted in a decrease in the carrying amount of these investments amounting to $27 thousand and an increase in the fiscal 2008 opening deficit accumulated during the development stage of $27 thousand. Further, the Company recognized a net unrealized gain in the consolidated statement of operations and comprehensive income for the year ended May 31, 2011 of $nil (2010 - $8 thousand, 2009 - $10 thousand).
Under U.S. GAAP, the Company previously accounted for these investments as "held-to-maturity" in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"). Because the Company did not have the ability or intent to hold these investments until their stated maturity date, the Company made a reassessment of the appropriateness of the previous classification and reallocated these investments as "available-for-sale" as of May 31, 2008, in accordance with SFAS 115. An unrealized holding gain in the amount of $nil (2010 - gain of $8 thousand, 2009 - gain of $10 thousand) was recorded in other comprehensive income relating to these
investments.
|
(c)
|
Consolidated statements of cash flows:
|
There are no differences between Canadian and U.S. GAAP that impact the consolidated statements of cash flows.
F-52
LORUS THERAPEUTICS INC.
Supplementary Information (continued)
Reconciliation of Canadian and United States Generally Accepted Accounting Principles
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
(d)
|
Investment tax credits:
|
Prepaid expenses and other assets as at May 31, 2011 include investment tax credits receivable of $196 thousand (2010 - $400 thousand, 2009 - $600 thousand).
Under Canadian GAAP, investment tax credits and other research and development credits are deducted from research and development expense for items of a current nature, and deducted from property and equipment for items of a capital nature. Under U.S. GAAP, these tax credits would be reclassified as a reduction of income tax expense. The impact would be higher research and development expense and an income tax recovery of $160 thousand for the year ended May 31, 2011 (2010 - $242 thousand; 2009- $200 thousand) with no net impact to loss for the year or loss per share.
|
(e)
|
Income taxes:
|
In accordance with U.S. GAAP, the Company uses enacted tax rates to record the future tax balances arising from temporary differences, whereas, under Canadian GAAP, the Company uses substantively enacted tax rates to record its future tax balances. While the Company used substantively enacted tax rates at May 31, 2011 the enacted rates were consistent with the substantively enacted rates and as such there was no difference between U.S. GAAP and Canadian GAAP. For the year ended May 31, 2010 all tax rates used to record future tax balances were enacted and as such no US GAAP difference would exist.
The Company fully recognizes its tax benefits. The Company does not expect significant changes in its valuation allowance for the next 12 months.
The Company and its Canadian subsidiary each file Canadian federal and provincial income tax returns. The Company and its Canadian subsidiary remain open to tax examinations by the Canadian federal and provincial tax authorities for years ended after the 2003 and 2002 taxation years, respectively.
The Company's former U.S. subsidiary filed U.S. federal and state income tax returns. The former U.S. subsidiary is subject to federal and state income tax examinations by U.S. tax authorities for taxation years ended May 31, 2008 and 2009.
The Company recognizes any interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the years ended May 31, 2011 and 2010, there was no such interest or penalties.
F-53
LORUS THERAPEUTICS INC.
Supplementary Information (continued)
Reconciliation of Canadian and United States Generally Accepted Accounting Principles
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
(f)
|
Adoption of new accounting pronouncements under U.S. GAAP:
|
There were no new accounting policies adopted under U.S. GAAP in the year ended May 31, 2011.
2010
The following accounting policies were adopted during the year ended May 31, 2010.
In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), which is primarily codified in ASC Topic 820 and delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the Company’s fiscal 2010 year. The adoption of this standard, when applied to non-financial assets and non-financial liabilities, did not have a material impact on the results of operations or financial position.
In December 2007, the FASB issued Statement No. 141R, which is primarily codified in ASC Topic 805,and requires most identifiable assets, liabilities, non-controlling interests and goodwill acquired in a business combination to be recorded at full fair value. ASC Topic 805 applies to all business combinations, including combinations among mutual entities and combinations by contract alone. Under ASC Topic 805, all business combinations will be accounted for by applying the acquisition method. ASC Topic 805 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15,
2008, specifically June 1, 2009 for the Company. As the Company did not enter into any business combination transactions on or after June 1, 2009, the adoption of this standard did not have any impact on the consolidated interim financial statements.
In December 2007, the FASB issued Statement No. 160, which is primarily codified in ASC Subtopic 810-10, and requires non-controlling interests (previously referred to as minority interests) to be treated as a separate component of equity, not as a liability or other item outside permanent equity. ASC Subtopic 810-10 applies to the accounting for non-controlling interests and transactions with non-controlling interest holders in consolidated financial statements. ASC Subtopic 810-10 is effective for annual periods beginning on or after December 15, 2008, specifically June 1, 2009 for the Company. The adoption of this standard did not have an impact on the results of
operations or financial position.
In December 2007, the FASB ratified EITF No. 07-1, Accounting for Collaborative Agreements ("EITF 07-1"), which is primarily codified in ASC Topic 808 and provides guidance on how the parties to a collaborative agreement should account for costs incurred and revenue generated on sales to third parties, how sharing payments pursuant to a collaboration agreement should be presented in the income statement and certain related disclosure requirements. ASC Topic 808 is effective for the first annual or interim reporting period beginning after December 15, 2008, specifically June 1, 2009 for the Company and should be applied retrospectively to all prior periods presented for all collaborative arrangements
existing as of the effective date. The adoption of this standard did not have an impact on the results of operations or financial position.
F-54
LORUS THERAPEUTICS INC.
Supplementary Information (continued)
Reconciliation of Canadian and United States Generally Accepted Accounting Principles
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
2009
The following accounting policies were adopted during the year ended May 31, 2009.
On June 1, 2008, the Company adopted ASC Subtopic 820-10 “Fair Value Measurements” formerly FASB Statement No. 157, which defines fair value, establishes a framework for measuring fair value under United States GAAP, and expands disclosures about fair value measurements. ASC Subtopic 820-10 applies to other accounting pronouncements that require or permit fair value measurements.
ASC Subtopic 820-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability. The adoption of this standard did not have an impact on the results of operations or financial position other than the additional disclosures as shown below.
(i) Fair value hierarchy:
ASC Subtopic 820-10 requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC Subtopic 820-10 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC Subtopic 820-10 prioritizes the inputs into three levels that may be used to measure fair value:
|
|
•
|
Level 1 - applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 - applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
|
F-55
LORUS THERAPEUTICS INC.
Supplementary Information (continued)
Reconciliation of Canadian and United States Generally Accepted Accounting Principles
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
|
•
|
Level 3 - applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
|
|
(g)
|
New accounting pronouncements not yet adopted under U.S. GAAP:
|
The Company will no longer be reporting under U.S. GAAP following the adoption of IFRS with a transition date of June 1, 2010.
F-56
LORUS THERAPEUTICS INC.
Supplementary Information
Reconciliation of Canadian and United States Generally Accepted Accounting Principles
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2010, 2009 and 2008
|
(h)
|
Consolidated statement of shareholders' equity (deficiency) for the period from June 1, 1998 to May 31, 2011 prepared in accordance with US GAAP:
|
|
Accumulated
|
||||||||||||||||||||||||||||
|
Contributed
|
other
|
|||||||||||||||||||||||||||
|
Number of
|
surplus/ |
comprehensive
|
||||||||||||||||||||||||||
|
shares
|
Amount
|
Warrants
|
APIC
|
Deficit
|
loss
|
Total
|
||||||||||||||||||||||
|
Balance, May 31, 1998
|
1,226 | $ | 37,180 | $ | - | $ | 667 | $ | (32,946 | ) | $ | - | $ | 4,901 | ||||||||||||||
|
Exercise of special warrants
|
178 | 1,004 | - | (1,217 | ) | - | - | (213 | ) | |||||||||||||||||||
|
Exercise of stock options
|
2 | 48 | - | - | - | - | 48 | |||||||||||||||||||||
|
Issue of warrants
|
- | - | - | 1,217 | - | - | 1,217 | |||||||||||||||||||||
|
Issue of special warrants
|
- | - | - | 213 | - | - | 213 | |||||||||||||||||||||
|
Other issuances
|
19 | 379 | - | - | - | - | 379 | |||||||||||||||||||||
|
Deficit
|
- | - | - | - | (4,623 | ) | - | (4,623 | ) | |||||||||||||||||||
|
Balance, May 31, 1999
|
1,425 | 38,611 | - | 880 | (37,569 | ) | - | 1,922 | ||||||||||||||||||||
|
Exercise of warrants
|
419 | 7,546 | - | (534 | ) | - | - | 7,012 | ||||||||||||||||||||
|
Issuance of special and
|
||||||||||||||||||||||||||||
|
purchase warrants
|
- | - | - | 8,853 | - | - | 8,853 | |||||||||||||||||||||
|
Issuance of public offering
|
512 | 41,952 | - | 659 | - | - | 42,611 | |||||||||||||||||||||
|
Issued of acquisition
|
1,201 | 14,000 | - | - | - | - | 14,000 | |||||||||||||||||||||
|
Exercise of units
|
29 | 1,821 | - | (321 | ) | - | - | 1,500 | ||||||||||||||||||||
|
Issuance under alternate compensation plan
|
1 | 15 | - | - | - | - | 15 | |||||||||||||||||||||
|
Exercise of special warrants
|
1,010 | 8,438 | - | (8,438 | ) | - | - | - | ||||||||||||||||||||
|
Exercise of stock options
|
58 | 1,113 | - | - | - | - | 1,113 | |||||||||||||||||||||
|
Stock-based compensation
|
- | 869 | - | - | - | - | 869 | |||||||||||||||||||||
|
Deficit
|
- | - | - | - | (8,599 | ) | - | (8,599 | ) | |||||||||||||||||||
|
Balance, May 31, 2000
|
4,655 | 114,365 | - | 1,099 | (46,168 | ) | - | 69,296 | ||||||||||||||||||||
|
Exercise of warrants
|
6 | 93 | - | (25 | ) | - | - | 68 | ||||||||||||||||||||
|
Issuance under alternate compensation plan
|
1 | 49 | - | - | - | - | 49 | |||||||||||||||||||||
|
Exercise of stock options
|
85 | 1,866 | - | - | - | - | 1,866 | |||||||||||||||||||||
|
Stock-based compensation
|
- | 351 | - | - | - | - | 351 | |||||||||||||||||||||
|
Deficit
|
- | 82 | - | - | (15,213 | ) | - | (15,131 | ) | |||||||||||||||||||
|
Balance, May 31, 2001
|
4,747 | 116,806 | - | 1,074 | (61,381 | ) | - | 56,499 | ||||||||||||||||||||
|
Exercise of compensation warrants
|
15 | 265 | - | (71 | ) | - | - | 194 | ||||||||||||||||||||
|
Exercise of stock options
|
52 | 1,194 | - | - | - | - | 1,194 | |||||||||||||||||||||
|
Stock-based compensation
|
- | (100 | ) | - | - | - | - | (100 | ) | |||||||||||||||||||
|
Deficit
|
- | - | - | - | (13,488 | ) | - | (13,488 | ) | |||||||||||||||||||
F-57
LORUS THERAPEUTICS INC.
Supplementary Information (continued)
Reconciliation of Canadian and United States Generally Accepted Accounting Principles
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
Accumulated
|
||||||||||||||||||||||||||||
|
Contributed
|
other
|
|||||||||||||||||||||||||||
|
Number of
|
surplus/
|
comprehensive
|
||||||||||||||||||||||||||
|
shares
|
Amount
|
Warrants
|
APIC
|
Deficit
|
loss
|
Total
|
||||||||||||||||||||||
|
Balance, May 31, 2002
|
4,814 | 118,165 | - | 1,003 | (74,869 | ) | - | 44,299 | ||||||||||||||||||||
|
Exercise of stock options
|
29 | 715 | - | - | - | - | 715 | |||||||||||||||||||||
|
Stock-based compensation
|
- | 558 | - | - | - | - | 558 | |||||||||||||||||||||
|
Deficit
|
- | - | - | - | (16,634 | ) | - | (16,634 | ) | |||||||||||||||||||
|
Balance, May 31, 2003
|
4,843 | 119,438 | - | 1,003 | (91,503 | ) | - | 28,938 | ||||||||||||||||||||
|
Share issuance
|
874 | 24,121 | - | 4,325 | - | - | 28,446 | |||||||||||||||||||||
|
Exercise of stock options
|
10 | 171 | - | - | - | - | 171 | |||||||||||||||||||||
|
Stock-based compensation
|
- | (88 | ) | - | - | - | - | (88 | ) | |||||||||||||||||||
|
Other issuances
|
- | 28 | - | - | - | - | 28 | |||||||||||||||||||||
|
Deficit
|
- | - | - | - | (30,301 | ) | - | (30,301 | ) | |||||||||||||||||||
|
Balance, May 31, 2004
|
5,727 | 143,670 | - | 5,328 | (121,804 | ) | - | 27,194 | ||||||||||||||||||||
|
Interest payment
|
14 | 300 | - | - | - | - | 300 | |||||||||||||||||||||
|
Exercise of stock options
|
9 | 112 | - | - | - | - | 112 | |||||||||||||||||||||
|
Expiry of compensation options
|
- | - | - | 1,405 | - | - | 1,405 | |||||||||||||||||||||
|
Issuance under alternate compensation plan
|
2 | 37 | - | - | - | - | 37 | |||||||||||||||||||||
|
Issuance of warrants
|
- | - | - | 1,048 | - | - | 1,048 | |||||||||||||||||||||
|
Deficit
|
- | - | - | - | (20,298 | ) | - | (20,298 | ) | |||||||||||||||||||
|
Balance, May 31, 2005
|
5,752 | 144,119 | - | 7,781 | (142,102 | ) | - | 9,798 | ||||||||||||||||||||
|
Interest payment
|
71 | 882 | - | - | - | - | 882 | |||||||||||||||||||||
|
Stock-based compensation
|
- | - | - | 56 | - | - | 56 | |||||||||||||||||||||
|
Deficit
|
- | - | - | - | (16,388 | ) | - | (16,388 | ) | |||||||||||||||||||
|
Balance, May 31, 2006
|
5,823 | 145,001 | - | 7,837 | (158,490 | ) | - | (5,652 | ) | |||||||||||||||||||
|
Equity issuance
|
1,127 | 11,641 | - | - | - | - | 11,641 | |||||||||||||||||||||
|
Interest payments
|
124 | 1,050 | - | - | - | - | 1,050 | |||||||||||||||||||||
|
Exercise of stock options
|
1 | 22 | - | (9 | ) | - | - | 13 | ||||||||||||||||||||
|
Repurchase of warrants
|
- | - | - | (252 | ) | - | - | (252 | ) | |||||||||||||||||||
|
Stock-based compensation
|
- | - | - | 697 | - | - | 697 | |||||||||||||||||||||
|
Deficit
|
- | - | - | - | (9,150 | ) | - | (9,150 | ) | |||||||||||||||||||
|
Balance, May 31, 2007
|
7,075 | 157,714 | - | 8,273 | (167,640 | ) | - | (1,653 | ) | |||||||||||||||||||
|
Interest payments
|
180 | 1,029 | - | - | - | - | 1,029 | |||||||||||||||||||||
|
Stock-based compensation
|
- | - | - | 767 | - | - | 767 | |||||||||||||||||||||
|
Other comprehensive loss
|
- | - | - | - | - | (20 | ) | (20 | ) | |||||||||||||||||||
|
Deficit
|
- | - | - | - | (5,526 | ) | - | (5,526 | ) | |||||||||||||||||||
|
Balance, May 31, 2008
|
7,255 | 158,743 | - | 9,040 | (173,166 | ) | (20 | ) | (5,403 | ) | ||||||||||||||||||
|
Interest payments
|
354 | 707 | - | - | - | - | 707 | |||||||||||||||||||||
|
Share issuance
|
951 | 2,790 | - | - | - | - | 2,790 | |||||||||||||||||||||
|
Warrant issuance
|
- | - | 417 | - | - | - | 417 | |||||||||||||||||||||
|
Stock-based compensation
|
- | - | - | 485 | - | - | 485 | |||||||||||||||||||||
|
Other comprehensive income
|
- | - | - | - | - | 10 | 10 | |||||||||||||||||||||
|
Deficit
|
- | - | - | - | (7,735 | ) | - | (7,735 | ) | |||||||||||||||||||
|
Balance, May 31, 2009
|
8,560 | $ | 162,240 | 417 | $ | 9,525 | $ | (180,901 | ) $ | (10 | ) | $ | (8,729 | ) | ||||||||||||||
|
Interest payments
|
7 | 15 | - | - | - | - | 15 | |||||||||||||||||||||
|
Share issuance
|
1,366 | 1,665 | - | - | - | - | 1,665 | |||||||||||||||||||||
|
Warrant issuance
|
- | - | 622 | - | - | - | 622 | |||||||||||||||||||||
|
Stock-based compensation
|
- | - | - | 171 | - | - | 171 | |||||||||||||||||||||
|
Other comprehensive income
|
- | - | - | - | - | 8 | 8 | |||||||||||||||||||||
|
Deficit
|
- | - | - | - | 5,706 | - | 5,706 | |||||||||||||||||||||
|
Balance, May 31, 2010
|
9,933 | $ | 163,920 | $ | 1,039 | $ | 9,696 | $ | (175,195 | ) | $ | (2 | ) | $ | (542 | ) | ||||||||||||
|
Share issuance
|
4,170 | 3,226 | - | - | - | 3,226 | ||||||||||||||||||||||
|
Warrant expiry
|
- | - | (417 | ) | 417 | - | - | - | ||||||||||||||||||||
|
Warrant issuance
|
- | - | 1,032 | - | - | - | 1,032 | |||||||||||||||||||||
|
Share issuance
|
1,582 | 1,641 | - | - | - | - | 1,641 | |||||||||||||||||||||
|
Warrant expiry
|
- | - | (622 | ) | 622 | - | - | - | ||||||||||||||||||||
|
Stock-based compensation
|
- | - | 524 | - | - | 524 | ||||||||||||||||||||||
|
Deficit
|
- | - | - | (5,036 | ) | - | (5,036 | ) | ||||||||||||||||||||
|
Balance, May 31, 2011
|
15,685 | $ | 168,787 | $ | 1,032 | $ | 11,259 | $ | (180,231 | ) | $ | (2 | ) | $ | 845 |
F-58
LORUS THERAPEUTICS INC.
Supplementary Information (continued)
Reconciliation of Canadian and United States Generally Accepted Accounting Principles
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
(i)
|
Subsequent events:
|
|
|
(a)
|
Subsequent to year end, on July 22, 2011, the Company filed a final short-form prospectus in connection with a best efforts offering (the "Offering") of a minimum of 5,000,000 units of the Corporation (the "Units") at a price of $0.40 per Unit for gross proceeds of $2,000,000 and a maximum of 10,000,000 Units for gross proceeds of $4,000,000. Each Unit consists of one common share of Lorus (a "Common Share") and one common share purchase warrant of Lorus (a "Warrant"). Each Warrant will entitle the holder to purchase one Common Share for five years after the closing of the Offering at an exercise price of $0.45 per Common Share (the "Exercise Price"). If on any date (the "Accelerated Exercise Date") the 10-day volume weighted average trading price of the
Common Shares on the Toronto Stock Exchange equals or exceeds 200% of the Exercise Price, then upon the Corporation sending the holders of Warrants written notice of such Accelerated Exercise Date and issuing a news release announcing such Accelerated Exercise Date, the Warrants shall only be exercisable for a period of 30 days following the date on which such written notice is sent to holders of Warrants.
|
In connection with the offering, Herbert Abramson, a director of the Corporation, entered into an irrevocable commitment letter on June 20, 2011, and amended July 11, 2011, to purchase, directly or indirectly, common shares and common share purchase warrants (or as may otherwise be agreed) in the capital of Lorus (collectively the "Securities") having an aggregate subscription price equal to the difference (the "Commitment Amount"), if any, between (a) the sum of (i) the gross proceeds realized by Lorus in the Offering and (ii) the gross proceeds received by Lorus in respect of all financings completed by Lorus from the date of the final short-form prospectus to November 30, 2011 and (b) $4.0
million.
The Offering closed on August 15, 2011 for total gross proceeds of $2.2 million. In connection with the Offering, Lorus has issued 5.5 million Common Shares and 5.5 million Warrants.
Mr. Abramson purchased 2.4 million Units of the Offering.
F-59
LORUS THERAPEUTICS INC.
Supplementary Information (continued)
Reconciliation of Canadian and United States Generally Accepted Accounting Principles
(Tabular amounts in thousands of Canadian dollars, except per share amounts)
Years ended May 31, 2011, 2010 and 2009
|
(b)
|
The Company disclosed in its management information circular dated October 28, 2011 that it would like to amend the exercise price of the November 2010 warrants from the $1.33 current exercise price to an exercise price equal to the 5-day volume weighted average trading price of the common shares of the Corporation on the Toronto Stock Exchange on the date of the approval of the shareholders to such amendment at the annual and special meeting (to be held on November 29, 2011), plus a 10% premium (to be rounded up). The Company has not yet determined the impact the potential re-pricing may have on the financial statements.
|
F-60
TABLE OF CONTENTS
Part IItem 1. Identity Of Directors, Senior Management and AdvisersItem 2. Offer Statistics and Expected TimetableItem 3. Key InformationItem 4. Information on The CompanyItem 4A. Unresolved Staff CommentsItem 5. Operating and Financial Review and ProspectsItem 6. Directors, Senior Management and EmployeesItem 7. Major Shareholders and Related Party TransactionsItem 8. Financial InformationItem 9. The Offer and ListingItem 10. Additional InformationItem 11. Qualitative and Quantitative Disclosures About Market RiskItem 12. Description Of Securities Other Than Equity SecuritiesPart IIItem 13. Defaults, Dividends Arrearages and DelinquenciesItem 14. Material Modifications To The Rights Of Security Holders and Use Of ProceedsItem 15. Controls and ProceduresItem 16. [reserved]Item 16A. Audit Committee Financial ExpertItem 16B. Code Of EthicsItem 16C. Principal Accountant Fees and ServicesItem 16D. Exemptions From The Listing Standards For Audit CommitteesItem 16E. Purchases Of Equity Securities By The Issuer and Affiliated PurchasersItem 16F. Change in Registrant S Certifying AccountantItem 16G. Corporate GovernancePart IIIItem 17. Financial StatementsItem 18. Financial StatementsItem 19. Exhibits