Exhibit 99.1
MERUS LABS INTERNATIONAL INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the three and nine months ended June 30, 2015 and 2014
The following section of our report sets forth Management’s Discussion and Analysis of the financial performance and condition of Merus Labs International Inc. (“the Company” or “Merus”) for the three and nine months ended June 30, 2015 compared to the three and nine months ended June 30, 2014. The analysis should be read in conjunction with the accompanying condensed consolidated interim financial statements (the “Financial Statements”) for the three and nine months ended June 30, 2015 and the related notes thereto.
The date of this MD&A is August 10, 2015.
FORWARD-LOOKING STATEMENTS
This MD&A contains certain statements or disclosures that may constitute forward-looking information or statements (collectively, “forward-looking information”) under applicable securities laws. All statements and disclosures, other than those of historical fact, which address activities, events, outcomes, results or developments that management of the Company, anticipates or expects may or will occur in the future (in whole or in part) should be considered forward-looking information. In some cases, forward-looking information can be identified by terms such as “forecast”, “future”, “may”, “will”, “expect”, “anticipate”, “believe”, “could”, “potential”, “enable”, “plan, “continue”, “contemplate”, “pro forma” or other comparable terminology. Forward-looking information presented in such statements or disclosures may, among other things include:
· | the Company’s expectations regarding sales from its existing products, including its sales forecasts; |
· | the Company’s ability to acquire new products; |
· | the Company’s expectations regarding it ability to raise capital, including its ability to secure the financing necessary to enable us to acquire new products; |
· | the Company’s expectations regarding sales from products that we acquire or license; |
· | the Company’s forecasts regarding its operating expenditures, including general and administrative expenses, |
· | the Company’s expectations regarding the development of its target markets; |
· | the Company’s expectations regarding government regulations of its products and any new products that we acquire; |
· | the Company’s expectations regarding currency exchange rates; |
· | the Company’s expectations regarding income taxes; |
· | the Company’s plans, objectives and targets for future revenue growth and operating performance; |
· | the Company’s plans and objectives regarding new products that it may acquire; and |
· | the Company’s forecast business results and anticipated financial performance. |
The forward-looking information in statements or disclosures in this MD&A is based (in whole or in part) upon factors which may cause actual results, performance or achievements of the Company to differ materially from those contemplated (whether expressly or by implication) in the forward-looking information. Those factors are based on information currently available to the Company, including information obtained from third-party industry analysts and other third party sources. Actual results or outcomes may differ materially from those predicted by such statements or disclosures. While the Company does not know what impact any of those differences may have, their business, results of operations, financial condition and credit stability may be materially adversely affected. Factors that could cause actual results or outcomes to differ materially from the results expressed or implied by forward-looking information include, among other things:
· | the acceptance of the Company’s products by regulatory and reimbursement agencies in various territories including Canada and Europe and inclusion on drug benefit formularies, hospital formularies and acceptance by pharmacies, physicians and patients in the marketplace; |
· | the Company’s ability to successfully market and sell its products; |
· | the Company’s ability to increase sales of its existing products; |
· | the Company’s ability to acquire new products and, upon acquisition, to successfully market and sell new products that are acquired; |
· | the Company’s ability to achieve the financing necessary to complete the acquisitions to new products; |
· | unanticipated cash requirements to support current operations, to expand the Company’s business or for capital expenditures; |
· | core patent protection for Merus’ product portfolio has expired or will expire in the future, which could result in significant competition from generic products resulting in a significant reduction in sales; |
· | delays or setbacks with respect to governmental approvals, or manufacturing or commercial activities; |
· | the Company's ability to service existing debt; |
· | the timing and unpredictability of regulatory actions; |
· | the patient health, legal, and commercial risks associated with patient adverse events or side effects resulting from the use of the Company’s products; |
· | the ability to source, develop and commercialize new products effectively; |
· | unanticipated cash requirements to support current operations, to expand its business or for capital expenditures; |
· | the inability to adequately protect its key intellectual property rights; |
· | the inability to make royalty payments as they become due; |
· | the loss of key management or scientific personnel; |
· | the activities of its competitors and specifically the commercialization of innovative or generic products that compete in the same category as the Company’s products; |
· | regulatory, legal or other setbacks with respect to its operations or business; |
· | market conditions in the capital markets and the biopharmaceutical industry that make raising capital or consummating acquisitions difficult, expensive or both; |
· | enactment of new government laws, regulations, court decisions, regulatory interpretations or other initiatives that are adverse to the Company or its interests; |
· | the risk that the Company is not able to arrange sufficient, cost-effective financing to repay maturing debt and to fund expenditures, future operational activities and acquisitions, and other obligations; and |
· | the risks associated with legislative and regulatory developments that may affect costs, revenues, the speed and degree of competition entering the market, global capital markets activity and general economic conditions in geographic areas where the Company operates. |
Investors should review the full discussions as to material risks and uncertainties, and factors and assumptions used to develop forward-looking statements, included in the Company’s annual report on Form 40-F.
Various assumptions or factors are typically applied in drawing conclusions or making the forecasts or projections set out in forward-looking information. Those assumptions and factors are based on information currently available to the Company, including information obtained from third-party industry analysts and other third party sources. In some instances, material assumptions and factors are presented or discussed elsewhere in this MD&A in connection with the statements or disclosure containing the forward-looking information. You are cautioned that the following list of material factors and assumptions is not exhaustive. The factors and assumptions include, but are not limited to:
· | no unforeseen changes in the legislative and operating framework for the business of the Company; |
· | a stable competitive environment; and |
· | no significant event occurring outside the ordinary course of business such as a natural disaster or other calamity. |
The Company is not obligated to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable laws. Because of the risks, uncertainties and assumptions contained herein, security holders should not place undue reliance on forward-looking statements or disclosures. The foregoing statements expressly qualify any forward-looking information contained herein.
The Company cautions you that the above list of risk factors is not exhaustive. Other factors which could cause actual results, performance or achievements of the Company to differ materially from those contemplated (whether expressly or by implication) in the forward-looking statements or other forward-looking information are disclosed in the Company’s publicly filed disclosure documents.
All historical financial information is prepared in accordance with IFRS and is expressed in Canadian dollars.
Corporate History
The Company was originally formed on December 19, 2011 by the amalgamation of Merus Labs International Inc. (“Old Merus”) and Envoy Capital Group Inc. (“Envoy”) pursuant to an arrangement agreement dated November 10, 2011 pursuant to theBusiness Corporations Act(British Columbia). Envoy was incorporated under the laws of the Province of British Columbia as “Potential Mines Ltd.” in December 1973 and was continued under the laws of the Province of Ontario in December 1997. At Envoy’s annual general meeting held on March 30, 2007 the shareholders voted to amend Envoy’s articles of incorporation by changing its name to Envoy Capital Group Inc. In connection with the amalgamation of Envoy and Old Merus, Envoy continued from the jurisdiction of the Province of Ontario to the Province of British Columbia on December 16, 2011.
Old Merus was incorporated under the laws of the Province of British Columbia on November 9, 2009 under the name 0865346 B.C. Ltd. On January 22, 2010, Old Merus changed its name to Merus Labs International Inc. in connection with a plan of arrangement with Range Gold Corp. and Merus Labs Inc. (“Merus Labs”).
On October 1, 2012, the Company amalgamated with Merus Labs, a wholly owned subsidiary of the Corporation continuing under the name “Merus Labs International Inc.”
The Company’s head office is located at Suite 2110, 100 Wellington St. West, P.O. Box 151, Toronto, Ontario M5K 1H1; and its telephone number is 416-593-3725.
The common shares in the capital of the Company (the “Common Shares”) are publicly traded on the Toronto Stock Exchange (“TSX”) under the symbol “MSL” and on NASDAQ under the symbol “MSLI”.
CORPORATE STRATEGY
Merus is a specialty pharmaceutical company that acquires prescription medicines in the following categories:
· | On patent but at maturity stage of product life cycle |
· | Branded generics |
· | Under promoted products |
· | Niche market pharmaceuticals |
· | Products with annual sales below the critical threshold for large pharma |
Once a product is acquired, our experienced team implements a focused sales and marketing plan to promote the product with the goal of increasing sales and market share.
The Merus corporate growth strategy is driven by a product acquisition plan which employs an opportunistic approach to source product acquisition candidates. This approach allows Merus to source pharmaceutical products across broad therapeutic classes which provides access to acquisition targets not available to other players and creates a diversified strategy. Although Merus has a broad therapeutic focus, opportunities will be pursued if the application of a dedicated small scale sales force can deliver incremental product sales growth. The geographic focus is Canada and Europe.
The Merus corporate strategy results in a diversified product portfolio approach. To manage such a product portfolio, a low cost operating model has been implemented in which there is a light infrastructure footprint. Merus has partnered with third party contract manufacturing and regulatory service providers to leverage their expertise but still maintain maximum flexibility for Merus.
Business Model for Acquisition of Diversified Legacy Products
Merus believes that it has a unique strategy in seeking to acquire legacy products primarily for the purpose of generating a stream of stable revenues and cash flow. Merus believes that this strategy will provide it with the flexibility to consider a broad range of acquisition targets from a variety of therapeutic areas. Therefore, the potential number of product acquisition candidates may be much larger for Merus than for its competitors. Management believes that its approach to product acquisition and its return objectives provide Merus with a competitive advantage in acquiring products as Merus can purchase diversified bundles of products from a single vendor. In contrast, Merus’ competitors, such as niche pharmaceutical companies, are more likely to focus on individual product acquisition within the same therapeutic area. As a result, certain vendors may view Merus as a preferred purchasing candidate.
Predictable Cost Structure
Merus’ plan is to establish a predictable cost structure by relying on a small employee base and outsourcing more of the operational functions associated with its business, including warehousing, distribution, customer service, invoicing, collections, regulatory affairs, medical and drug information, human resources and informational technology. Wherever possible, Merus achieves cost controls by entering into contractual supply and/or service agreements that dictate fixed or percentage fixed costs with annual adjustments for inflation. In the case of its manufacturing supply agreements, its cost of goods will be based on a fixed, per unit cost with annual inflationary adjustments. Management believes the predictability, flexibility and efficiency gained by contracting with established, experienced service organizations will assist Merus in maintaining its margins and maximizing distributable cash.
Partnership with Leading Service Providers
Related to the above, Merus will enter into outsourcing relationships with leading providers of pharmaceutical contract services for many of the operational functions associated with its business and intend to pursue this strategy in the future.
Competitors of Merus
Competitors in the pharmaceutical market range from large multinational pharmaceutical development corporations to small, single product companies that may limit their activities to a particular therapeutic area, region or territory. Competition also comes from generic companies, which develop and commercialize formulations that are identical to marketed brands. Merus expects to compete with a variety of drug companies. With respect to its acquisition strategy, Merus expects to compete principally with other pharmaceutical companies who seek to acquire mature pharmaceutical products as part of their growth strategy. These companies, however, typically focus on under-promoted products in specific therapeutic niches that offer growth potential through synergistic sales and marketing efforts. In addition, since Merus is not focused on specific therapeutic classes, it will have the ability to purchase diversified products and product bundles.
OVERVIEW
During the last twelve months ended June 30, 2015 and up to the date of this MD&A, the Company announced the following:
· | July 10, 2015 – Merus Announces Filing of Preliminary Base Shelf Prospectus |
· | June 3, 2015 – Merus Provides Update on German Reimbursement Review |
· | June 1, 2015 – Merus Announces Closing of Over-Allotment Option |
· | May 28, 2015 – Merus Labs to Present at Jefferies 2015 Healthcare Conference in New York |
· | May 26, 2015 – Merus Appoints Frank Rotmann VP & Head of European Operations |
· | May 22, 2015 – Merus Acquires Specialty Product Rights in Multiple Countries |
· | April 30, 2015 – Merus Announces Closing of $60.0 Million Bought Deal Financing |
· | March 27, 2015 – Merus Appoints New Director and Provides European Update |
· | March 2, 2015 – Merus Announces Settlement of Canadian Patent Litigation |
· | February 4, 2015 - Merus Appoints Geoff Morrow as Vice President, Business Development |
· | December 15, 2014 - Merus Appoints Barry Fishman as Chief Executive Officer |
· | November 17, 2014 - Merus Announces Normal Course Issuer Bid |
· | September 23, 2014 - Merus Announces Management and Board Changes |
· | September 8, 2014 - Merus Announces Acquisition of Sintrom |
· | August 14, 2014 - Merus Announces Completion of $7 Million Financing Transaction with Dacha Strategic Metals |
· | August 7, 2014 – Merus Signs Product Acquisition Letter of Intent |
· | July 17, 2014 - Merus Announces Conversion of $10 Million Convertible Debentures |
· | July 11, 2014 - Merus Announces Closing of $10 Million Preferred Share Financing |
· | July 4, 2014 - Merus Signs Definitive Acquisition Agreement with Dacha Strategic Metals |
OVERALL PERFORMANCE
For the three months ended June 30, 2015, the Company incurred a net loss of $1,606,340 compared to a net loss of $171,666 for the three months ended June 30, 2014. For the three months ended June 30, 2015, EBITDA1 was $5,837,103, compared to $3,763,487 for the comparative period. Adjusted EBITDA, which adds back non-cash share based compensation expense, foreign exchange, investment expenses and acquisition costs, was $6,355,023, compared to $3,857,672 for the prior year comparative period. As at June 30, 2015, the Company had an accumulated deficit of $61,480,304.
Cash provided by operating activities of the Company was $5,787,140 for the three months ended June 30, 2015, compared to cash provided by continuing operations of $3,172,267, for the three months ended June 30, 2014.
Operating risks include but are not limited to: the Company’s ability to attract and retain key personnel, effectively manage growth, and smoothly integrate newly acquired pharmaceutical products and businesses; impact of new or existing generic and innovative competing products, regulatory issues and risk that the Company may not be able to adequately protect the intellectual property surrounding its products, conflicts of interest among the Company’s directors, officers, promoters and members of management; unanticipated expenses; changes in business strategy; impact of any negative publicity; general political and economic conditions; and acts of God and other unforeseeable events, natural or human-caused. Financial risks include but are not limited to the availability of capital to finance the Company’s activities.
The Company cannot anticipate or prevent all of the potential risks to its success, nor predict the impact of any such risk. To the extent possible, management implements strategies aimed at reducing or mitigating risks and uncertainties associated with its business.
1EBITDA – Non-IFRS Financial Measures
The term EBITDA does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other companies. The Company defines EBITDA as earnings before interest expense, taxes, depreciation and amortization (including impairment charges). Adjusted EBITDA is the same measure with additional adjustments for non-cash stock based compensation), foreign exchange gains or losses, investment income or expense, and acquisition costs. The Company believes EBITDA to be an important measurement that allows it to assess the operating performance of its ongoing business on a consistent basis without the impact of amortization and impairment expenses, debt service obligations and other non-operating items. The Company excludes amortization and impairment expenses because their level depends substantially on non-operating factors such as the historical cost of intangible assets. The Company's method for calculating EBITDA may differ from that used by other issuers and, accordingly, this measure may not be comparable to EBITDA used by other issuers.
Three Months Ended June 30 | Nine Months Ended June 30 | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net income (loss) for the period | $ | (1,606,340 | ) | $ | (171,666 | ) | $ | 342,349 | $ | (3,512,612 | ) | |||||
Interest expense | 1,155,890 | 706,922 | 4,135,300 | 2,276,636 | ||||||||||||
Income tax expense | 118,616 | 134,059 | 370,948 | 404,118 | ||||||||||||
Depreciation | 3,833 | 1,419 | 11,524 | 3,193 | ||||||||||||
Amortization | 6,165,104 | 3,092,753 | 17,853,026 | 9,191,164 | ||||||||||||
EBITDA | $ | 5,837,103 | $ | 3,763,487 | $ | 22,713,147 | $ | 8,362,499 | ||||||||
Add/(Deduct): | ||||||||||||||||
Non-cash stock based compensation | 600,942 | 346,672 | 2,036,464 | 1,135,012 | ||||||||||||
Investment (income) expense | 46 | 1,495 | (566 | ) | 7,949 | |||||||||||
Foreign exchange (gains) losses | (83,068 | ) | (253,982 | ) | (1,445,584 | ) | 448,953 | |||||||||
Adjusted EBITDA | $ | 6,355,023 | $ | 3,857,672 | $ | 23,303,461 | $ | 9,954,413 |
PRODUCT SUMMARY
The Company currently has products in the area of urology/women's health, anticoagulants and anti-infectives.
Urology / Women's Health
Over Active Bladder
Overactive bladder occurs when a large muscle in the bladder known as the detrusor contracts more often than normal. This causes a person to feel a sudden and sometimes overwhelming urge to urinate even when the bladder isn’t full. Urgency, incontinence, and urinary frequency can also be caused by urinary-tract infections, kidney stones, prostate infection or enlargement, or medicine taken to treat other conditions such as high blood pressure. Though not life-threatening, overactive bladder is inconvenient, can be embarrassing, and can markedly reduce quality of life.
According to an article published in the Reviews of Urology by the Department of Urology, New York University School of Medicine, in women, moderate and severe bother have a prevalence ranging from about 3% to 17%. Severe incontinence has a low prevalence in young women, but rapidly increases at ages 70 through 80. In men, the prevalence of incontinence is much lower than in women, about 3% to 11% overall, with urge incontinence accounting for 40% to 80% of all male patients. Incontinence in men also increases with age, but severe incontinence in 70- to 80-year-old men is about half of that in women.
Decision Resources, an advisory firm for pharmaceutical and healthcare issues, finds that although more than 50 percent of people with overactive bladder in the world’s major pharmaceutical markets are undiagnosed, the sizeable prevalent population fuels significant sales for the indication. As a result, the overactive bladder drug market will increase from approximately $3 billion in 2009 to nearly $4 billion in 2019 in the United States, France, Germany, Italy, Spain, United Kingdom and Japan.
Emselex®/Enablex®
In 2003, Novartis Pharma AG (Novartis) acquired the Emselex®/Enablex® (darifenacin) product from Pfizer Inc. and the product was approved for sale in Europe and the United States in 2004. As the global sales of Emselex®/Enablex® were below the critical sales threshold for Novartis, the company decided to reduce its marketing and sales efforts in the majority of territories where the product was marketed. In 2010, Novartis divested the product rights for the United States to Warner Chilcott Plc. A key patent protecting Emselex®/Enablex® expires in August 2016, however, the Company also has a Supplementary Protection Certificate ("SPC") which is expected to provide an additional barrier to generic entrants until October 2019 in most European markets.
In July 2012, the Company acquired from Novartis, the Canadian and European rights (excluding France, Spain and Italy) to manufacture, market, and sell the branded prescription medicine product Emselex®/Enablex® (darifenacin) extended release tablets. Darifenacin is a muscarinic antagonist indicated for the treatment of overactive bladder with symptoms of urge urinary incontinence, urgency and frequency. The product’s specific mechanism of action is the blocking of the M3 muscarinic receptor, which is primarily responsible for bladder muscle contractions. As overactive bladder is a chronic condition, Emselex®/Enablex® is prescribed as a medication to be taken once daily and the extended release tablet format is produced in 7.5mg and 15mg dosage strengths.
As Merus has acquired the product rights in a number of European countries in which the product was not being actively marketed, we have entered into promotion and distribution agreements with local marketing and sales organizations with the goal of incrementally increasing sales in those regions.
Under the terms of the agreements, the partner companies have been granted exclusive rights to distribute, market, and sell Emselex®/Enablex® in their respective territories. Other than Switzerland and Canada, the territories covered by these distribution and promotion agreements did not have any substantial marketing and sales resources devoted to the product in recent years. Merus has entered into these promotion and distribution agreements with partner companies that have a wealth of knowledge and expertise in their local markets. Emselex®/Enablex® is a major growth driver for the Company and these collaborations will enable Merus to broaden its reach in countries which were previously underserved in terms of marketing and sales efforts.
During fiscal 2013, Merus also entered into an agreement with a European contract manufacturing group to manufacture Emselex®/Enablex® for sale and distribution in Europe and Canada. The operational phase of the manufacturing tech transfer began in May 2013. During the operational transition period Novartis will continue to manage the manufacturing of Emselex®/Enablex®.
Anticoagulants
Anticoagulants prevent stroke and systemic embolism in patients with Atrial Fibrillation. Atrial Fibrillation (AF) is the most common cardiac arrhythmia (heart rhythm disorder) and is associated with palpitations, chest pain, or congestive heart failure. Embolism refers to where a clot exists and breaks off and flows into the blood stream later clogging an artitery. Antigoagulants treat and prevent deep vein thrombosis (DVT) and pulmonary embolism (PE) and also prevent venous thromboembolic events (VTE) in patients who have undergone hip or knee replacement surgery.
· | Atrial Fibrillation: AF affects 1–2% of the population and likely to increase in the next 50 years. Prevalence of AF increases with age, from 0.5% at age 40-50, to 5–15% at age 80. Over 6 million Europeans suffer arrhythmia with prevalence estimated to double in the next 50 years |
· | VTE: Approximately 1.1 million venous thromboembolic events occur each year across the EU encompassing: DVT events - 61% of total and PE events - 39% of total |
When patients have AF the heart’s two upper chambers (atria) begin to quiver instead of beating effectively. As a result, blood isn’t pumped completely out of the atria and begins to pool and clot. The clot later leaves the heart via blood flow to the brain where it can lodge in a brain artery causing a stroke. It is estimated that 15% of strokes occur with patients with AF.
Global Industry Analysts Inc., one of the world’s largest market research publishers, projected that the global anticoagulants market will soon surpass $11.2Bn, driven by an aging global population, rising incidence of cardiovascular diseases, cancers, and acute hip and knee complications, as well as emergence of innovative therapeutics targeting new and previously targeted clotting factors.
Anticoagulants are a rapidly evolving market for both legacy and emerging treatment regimes. Dominated by just two therapy classes – vitamin K antagonist and heparin injectables; the anticoagulants industry has come a long way since the 1990s, when advancements in thrombotic disease detection and increased physician awareness were major drivers for market growth. Market growth is currently led by the arrival of novel therapeutics as well as favorable demographic tailwinds. The United States and Europe dominate the global anticoagulants market, which is expected to grow dramatically as advanced therapeutics present brighter prospects for coagulation as well as patient management. While novel drugs are likely to impact the market sometime in near future, factors that already influence market prospects include increasing use of low molecular weight heparins, patient population (Baby Boomers reaching age of retirement), and additional indications for existing drugs. Future impact of anticoagulants is expected to mainly result from enormous patient potential. Among these, an aging population at growing risk of venous and arterial problems and patients on long-term anticoagulation would be the major influencers. Currently, the global anticoagulants market is led by vitamin K antagonist (VKA), unfractionated heparin and low molecular weight heparins (heparins). The injectable anticoagulants market has maintained a steady pace over the years with more number of patients receiving anticoagulation with one or more of the injectable therapies. From 2008 to Sept 2013 total European VKA sales have grown from $188MM to $225MM with Warfarin and Acenocoumarol as the only molecules representing annual growth in each respective year.
Sintrom®
In September 2014, the Company acquired from Novartis, in certain European countries, the rights to manufacture, market, and sell the branded prescription medicine product Sintrom® (acenocoumarol). Acenocoumarol is an anticoagulant indicated for the treatment and prevention of thromboembolic diseases. Sintrom® has been available in Europe for over 50 years and in calendar year 2013 the product had net sales of approximately US$28 million in the territories acquired.
Sintrom was approved in Europe in the early 1950’s and its patent expired in 1964. As a result, the product has not only been on the European market for over five decades but also faced generic competition over the same period. It is important to note that the product is not subject to intense competition from generics given the legacy nature of the product (effective and well known), its low price and strong market share. These key competitive features make the product uneconomical for new generic entries.
VKA’s represent a fraction of the price of NOAC’s. Within the VKA European market, Sintrom is priced in the mid-tier with the generic version of the drug representing the lowest price at almost half of Sintrom. It is important to note that generic versions of Sintrom are only available in four European countries; Netherlands, Poland, Romania and Hungary. From a competition perspective, the threat of generics remains low for several reasons: 1) Sintrom along with other VKA’s are legacy drugs and are priced to compete with generics providing an economic barrier; 2) Europe is highly fragmented with multiple local registration requirements for generics providing a political barrier; and 3) Sintrom has an established brand in these market and has increased sales in some countries despite presence of a generic.
Sintrom’s key competition in the Vitamin K antagonist (VKA) segment of the anticoagulant business is Warfarin and Marcoumar. Warfarin holds the largest market share and is sold in several different countries under different brand names. Warfarin is the chemical name for Coumadin and is manufactured as a generic by several different manufactures including Barr, Sandoz, Merck, Taro, and others. Warfarin is a direct competitor of Sintrom, but not a generic substitute because although similar, it is not the same molecule. The major difference between the above noted products is biological half-life (T ½ or biological half-life is the time required for an organism to eliminate one-half of a substance which has been introduced into it). The key benefit of Sintrom is because it has a shorter biological half-life, doctors are able to adjust dosages in the short term and can more readily apply an antidote. Both Warfarin and Marcoumar have a longer life and thus provide more constant long term plasma levels.
New Oral Anti-Coagulants (NOAC’s) such as Pradaxa (Boehringer Ingelheim), Xarelto (Bayer) and Eliquis (Apixaban) obtained EMA approval in 2011/2012 with patent expiry in 2020/2023. These products are the “next generation” of anti-coagulants and have many benefits over legacy anti-coagulants such as VKA’s and as a result many international guidelines recommend NOAC as the preferred option. However, VKAs in some countries are still the preferred option due to local guidelines, broad physician experience, and low price (NOAC's can be up to 50 times more expensive). NOAC’s are superior to VKA’s in terms of safety, efficacy and therapeutic window and for this reason have received much attention since their introduction. However, these drugs exhibit one key issue – in emergency bleeds or surgery, physicians are unable to medically administer an antidote unlike VKA’s. Furthermore, given NOAC’s do not require the same level of monitoring, VKA’s provide physicians with greater oversight over patient progress prompting emergency avoidance. Lastly, doctors have been using VKA’s for decades and as a result are comfortable with dosing, monitoring procedures and reversals vs NOAC’s.
Sintrom will be sold predominantly through distributors with whom Merus already has established relationships. Sintrom will be sold by the distributors to wholesalers and pharmacy networks.
Sintrom will continue to be manufactured by Novartis and its contract organizations for a period of time in order to allow Merus to transition the product manufacturing to a contract manufacturer and obtain the related approvals. The transition to a third party manufacturer is expected to provide additional cost savings. The Company has signed agreements with two contract manufacturers and is currently undergoing the technology transfer process..
The Company funded the Sintrom® acquisition with cash on hand (from operations and equity financings), the issuance of preferred shares, and a debt facility provided to Merus by a syndicate of lenders which also refinanced the Company’s existing debt. Pursuant to the acquisition, Merus in-licensed the Sintrom® trademark, certain related intellectual property, and acquired other information and materials required to continue commercializing the brand in the territories acquired.
Cholinergic Agents
Cholinergic agents work by increasing the secretion of saliva from the salivary glands, which helps to relieve dry mouth. Pilocarpine is considered to be the gold standard, however there are less effective alternative therapies (non-pilocarpine) that exist.
Salagen
In May 2015, Merus acquired the product rights to Salagen (pilocarpine hydrochloride) capsules from Novartis AG in 18 European territories. Salagen® is indicated for xerostomia following radiation therapy, in addition to Sjogren's syndrome. Salagen® had total sales of approximately $7.8 million in 2014. The first marketing authorization was received in 2001 (in EU) and the product has no patent life remaining.
Hormone Replacement Therapies
Hormone replacement therapies (HRT’s) use estrogen to alleviate menopausal systems or osteoporosis.
Estraderm
In May 2015, Merus acquired the product rights to Estraderm MX (β-Estradiol) transdermal patches from Novartis AG in six markets, four of which are in Europe. Estraderm® is indicated to manage certain symptoms of post-menopause and to prevent osteoporosis related to menopause. Estraderm® sales were approximately $3.6 million in 2014. The first marketing authorization was received in 2001 (in EU) and the product has no patent life remaining.
Anti-infectives
The global market for anti-infective drugs, which mainly includes antibacterials, antivirals, antifungals, and vaccines, is projected to exceed $103 billion by the year 2015, according to a published report. Antibacterials represent the largest segment of the anti-infectives market globally. The competitive landscape remains highly fragmented, however Merck and GSK are market leaders in the category.
Vancocin
In May 2011, Old Merus acquired Vancocin (vancomycin hydrochloride) capsules from Iroko International LP. a subsidiary of Iroko Pharmaceuticals, LLC. According to IMS Canada, Vancocin® 125mg and 250mg capsules had combined total sales of approximately $7.8 million in 2010.
Vancomycin was first isolated by Eli Lilly. The original indication for vancomycin was for the treatment of penicillin-resistant staphylococcus aureus. One advantage that was quickly apparent is that staphylococci did not develop significant resistance despite serial passage in culture media containing vancomycin. The rapid development of penicillin resistance by staphylococci led to the compounds being fast-tracked for approval by the US Food and Drug Administration (“FDA”). Eli Lilly first marketed vancomycin hydrochloride under the trade name Vancocin. Vancocin is a powerful antibiotic used to treat a life-threatening disease resulting from the infection of Clostridium Difficile (“C. Difficile”).
C. Difficile is on the increase with higher mortality and severity. Due to the nature of the disease, intravenous (systemic) solutions are regarded as ineffective. To be effective against C. Difficile, drugs must act locally on the flora of the gastro intestinal track. Intravenous solutions by definition do not act locally.
Clinical Practice Guidelines (Clinical Practice Guidelines for Clostridium difficile Infection in Adults: 2010 Update by the Society for Healthcare Epidemiology of America (SHEA) and the Infectious Diseases Society of America (IDSA)) state that oral Vancocin should be used as first line therapy in severe cases of C. Difficile. The guidelines state that vancomycin is the drug of choice for an initial episode of severe C. Difficile. The dosage is 125 mg orally four times per day for 10–14 days. Vancomycin administered orally (and per rectum, if ileus is present) is the regimen of choice for the treatment of severe, complicated C. Difficile.
Changes in the Competitive Landscape
Vancocin
In December 2011, Health Canada granted a notice of compliance (“NOC”) to Pharmaceutical Partners of Canada Inc. (“PPC”), which grants PPC the authority to market their generic version of Vancocin capsules in the Canadian market. In July 2012, PPC confirmed its intentions to market a generic vancomycin capsule product and in November 2012 gained reimbursement listing status in a number of provinces. The entry of this generic product as well as subsequent generic entrants has had a material adverse effect on the sales of Merus’ branded Vancocin capsules and other existing and future market entrants may also have a material adverse effect on sales.
Enablex
In June 2014, Merus received notification from Apotex Inc. (“Apotex”) that it has filed with Health Canada an Abbreviated New Drug Submission (“ANDS”) seeking market approval for a generic version of Enablex® (darifenacin hydrobromide tablets) for the Canadian marketplace. In connection with this filing, we received Notices of Allegation (“NOAs”) from Apotex against our Enablex® patents listed on the Canadian patent register which expire in August of 2016 and beyond. The NOAs were issued under the Canada Patented Medicines (Notice of Compliance) Regulations (the “Regulations”). Enablex® is currently protected in Canada by three issued patents listed on the Canadian patent register. On March 2, 2015, Merus reached an out of court settlement with Apotex and litigation has ceased.
During the last year, the Company was informed by the German Federal Joint Committee (G-BA), responsible for directives on drug reimbursement policy, that in Germany there is a plan to introduce a single reimbursement class for all anticholinergic-based OAB products in the market. This new classification would effectively set a maximum reimbursable price for public payors. The Committee has invited Merus to provide a rationale for Enablex (Darifenacin) being excluded from the class, which the Company has done. The process of assessing arguments for exclusion from the class, the determination of a reimbursement price for the class, and that price becoming effective could take up to a year or more. Most recently the Company attended an oral hearing on June 9, 2015 along with other affected pharmaceutical companies. The Company has not been notified of the outcome of that meeting or been given a timeline for such. If Darifenacin is not excluded from the class and is subject to a maximum reimbursement price, there may be a material adverse effect on sales.
Arbitration Proceeding
The Company has received notice of a request for arbitration from the original owner of the Company’s former Factive® product. The request for arbitration is based on the original license agreement entered into by the original owner and Cornerstone Therapeutics, Inc. (now Chiesi USA, Inc.). The request for arbitration names the Company as a respondent together with Cornerstone and Vansen Pharma, Inc. The request for arbitration includes the allegation that Cornerstone did not have the legal right to transfer the Factive product to Merus. The original owner is seeking an award for damages relating to an alleged breach of contract, as well as disgorgement of revenues and other benefits derived by the Company from sales of Factive. The Company is defending the claim and has denied any liability to the original owner. The Company and Cornerstone have each asserted claims against the other, seeking indemnity and damages related to the original owner’s claim.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2015 AND 2014
For the three months ended June 30, 2015, the Company incurred a net loss of $1,606,340 ($0.02 per share), compared to a net loss of $171,666 ($0.00 per share) for the prior year. EBITDA for the three months ended June 30, 2015 was $5,837,103, compared to EBITDA for the prior year of $3,763,487. Adjusted EBITDA, which adds back non-cash stock based compensation, foreign exchange, investment expenses and acquisition costs, was $6,355,023 for the three months ended June 30, 2015, compared to $3,857,672 for the comparative prior period.
Revenues and Gross Margin
Revenues were $9,505,483 for the three months ended June 30, 2015 compared to revenues of $7,184,909 for the three months ended June 30, 2014. All revenues in the prior year comparative period were attributable to sales of Vancocin and Enablex. Revenues during the period ended June 30, 2015 also include sales of Sintrom as well as Salagen and Estraderm. Salagen and Estraderm sales were only recorded from May 22, 2015, the date of acquisition, to June 30, 2015.
Gross margin for the three months ended June 30, 2015 was $8,692,980 (91%) compared to gross margin of $5,817,847 (81%) for the three months ended June 30, 2014. The higher margin as a percentage of revenue in the current period is primarily a result of recording Sintrom, Salagen, and Estraderm sales on a net basis and an increase in the average selling price in Germany for Enablex resulting from the expiration of a legacy marketing agreement in December 2014.
Revenues from Sintrom during the three months ended June 30, 2015 were $2,802,184. During the current period, the Company recorded Sintrom revenues in the statements of operations entirely on a net basis, whereby revenues were recorded net of cost of goods and selling expenses, subject to a transition arrangement whereby Novartis continues to provide certain sales and distribution functions while the parties work through the process of transferring the necessary marketing authorizations. As a result of this arrangement the Company is considered to be acting as an agent rather than principal and revenues are recorded on a net basis. Had the Company recorded Sintrom on a gross basis, revenues and cost of goods would have been higher by $3,873,014.
Revenues from Salagen during the three months ended June 30, 2015 were $648,523. Similar to Sintrom, during the current period, the Company recorded Salagen revenues in the statements of operations entirely on a net basis, whereby revenues were recorded net of cost of goods and selling expenses. Had the Company recorded Salagen on a gross basis, revenues and cost of goods would have been higher by $160,564.
Revenues from Estraderm during the three months ended June 30, 2015 were $198,625. Similar to Sintrom, during the current period, the Company recorded Estraderm revenues in the statements of operations entirely on a net basis, whereby revenues were recorded net of cost of goods and selling expenses. Had the Company recorded Estraderm on a gross basis, revenues and cost of goods would have been higher by $136,841.
Revenues attributable to Enablex for the three months ended June 30, 2015 were $4,949,292, compared to $6,431,205 for the three months ended June 30, 2014. Revenues for Enablex were lower in the current period compared to the same period last year due primarily to inventory normalization in Germany with respect to a new distributor. Until the end of December 2014, the Company was bound to a legacy marketing and distribution agreement in Germany. Upon its expiration at the beginning of the fiscal second quarter, the Company began to benefit from gaining a larger portion of revenue in the territory. As a result of the transition to a new distributor, some large orders were shipped in the second quarter with much smaller orders shipped in the current quarter. As a result, revenues last quarter exceeded expectations while revenues in the current quarter were considerably lower. There have been no unexpected changes in market demand, however, revenue is recorded as the product is shipped to the wholesale channels. Going forward the Company expects to see a more even revenue pattern as inventories stabilize and orders shipped to the distributor should more closely follow market demand.
Revenues attributable to Vancocin were $906,859 for the three months ended June 30, 2015, compared to $753,704 for the three months ended June 30, 2014. The increase in revenue from this product in the current fiscal year was primarily due to a true-up of the returns provision in the prior year quarter, offset by the entry of a second generic Vancomycin which began to impact the market during the third quarter of fiscal 2014.
Sales and Marketing Expense
The Company incurred sales and marketing expenses of $252,332 for the three months ended June 30, 2015, compared to $568,593 for the three months ended June 30, 2014. Sales and marketing expenses were higher during the prior year period primarily due to strategic investment in marketing and promotion for Enablex, specifically in territories not previously addressed. As the promotional program matures, less spend has been allocated to the product.
General and Administrative Expense
General and administrative expenses for the three months ended June 30, 2015 were $2,686,567, compared to $1,738,254 for the three months ended June 30, 2014. Excluding the impact of non-cash share based compensation, general and administrative expenses in the current year increased by $694,043 compared to the previous year, primarily due to higher legal expenses and increased headcount.
Amortization of Intangible Assets
The three months ended June 30, 2015 included amortization expense of $6,165,104, compared to $3,092,753 for the three months ended June 30, 2014. The increase in amortization is mainly due to the addition of Sintrom, Salagen, and Estraderm to the portfolio.
Interest Expense and Foreign Exchange Gains and Losses
Interest expense of $1,155,890 was incurred during the three months ended June 30, 2015, compared to $706,922 for the three months ended June 30, 2014. The higher interest charges relate to the additional debt incurred for the purchase of Sintrom.
Foreign exchange gains of $83,068 were recorded in the three months ended June 30, 2015, primarily due to the appreciation in value of US dollar denominated balances as well as the settlement of favourable Euro hedges during the period. Foreign currency gains of $253,982 were incurred in the same period last year due to the appreciation of the Euro relative to the Canadian dollar.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2015 AND 2014
For the nine months ended June 30, 2015, the Company earned net income of $342,349 ($0.00 per share), compared to a net loss of $3,512,612 ($0.09 per share) for the prior year. EBITDA for the nine months ended June 30, 2015 was $22,713,147, compared to EBITDA for the prior year of $8,362,499. Adjusted EBITDA, which adds back non-cash stock based compensation, foreign exchange, investment expenses and acquisition costs, was $23,303,461 for the nine months ended June 30, 2015, compared to $9,954,413 for the prior year.
Revenues and Gross Margin
Revenues were $32,813,946 for the nine months ended June 30, 2015 compared to revenues of $20,132,416 for the nine months ended June 30, 2014. All revenues in the prior year comparative period were attributable to sales of Vancocin and Enablex. Revenues during the period ended June 30, 2015 also include sales of Sintrom, Salagen, and Estraderm. Salagen and Estraderm sales were only recorded from May 22, 2015, the date of acquisition, to June 30, 2015.
Gross margin for the nine months ended June 30, 2015 was $29,298,685 (89%) compared to gross margin of $16,570,837 (82%) for the nine months ended June 30, 2014. The higher margin as a percentage of revenue in the current period is primarily a result of recording Sintrom, Salagen, and Estraderm sales on a net basis and an increase in the average selling price in Germany for Enablex resulting from the expiration of a legacy marketing agreement in December 2014.
Revenues from Sintrom during the nine months ended June 30, 2015 were $9,499,997. During the current period, the Company recorded Sintrom revenues in the statements of operations entirely on a net basis, whereby revenues were recorded net of cost of goods and selling expenses, subject to a transition arrangement whereby Novartis continues to provide certain sales and distribution functions while the parties work through the process of transferring the necessary marketing authorizations. As a result of this arrangement the Company is considered to be acting as an agent rather than principal and revenues are recorded on a net basis. Had the Company recorded Sintrom on a gross basis, revenues and cost of goods would have been higher by $12,131,697.
Revenues from Salagen during the nine months ended June 30, 2015 were $648,523. As the product rights were recently acquired, quarter revenue is equal to year-to-date revenue. During the current period, the Company recorded Salagen revenues in the statements of operations entirely on a net basis, whereby revenues were recorded net of cost of goods and selling expenses. Had the Company recorded Salagen on a gross basis, revenues and cost of goods would have been higher by $160,564.
Revenues from Estraderm during the nine months ended June 30, 2015 were $198,625. As the product rights were recently acquired, quarter revenue is equal to year-to-date revenue. During the current period, the Company recorded Estraderm revenues in the statements of operations entirely on a net basis, whereby revenues were recorded net of cost of goods and selling expenses. Had the Company recorded Estraderm on a gross basis, revenues and cost of goods would have been higher by $136,841.
Revenues attributable to Enablex for the nine months ended June 30, 2015 were $20,066,225, compared to $19,093,659 on a similar gross basis for the nine months ended June 30, 2014. Revenues for Enablex were higher in the current period compared to the same period last year due primarily to sales in Germany being recorded at the full ex-factory price due to the expiration of a legacy marketing agreement.
Revenues attributable to Vancocin were $2,400,576 for the nine months ended June 30, 2015, compared to $3,561,877 for the nine months ended June 30, 2014. The decrease in revenue from this product in the current fiscal year was primarily due to the entry of a second generic Vancomycin which began to impact the market during the third quarter of fiscal 2014.
Sales and Marketing Expense
The Company incurred sales and marketing expenses of $737,831 for the nine months ended June 30, 2015, compared to $2,318,642 for the nine months ended June 30, 2014. Sales and marketing expenses were higher during the prior year period primarily due to strategic upfront investment in marketing and promotion for Enablex, specifically in territories not previously addressed such as the UK.
General and Administrative Expense
General and administrative expenses for the nine months ended June 30, 2015 were $7,293,857, compared to $5,432,794 for the nine months ended June 30, 2014. Excluding the impact of non-cash share based compensation, general and administrative expenses in the current year increased by $959,611 compared to the previous year, primarily due to higher legal expenses relating to the arbitration proceeding, along with additional headcount.
Amortization of Intangible Assets
The nine months ended June 30, 2015 included amortization expense of $17,853,026, compared to $9,191,164 for the nine months ended June 30, 2014. The increase in amortization is mainly due to the addition of Sintrom, Salagen, and Estraderm to the portfolio.
Interest Expense and Foreign Exchange Gains and Losses
Interest expense of $4,135,300 was incurred during the nine months ended June 30, 2015, compared to $2,276,636 for the nine months ended June 30, 2014. The higher interest charges relate to the additional debt incurred for the purchase of Sintrom.
Foreign exchange gains of $1,445,584 were recorded in the nine months ended June 30, 2015, primarily due to the appreciation in value of US dollar and Euro denominated balances as well as the settlement of favourable Euro hedges during the period. Conversely, foreign currency losses of $448,953 were incurred in the same period last year due to the appreciation of the Euro relative to unfavourable forward contracts held by the Company as part of its hedging strategy.
SUMMARY OF QUARTERLY RESULTS
Seasonality
Merus’ product lines are generally not susceptible to fluctuations as a result of seasonal variations. Historic revenues have not indicated that any of the Company's products will have seasonal variations which would materially impact revenue.
Q3 2015 | Q2 2015 | Q1 2015 | Q4 2014 | |
Revenues | $9.51 million | $12.68 million | $10.63 million | $6.02 million |
Gross margin | $8.69 million | $11.24 million | $9.37 million | $5.09 million |
Net income (loss): | ||||
From continuing operations | ($1.61) million | $2.16 million | ($0.22) million | ($4.55) million |
Including discontinued Operations | ($1.61) million | $2.16 million | ($0.22) million | ($4.55) million |
Earnings (loss) per share: | ||||
From continuing operations: | ||||
Basic | ($0.02) | $0.03 | ($0.00) | ($0.06) |
Diluted | ($0.02) | $0.03 | ($0.00) | ($0.06) |
Including discontinued operations: | ||||
Basic | ($0.02) | $0.03 | ($0.00) | ($0.06) |
Diluted | ($0.02) | $0.03 | ($0.00) | ($0.06) |
EBITDA1 | $5.84 million | $9.42 million | $7.46 million | $4.78 million |
1EBITDA – Non-IFRS Financial Measures - see definition under "Overall Performance"
Q3 2014 | Q2 2014 | Q1 2014 | Q4 2013 | |
Revenues | $7.18 million | $6.69 million | $6.26 million | $9.13 million |
Gross margin | $5.82 million | $5.48 million | $5.27 million | $7.62 million |
Net income (loss): | ||||
From continuing operations | ($0.17) million | ($1.45) million | ($1.89) million | $0.51 million |
Including discontinued operations | ($0.17) million | ($1.45) million | ($1.89) million | ($0.05) million |
Earnings (loss) per share: | ||||
From continuing operations: | ||||
Basic | ($0.00) | ($0.04) | ($0.05) | $0.02 |
Diluted | ($0.00) | ($0.04) | ($0.05) | $0.02 |
Including discontinued operations: | ||||
Basic | ($0.00) | ($0.04) | ($0.05) | ($0.00) |
Diluted | ($0.00) | ($0.04) | ($0.05) | ($0.00) |
EBITDA | $3.76 million | $2.52 million | $2.07 million | $5.61 million |
LIQUIDITY AND CAPITAL RESOURCES
The Company currently manages its capital structure and makes adjustments to it, based on cash resources expected to be available to the Company, in order to support its future business plans. As at June 30, 2015, excluding provisions and obligations related to long term debt, the Company had working capital of $47,162,873 compared to $16,274,224 at September 30, 2014. The increase in working capital was due primarily to the completion of a prospectus offering, along with cash generated from operations, offset by the acquisition of two products and scheduled repayments against the credit facility.
The Company’s plan of operations in the next twelve months is to satisfy short-term debt obligations, while strategically looking for new acquisitions. The Company completed four financings during the past fiscal year, including two bought deal prospectus offerings, a preferred share financing and an acquisition involving cash. The Company used the majority of these funds, along with additional debt financing primarily for its acquisition of Sintrom in September 2014. In April 2015, the Company completed its most recent bought deal financing for gross proceeds of $60 million and in May, the Company used a portion of those proceeds to acquire the rights to Salagen and Estraderm for approximately $37 million.
The Company generates significant positive cash flow from operations, however, the Company may raise additional financing, if required, to pursue the acquisition of other pharmaceutical products. Management reviews the capital management approach on an ongoing basis and believes that this approach is reasonable given the current state of financial markets. In the case of uncertainty over the ability to raise funds in current or future economic conditions, the Company would manage capital by minimizing ongoing expenses.
Cash provided by operations of the Company was $5,787,140 and $17,406,425 for the three and nine months ended June 30, 2015, respectively, compared to $3,172,267 and $9,288,864 for the three and nine months ended June 30, 2014 respectively. The increase in cash flows from operations in the current year period was primarily a result of cash flows generated from the Sintrom operations as well as the contribution of Salagen and Estraderm.
Cash provided by financing activities for the three and nine months ended June 30, 2015 was $55,791,929 and $47,693,248, respectively, compared to cash provided by financing activities for the three and nine months ended June 30, 2014 of $27,162,691 and $44,546,979, respectively. The current year period includes proceeds of the prospectus offering and option exercises offset by scheduled debt repayments and dividends paid on the preferred shares. The prior year comparative period includes proceeds from a smaller prospectus offering offset by scheduled debt repayments on the former debt facility.
Cash used by investing activities was $37,343,224 and $37,875,476 for the three and nine months ended June 30, 2015, respectively compared to cash provided by investing activities of $33,071 and $143,797 for the three and nine months ended June 30, 2014, respectively. Cash used during the current period related primarily to the purchase of Salagen and Estraderm, along with technology transfer costs for Enablex. Cash provided by investing activities in the prior year was related to proceeds withdrawn on a short term investment.
COMMITMENTS
(a) Operating lease commitments
The Company has entered into operating lease agreements for office premises and equipment with minimum annual lease payments to expiry as follows:
June 30, 2015 | |
Less than 1 year | $ 105,576 |
1 to 2 years | 105,576 |
2 to 3 years | 52,788 |
Thereafter | - |
Total | $ 263,940 |
(b) Liability settlement
The table below analyzes the Company’s non-derivative financial liabilities into relevant maturity groupings based on the remaining period at the statement of financial position date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows and do not include capitalized transaction costs.
Fiscal year ended September 30 | ||||||||||||||||||||
At June 30, 2015 | Total | 2015 | 2016 | 2017 | Thereafter | |||||||||||||||
Debt | $ | 68,000,000 | $ | 4,000,000 | $ | 16,000,000 | $ | 16,000,000 | $ | 32,000,000 | ||||||||||
Accounts payable and accrued liabilities | 3,416,308 | 3,416,308 | - | - | - | |||||||||||||||
Income taxes payable | 1,358,674 | 1,358,674 | - | - | - | |||||||||||||||
Total | $ | 72,774,982 | $ | 8,774,982 | $ | 16,000,000 | $ | 16,000,000 | $ | 32,000,000 |
OFF BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements.
RELATED PARTY TRANSACTIONS
At June 30, 2015, there were no amounts owing to or from related parties. The remuneration of directors and other members of key management personnel are as follows:
Three months ended June 30 | Nine months ended June 30 | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Salaries | $ | 320,519 | $ | 296,491 | $ | 1,159,311 | $ | 586,701 | ||||||||
Share based compensation | 600,942 | 660,147 | 2,036,434 | 788,340 | ||||||||||||
$ | 921,461 | $ | 956,638 | $ | 3,195,745 | $ | 1,375,041 |
CHANGES IN CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Accounting policies
There were no changes in the Company’s critical accounting policies during the period.
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures form a framework designed to provide reasonable assurance that information disclosed publicly fairly presents in all material respects the financial condition, results of operations and cash flows of the Company for the periods presented in this MD&A. The Company's disclosure controls and procedures framework includes processes designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to management by others within those entities to allow timely decisions regarding required disclosure.
The Company’s management, with the participation of its CEO and CFO is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.
As at June 30, 2015, management evaluated the design and operating effectiveness of the Company’s internal controls over financial reporting and concluded as at June 30, 2015, the Company’s internal controls over financial reporting were operating effectively.
There were no material changes made to the Company’s internal controls over financial reporting during the three months ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. In addition, management assessed disclosure controls and procedures to be effective as of June 30, 2015.
DISCLOSURE OF OUTSTANDING SHARE DATA
Common Shares
The Company’s authorized share capital consists of an unlimited number of common shares without par value. As at August 10, 2015 the Company had 102,301,641 common shares issued and outstanding.
Preference Shares
The Company is authorized to issue an unlimited number of preferred shares without par value. The preferred shares may be issued in series on such terms as determined by the directors of the Company in accordance with the special rights and restrictions as set out in the Articles of the Company. As of February 11, 2015, the Company had 10,000 Series A Preferred Shares issued and outstanding, each with a liquidation value of $1,000, for a total value of $10,000,000. The Series A Preferred Shares pay a dividend of 8% per annum, subject to adjustment if the Company does not redeem these Preferred Shares after October 31, 2019. At any time at the option of the holder, the Series A Preferred Shares may be converted into the Company’s common shares at a conversion price of $2.20 per share. The Series A Preferred Shares are redeemable at the option of the Company at any time after October 31, 2019. The Series A Preferred Shares are also redeemable by the Company at any time in the event of a change of control subject to payment of a change of control premium.
Stock Options
The Company has 3,818,500 stock options outstanding as at August 10, 2015.
Share Purchase Warrants
The Company has no share purchase warrants outstanding as at August 10, 2015.
ADDITIONAL INFORMATION
Additional information about the Company is available on SEDAR at http://www.sedar.com.
Merus Labs International Inc. |
Condensed Consolidated Interim Statements of Financial Position |
(Unaudited) |
(Expressed in Canadian dollars) |
As at: | June 30 | September 30 | ||||||||
2015 | 2014 | |||||||||
Assets | ||||||||||
Current assets | ||||||||||
Cash and cash equivalents | $ | 41,582,764 | $ | 14,358,567 | ||||||
Short-term investments | 5,568 | 5,002 | ||||||||
Trade and other receivables | 6,804,792 | 4,072,304 | ||||||||
Inventories | 3,321,122 | 2,606,568 | ||||||||
Derivative assets | note 3 | - | 269,699 | |||||||
Prepaid expenses | 223,609 | 128,281 | ||||||||
51,937,855 | 21,440,421 | |||||||||
Non-current assets | ||||||||||
Property and equipment | note 4 | 114,970 | 128,593 | |||||||
Intangible assets | notes 2, 5 | 194,609,108 | 176,624,352 | |||||||
Total assets | $ | 246,661,933 | $ | 198,193,366 | ||||||
Liabilities and Equity | ||||||||||
Current liabilities | ||||||||||
Accounts payable and accrued liabilities | 3,416,308 | 4,169,095 | ||||||||
Income taxes payable | 1,358,674 | 997,102 | ||||||||
Derivative liabilities | note 3 | 304,732 | - | |||||||
Long term debt due within one year | note 7 | 15,247,658 | 15,348,386 | |||||||
20,327,372 | 20,514,583 | |||||||||
Non-current liabilities | ||||||||||
Provisions | note 6 | 188,408 | 330,789 | |||||||
Long term debt | note 7 | 51,125,294 | 62,712,009 | |||||||
Total liabilities | 71,641,074 | 83,557,381 | ||||||||
Equity | ||||||||||
Share capital | note 8 | 184,534,553 | 123,808,971 | |||||||
Equity reserve | note 8 | 36,739,784 | 35,132,914 | |||||||
Preferred shares | note 9 | 9,947,730 | 9,947,730 | |||||||
Accumulated deficit | (61,294,126 | ) | (61,033,735 | ) | ||||||
Accumulated other comprehensive income | 5,092,918 | 6,780,105 | ||||||||
Total equity | 175,020,859 | 114,635,985 | ||||||||
Total liabilities and equity | $ | 246,661,933 | $ | 198,193,366 |
Commitments and contingencies (note 10) | |
Approved on behalf of the Board: | |
(signed) | (signed) |
Tim Sorensen, | Dave Guebert, |
Director | Director |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements
Merus Labs International Inc. |
Condensed Consolidated Interim Statements of Operations |
(Unaudited) |
(Expressed in Canadian dollars) |
Three months ended June 30 | Nine months ended June 30 | |||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||||
Revenues | $ | 9,505,483 | $ | 7,184,909 | $ | 32,813,946 | $ | 20,132,416 | ||||||||||
Cost of goods sold | 812,503 | 1,367,062 | 3,515,261 | 3,561,579 | ||||||||||||||
Gross margin | 8,692,980 | 5,817,847 | 29,298,685 | 16,570,837 | ||||||||||||||
Operating expenses: | ||||||||||||||||||
Sales and marketing | 252,332 | 568,593 | 737,831 | 2,318,642 | ||||||||||||||
General and administrative | note 8 | 2,686,567 | 1,738,254 | 7,293,857 | 5,432,794 | |||||||||||||
Amortization of intangible assets | note 5 | 6,165,104 | 3,092,753 | 17,853,026 | 9,191,164 | |||||||||||||
Depreciation | note 4 | 3,833 | 1,419 | 11,524 | 3,193 | |||||||||||||
Foreign exchange (gains) losses | note 3 | (83,068 | ) | (253,982 | ) | (1,445,584 | ) | 448,953 | ||||||||||
9,024,768 | 5,147,037 | 24,450,654 | 17,394,746 | |||||||||||||||
Operating income (loss) | (331,788 | ) | 670,810 | 4,848,031 | (823,909 | ) | ||||||||||||
Interest expense | 1,155,890 | 706,922 | 4,135,300 | 2,276,636 | ||||||||||||||
Investment (income) expense | 46 | 1,495 | (566 | ) | 7,949 | |||||||||||||
Earnings (loss) before income taxes | (1,487,724 | ) | (37,607 | ) | 713,297 | (3,108,494 | ) | |||||||||||
Income tax expense | note 12 | 118,616 | 134,059 | 370,948 | 404,118 | |||||||||||||
Net income (loss) for the period | (1,606,340 | ) | (171,666 | ) | $ | 342,349 | $ | (3,512,612 | ) | |||||||||
Earnings (loss) per share | ||||||||||||||||||
Basic | $ | (0.02 | ) | $ | - | $ | - | $ | (0.08 | ) | ||||||||
Diluted | $ | (0.02 | ) | $ | - | $ | - | $ | (0.08 | ) | ||||||||
Weighted average number of common shares outstanding - basic | 95,296,670 | 54,027,137 | 85,935,150 | 44,018,351 | ||||||||||||||
Weighted average number of common shares outstanding - diluted | 96,131,772 | 54,027,137 | 86,633,193 | 44,018,351 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements
Merus Labs International Inc. |
Condensed Consolidated Interim Statements of Comprehensive Income (Loss) |
(Unaudited) |
(Expressed in Canadian dollars) |
Three months ended June 30 | Nine months ended June 30 | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net income (loss) for the period | $ | (1,606,340 | ) | $ | (171,666 | ) | $ | 342,349 | $ | (3,512,612 | ) | |||||
Other comprehensive income (loss) | ||||||||||||||||
Items that may be reclassified to income: | ||||||||||||||||
Currency translation differences | 4,852,572 | (2,898,841 | ) | (1,687,187 | ) | 3,224,863 | ||||||||||
Other comprehensive income (loss) for the period | 4,852,572 | (2,898,841 | ) | (1,687,187 | ) | 3,224,863 | ||||||||||
Total comprehensive income (loss) | $ | 3,246,232 | $ | (3,070,507 | ) | $ | (1,344,838 | ) | $ | (287,749 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements
Merus Labs International Inc. |
Condensed Consolidated Interim Statements of Cash Flows |
(Unaudited) |
(Expressed in Canadian dollars) |
Nine months ended June 30 | ||||||||
2015 | 2014 | |||||||
Operating activities | ||||||||
Net income (loss) for the period | $ | 342,349 | $ | (3,512,612 | ) | |||
Adjustments for the following items: | ||||||||
Amortization of intangible assets | 17,853,026 | 9,191,164 | ||||||
Depreciation | 11,524 | 3,193 | ||||||
Interest expense | 4,135,300 | 2,276,636 | ||||||
Income tax expense | 370,948 | 404,118 | ||||||
Unrealized (gains) losses on foreign exchange | 342,664 | 134,999 | ||||||
Share-based compensation | 2,036,464 | 1,135,012 | ||||||
Change in fair value of derivative financial instruments | 574,431 | (27,089 | ) | |||||
Change in fair value of long-term debt | (186,178 | ) | - | |||||
Interest paid | (3,636,565 | ) | (1,899,374 | ) | ||||
Net change in non-cash working capital balances: | ||||||||
Provisions | (142,381 | ) | 94,932 | |||||
Trade and other receivables | (2,732,488 | ) | 4,607,903 | |||||
Prepaid expenses | (95,328 | ) | (78,552 | ) | ||||
Inventories | (714,554 | ) | (1,900,733 | ) | ||||
Accounts payable and accrued liabilities | (752,787 | ) | (1,140,733 | ) | ||||
Income taxes payable | - | - | ||||||
Net cash provided by operating activities | 17,406,425 | 9,288,864 | ||||||
Financing activities | ||||||||
Repayment of long-term debt | (12,000,000 | ) | (6,300,000 | ) | ||||
Proceeds from prospectus offering | 59,562,323 | 50,846,979 | ||||||
Proceeds from exercise of stock options | 733,665 | - | ||||||
Dividends paid on preferred shares | (602,740 | ) | - | |||||
Net cash provided by financing activities | 47,693,248 | 44,546,979 | ||||||
Investing activities: | ||||||||
Product acquisitions | (36,439,154 | ) | - | |||||
Capitalized development costs | (1,435,756 | ) | - | |||||
Short-term investments | (566 | ) | 36,017 | |||||
Purchase of property and equipment | - | 107,780 | ||||||
Net cash (used in) provided by investing activities | (37,875,476 | ) | 143,797 | |||||
Net change in cash and cash equivalents | 27,224,197 | 53,979,640 | ||||||
Cash and cash equivalents,beginning of period | 14,358,567 | 8,084,367 | ||||||
Cash and cash equivalents, end of period | $ | 41,582,764 | $ | 62,064,007 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements
Merus Labs International Inc. |
Condensed Consolidated Interim Statements of Changes in Equity |
(Unaudited) |
(Expressed in Canadian dollars) |
Share capital | Equity reserve | Preferred Shares | Convertible debt - equity component | Accumulated deficit | Accumulated other comprehensive income (AOCI) | Total equity | ||||||||||||||||||||||
Balance, September 30, 2013 | $ | 56,014,232 | $ | 33,881,330 | $ | - | $ | 1,313,550 | $ | (52,972,037 | ) | $ | 5,681,546 | $ | 43,918,621 | |||||||||||||
Share-based compensation (note 8) | - | 1,135,012 | - | - | - | - | 1,135,012 | |||||||||||||||||||||
Net loss for the period | - | - | - | - | (3,512,612 | ) | - | (3,512,612 | ) | |||||||||||||||||||
Other comprehensive income | - | - | - | - | - | 3,384,258 | 3,384,258 | |||||||||||||||||||||
Balance, June 30, 2014 | $ | 56,014,232 | $ | 35,016,342 | $ | - | $ | 1,313,550 | $ | (56,484,649 | ) | $ | 9,065,804 | $ | 44,925,279 | |||||||||||||
Balance, September 30, 2014 | $ | 123,808,971 | $ | 35,132,914 | $ | 9,947,730 | $ | - | $ | (61,033,735 | ) | $ | 6,780,105 | $ | 114,635,985 | |||||||||||||
Prospectus offering (note 13) | 59,562,323 | - | - | - | - | - | 59,562,323 | |||||||||||||||||||||
Share-based compensation (note 8) | - | 2,036,464 | - | - | - | - | 2,036,464 | |||||||||||||||||||||
Cancellation of shares in escrow (note 8) | (68,333 | ) | 68,333 | - | - | - | - | - | ||||||||||||||||||||
Stock option exercise | 1,231,592 | (497,927 | ) | - | - | - | - | 733,665 | ||||||||||||||||||||
Net income for the period | - | - | - | - | 342,349 | - | 342,349 | |||||||||||||||||||||
Dividends to preferred shareholders (note 9) | - | - | - | - | (602,740 | ) | - | (602,740 | ) | |||||||||||||||||||
Other comprehensive loss | - | - | - | - | - | (1,687,187 | ) | (1,687,187 | ) | |||||||||||||||||||
Balance, June 30, 2015 | $ | 184,534,553 | $ | 36,739,784 | $ | 9,947,730 | $ | - | $ | (61,294,126 | ) | $ | 5,092,918 | $ | 175,020,859 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements
Merus Labs International Inc. |
Notes to Condensed Consolidated Interim Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
For the three and nine months ended June 30, 2015 and 2014 |
1. | Presentation of Financial Statements |
Nature of Business
Merus Labs International Inc., incorporated under the Business Corporations Act (British Columbia), and its subsidiaries (the “Company”), operate in Canada and Europe. The head office of the Company is 100 Wellington St. West, Ste. 2110, Toronto, Ontario M5K 1H1. The Company is a specialty pharmaceutical company engaged in the acquisition and licensing of branded prescription pharmaceutical products.
Basis of Preparation
These unaudited condensed consolidated interim financial statements (“interim financial statements”) of the Company have been prepared on a historical cost basis, except for certain financial assets which are presented at fair value, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IASB”) (“IFRS”) for interim financial statements. The interim financial statements have been prepared on a basis consistent with the Company’s annual audited consolidated financial statements for the year ended September 30, 2014. The interim financial statements are in compliance with International Accounting Standard 34,Interim Financial Reporting(“IAS 34”). Accordingly, certain information and note disclosure normally included in annual financial statements prepared in accordance with IFRS, have been omitted or condensed. During the quarter ended June 30, 2015, there were no significant changes in accounting policies or their application.
The preparation of the Company’s interim financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the end of the reporting period. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements have been set out in note 2 of the Company’s annual audited consolidated financial statements for the year ended September 30, 2014. These interim financial statements should be read in conjunction with the Company’s annual audited consolidated financial statements for the year ended September 30, 2014.
These interim financial statements were authorized for issue by the Company’s Board of Directors on August 10, 2015.
Merus Labs International Inc. |
Notes to Condensed Consolidated Interim Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
For the three and nine months ended June 30, 2015 and 2014 |
2. | Acquisitions |
Salagen and Estraderm
On May 21, 2015, the Company acquired the rights to manufacture, market, and sell two established specialty pharmaceutical products in certain European and other markets.
Salagen ® (pilocarpine hydrochloride) is indicated for xerostomia following radiation therapy, in addition to Sjogren's syndrome. Estraderm MX® is a transdermal delivery format of estradiol used for symptomatic treatment of menopause.
Pursuant to the acquisition, the Company acquired the product rights, certain related intellectual property, and other information and materials required to continue marketing and selling the brands in the territories acquired. Total consideration for the product acquisition was US$29,500,000 funded from cash on hand. The transaction was accounted for as the acquisition of assets.
Costs incurred to complete the acquisition were approximately $73,000, which were capitalized to the cost of the assets acquired. The fair value of the acquired identifiable net assets was $36,439,154 (US$29,500,000 plus transaction costs) and was allocated as follows:
Product rights - Salagen | $ | 27,818,515 | ||
Product rights - Estraderm | 8,620,639 | |||
Net assets acquired | $ | 36,439,154 |
Sintrom
On September 8, 2014, the Company acquired the European rights to manufacture, market, and sell the branded prescription medicine product Sintrom.
Pursuant to the acquisition, the Company acquired the Sintrom product rights, certain related intellectual property, and other information and materials required to continue marketing and selling the brand in the territories acquired. Total consideration for the product acquisition was US$111,000,000. Approximately US$53,000,000 of the upfront cash payment was funded through a new $80,000,000 debt facility from a syndicate of Canadian commercial lenders, with the remainder funded from cash on hand (note 7). The transaction was accounted for as an asset acquisition.
Merus Labs International Inc. |
Notes to Condensed Consolidated Interim Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
For the three and nine months ended June 30, 2015 and 2014 |
Costs incurred to complete the acquisition were approximately $157,000, which were capitalized to the cost of the assets acquired. The fair value of the acquired identifiable net assets was $121,512,827 (US$111,000,000 plus transaction costs) and was allocated as follows:
Product rights | $ | 121,512,827 | ||
Net assets acquired | $ | 121,512,827 |
3. | Derivative financial instruments |
June 30 | September 30 | |||||||
2015 | 2014 | |||||||
Assets: | ||||||||
Forward foreign exchange contracts | $ | - | $ | 269,699 | ||||
Total derivative assets | $ | - | $ | 269,699 | ||||
Liabilities: | ||||||||
Forward foreign exchange contracts | $ | 118,555 | $ | - | ||||
Interest rate swap | 186,177 | - | ||||||
Total derivative liabilities | $ | 304,732 | $ | - |
In connection with its European operations, the Company uses foreign currency contracts in order to partially hedge the risk associated with its Euro currency source revenue. At June 30, 2015, the Company had forward foreign exchange contracts outstanding with a notional principal amount of $13,850,000 (September 30, 2014: $4,861,370). For the nine months ended June 30, 2015, gains of $12,855 (June 30, 2014: losses of $343,570) were recognized in foreign exchange (gains) losses in the statements of operations in connection with these contracts.
In accordance with the terms of the Company’s long-term debt (note 7), during the second quarter the Company entered into an interest rate swap for 50% of the outstanding balance, effectively fixing the rate on that portion of the loan at 5.72% until maturity. At June 30, 2015 the fair value of the interest rate swap contract represented a liability to the Company.
Merus Labs International Inc. |
Notes to Condensed Consolidated Interim Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
For the three and nine months ended June 30, 2015 and 2014 |
4. | Property and equipment |
Continuity of property and equipment as at June 30, 2015 was as follows:
Computer | Furniture | Manufacturing | Total | |||||||||||||
Equipment | and Fixtures | Equipment | ||||||||||||||
Cost at September 30, 2014 | $ | 2,615 | $ | 11,790 | $ | 120,758 | $ | 135,163 | ||||||||
Foreign exchange differences | (45 | ) | (30 | ) | (2,065 | ) | (2,140 | ) | ||||||||
Cost at June 30, 2015 | $ | 2,570 | $ | 11,760 | $ | 118,693 | $ | 133,023 | ||||||||
Accumulated Depreciation at September 30, 2014 | $ | 1,786 | $ | 4,784 | $ | - | $ | 6,570 | ||||||||
Depreciation charge | 612 | 2,007 | 8,905 | 11,524 | ||||||||||||
Foreign exchange differences | (31 | ) | (7 | ) | (3 | ) | (41 | ) | ||||||||
Accumulated Depreciation at June 30, 2015 | $ | 2,367 | $ | 6,784 | $ | 8,902 | $ | 18,053 | ||||||||
Carrying amount at September 30, 2014 | $ | 829 | $ | 7,006 | $ | 120,758 | $ | 128,593 | ||||||||
Carrying amount at June 30, 2015 | $ | 203 | $ | 4,976 | $ | 109,791 | $ | 114,970 |
Merus Labs International Inc. |
Notes to Condensed Consolidated Interim Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
For the three and nine months ended June 30, 2015 and 2014 |
5. | Intangible assets |
Continuity of intangible assets as at June 30, 2015 was as follows:
Product Rights | Patents | Total | ||||||||||
Cost at September 30, 2014 | $ | 192,808,581 | $ | 21,961,923 | $ | 214,770,504 | ||||||
Product acquisitions (note 2) | 36,439,154 | - | 36,439,154 | |||||||||
Additions arising from internal development | 1,435,756 | - | 1,435,756 | |||||||||
Foreign exchange differences | (2,055,564 | ) | (375,524 | ) | (2,431,088 | ) | ||||||
Cost at June 30, 2015 | $ | 228,627,927 | $ | 21,586,399 | $ | 250,214,326 | ||||||
Accumulated Amortization at September 30, 2014 | $ | 27,324,473 | $ | 10,821,679 | $ | 38,146,152 | ||||||
Amortization charge | 14,263,977 | 3,589,049 | 17,853,026 | |||||||||
Foreign exchange differences | (207,598 | ) | (186,362 | ) | (393,960 | ) | ||||||
Accumulated amortization at June 30, 2015 | $ | 41,380,852 | $ | 14,224,366 | $ | 55,605,218 | ||||||
Carrying amount at September 30, 2014 | $ | 165,484,108 | $ | 11,140,244 | $ | 176,624,352 | ||||||
Carrying amount at June 30, 2015 | $ | 187,247,075 | $ | 7,362,033 | $ | 194,609,108 |
6. | Provisions |
Nine months ended June 30, 2015 | Twelve months ended September 30, 2014 | |||||||
Balance at beginning of period | $ | 330,789 | $ | 283,273 | ||||
Charges | 140,902 | 695,864 | ||||||
Utilization | (289,014 | ) | (644,362 | ) | ||||
Foreign exchange | 5,731 | (3,986 | ) | |||||
Balance at end of period | $ | 188,408 | $ | 330,789 | ||||
Less: current portion of provisions | - | - | ||||||
Non-current portion of provisions | $ | 188,408 | $ | 330,789 |
The Company’s provisions are comprised of the following product-related liabilities:
Product Returns Liability:
The Company accepts all product returns relating to North American and certain European product sales. Management estimates the fair value of the product returns liability by taking into consideration the amount of units previously sold, returns experience to date, expiry of product currently in inventory, forecast sales volumes, and changes in the marketplace.
Merus Labs International Inc. |
Notes to Condensed Consolidated Interim Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
For the three and nine months ended June 30, 2015 and 2014 |
7. | Long-term debt |
June 30 2015 | September 30 2014 | |||||||
Current | ||||||||
Secured facility, net of unamortized transaction costs of $566,164 and fair value adjustment of $186,178 | $ | 15,247,658 | $ | 15,348,386 | ||||
Total | $ | 15,247,658 | $ | 15,348,386 | ||||
Non-Current | ||||||||
Secured facility, net of unamortized transaction costs of $874,706 | $ | 51,125,294 | $ | 62,712,009 | ||||
Total | $ | 51,125,294 | $ | 62,712,009 |
On September 5, 2014, the Company entered into a new secured debt facility with a syndicate of Canadian lenders. The new facility provided additional funds for the purchase of Sintrom and refinanced the Company's existing senior secured debt at a lower rate and extended term. The new facility matures September 5, 2019 and provides for an $80 million term loan, currently at the Canadian BA rate plus 4.5%, with principal repayments of $4,000,000 per quarter and monthly interest payments.
In accordance with the terms of the loan, during the second quarter the Company entered into an interest rate swap for 50% of the outstanding balance, effectively fixing the rate on that portion of the loan at 5.72% until maturity.
The facility is secured by all assets of the Company and contains affirmative and negative covenants including compliance with laws and restrictions on additional debt, as well as financial covenants such as debt to earnings and fixed charge coverage ratios. The Company was in compliance with all covenants of the senior secured facility as at June 30, 2015. Finance costs of $1,986,786 were capitalized to the loan balance and will be amortized over the term of the loan.
Merus Labs International Inc. |
Notes to Condensed Consolidated Interim Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
For the three and nine months ended June 30, 2015 and 2014 |
8. | Share capital |
(a) Authorized:
Unlimited common shares without par value.
Issued:
Nine months ended June 30, 2015 | Year ended September 30, 2014 | |||||||||||||||
Number of shares | Amount | Number of shares | Amount | |||||||||||||
Balance,beginning of period | 81,245,724 | $ | 123,808,971 | 38,391,512 | $ | 56,014,232 | ||||||||||
Common shares cancelled pursuant to escrow agreement | (33,333 | ) | (68,333 | ) | - | - | ||||||||||
Common shares issued pursuant to prospectus offerings | 20,672,750 | 59,562,323 | 31,929,750 | 50,846,979 | ||||||||||||
Common shares issued on conversion of debenture | - | - | 6,677,918 | 10,140,598 | ||||||||||||
Common shares issued pursuant to acquisition | - | - | 4,246,544 | 6,807,162 | ||||||||||||
Common shares issued pursuant to options exercise | 416,500 | 1,231,592 | - | - | ||||||||||||
Balance,end of period | 102,301,341 | $ | 184,534,553 | 81,245,724 | $ | 123,808,971 |
(b) Escrow shares
On December 4, 2014, the Company cancelled 33,333 shares still held in escrow pursuant to the acquisition of Orbis Pharma, Inc. As per the terms of the agreement, any shares remaining in escrow were cancelled upon termination of employment of the Company's former Chief Executive Officer in October 2014.
(c) Prospectus offerings
On April 30, 2015, the Company completed a prospectus offering of 20,672,750 shares, including the underwriter over-allotment option, at a price of $3.05 per share for gross proceeds of $63,051,888. Proceeds were used for acquisitions and general corporate purposes. Costs of the offering were approximately $3,489,000.
Merus Labs International Inc. |
Notes to Condensed Consolidated Interim Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
For the three and nine months ended June 30, 2015 and 2014 |
On June 19, 2014, the Company closed a prospectus offering of 18,400,000 shares, including the underwriter over-allotment option, at a price of $1.70 per share for gross proceeds of $31,280,000. Proceeds were used for acquisitions and general corporate purposes. Costs of the offering were approximately $2,017,000.
On March 25, 2014, the Company closed a prospectus offering of 11,765,000 shares at a price of $1.70 per share for gross proceeds of $20,000,500. Additionally, on June 30, 2014, the underwriters exercised their over-allotment option on the offering, resulting in an additional issuance of 1,764,750 shares for gross proceeds of $3,000,075. Proceeds were used for acquisitions and general corporate purposes. Costs of the offering were approximately $1,416,000.
(d) Conversion of debenture
On July 17, 2014, the Company notified the holder of its convertible debenture that it had achieved the threshold required to force conversion into common shares as per the terms of the arrangement. As such, the Company issued 6,677,918 shares in satisfaction of the outstanding principal and accrued interest to the date of conversion. |
(e) Acquisitions
On August 14, 2014, the Company completed an acquisition agreement with Dacha Strategic Metals Inc. (“Dacha”). The acquisition agreement provided that Dacha convert its liquid assets into cash and cash equivalents and contribute the proceeds to a new subsidiary. The purchase price was equal to the total value of the cash held by the newly incorporated subsidiary, being $6,975,001 and was paid for by the issuance to Dacha of the Company's common shares valued at $1.70 per share, subject to certain purchase price adjustments. Costs of the acquisition were approximately $168,000. |
(f) Stock option plan
The Company has reserved 10,230,134 common shares under a 10% rolling reloading stock option plan. Under the plan, the options are exercisable for one common share and the exercise price of the option must equal the market price of the underlying share at the grant date. The options have vesting periods ranging from the date of grant up to three years. Once vested, options are exercisable at any time until expiry.
In May 2014, the Company granted 150,000 options to a new director. The options have a term of five years, vesting immediately, with an exercise price of $1.69 per share. In addition, the Company granted 75,000 options to an advisor to the Board of Directors. The options are exercisable at $1.70 for a period of five years and vest on April 23, 2014.
In September 2014, the Company granted 200,000 options to an executive officer. The options have a term of five years, with one half vesting immediately and the remainder vesting on the first anniversary of the date of grant and an exercise price of $1.63 per share.
In November 2014, the Company granted 50,000 options to a consultant. The options have a term of five years, vesting immediately, with an exercise price of $1.69 per share.
Merus Labs International Inc. |
Notes to Condensed Consolidated Interim Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
For the three and nine months ended June 30, 2015 and 2014 |
In December 2014, the Company granted 300,000 options to an executive officer in connection with his employment agreement. The options have a term of five years, with one half vesting immediately and the remainder vesting on the first anniversary of the date of grant. The options have an exercise price of $1.88 per share.
In January 2015, the Company granted 1,210,000 options to directors, management and employees in connection with the annual incentive program. The options have a term of five years, with one half vesting immediately and the remainder vesting on the first anniversary of the date of grant. The options have an exercise price of $1.75 per share.
In March 2015, the Company granted a total of 225,000 options to a new director and a new executive officer in connection with their services. The options have a term of five years, with one third vesting immediately, one third on the first anniversary date and the remainder vesting on the second anniversary of the date of grant. The options have an exercise price of $2.73 per share.
In May 2015, the Company granted 150,000 options to a new executuive. The options have a term of five years, with one third vesting immediately, one third on the first anniversary date and the remainder vesting on the second anniversary of the date of grant. The options have an exercise price of $2.92 per share.
The estimated fair value of the options granted during the three months ended June 30, 2015, using the Black-Scholes option pricing model, was $250,065 (2014: $155,164). $353,877 was expensed in the financial statements during the three months ended June 30, 2015 (2014: $346,672) relating to current and prior period grants and has been included in general and administrative expenses in the statement of operations and in equity as equity reserves. The remaining expense will be recognized over the balance of the vesting periods.
(g) Stock option details
The fair value of each option granted was estimated on the date of the grant using the Black-Scholes fair value option pricing model with the following assumptions:
Nine months ended June 30 | ||||||||
2015 | 2014 | |||||||
Weighted-average fair value of options | $ | 1.15 | $ | 1.09 | ||||
Risk-free interest rate | 1.24 | % | 2.0 | % | ||||
Volatility of the Company's common shares | 71 | % | 74 | % | ||||
Weighted average expected life of the options | 5 years | 5 years | ||||||
Forfeiture rate | 8.7 | % | 0 | % | ||||
Expected dividends | Nil | Nil |
Volatility was determined based on daily observations of the historical stock price over a period consistent with the expected life of the options at the date of grant.
Merus Labs International Inc. |
Notes to Condensed Consolidated Interim Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
For the three and nine months ended June 30, 2015 and 2014 |
Details of the options are as follows:
Number of | Weighted average | |||||||
options | price per share | |||||||
Options outstanding, September 30, 2013 | 2,465,000 | $ | 1.90 | |||||
Options granted | 1,525,000 | 1.75 | ||||||
Options expired | (200,000 | ) | 2.03 | |||||
Options forfeited | (333,333 | ) | 1.94 | |||||
Options outstanding, September 30, 2014 | 3,456,667 | $ | 1.82 | |||||
Options granted | 1,935,000 | 1.97 | ||||||
Options expired | (1,006,667 | ) | 2.01 | |||||
Options forfeited | (150,000 | ) | 1.73 | |||||
Options exercised | (416,500 | ) | 1.76 | |||||
Options outstanding, June 30, 2015 | 3,818,500 | $ | 1.86 |
The range of exercise prices for outstanding and exercisable options at June 30, 2015 are as follows:
Number | Weighted Average | Number | ||||||||||||
Exercise Price | Outstanding | Contractual Life | Exercisable | |||||||||||
$0.51 | 8,500 | 2.87 | 8,500 | |||||||||||
$0.91 | 150,000 | 3.02 | 150,000 | |||||||||||
$1.19 | 50,000 | 2.53 | 50,000 | |||||||||||
$1.49 | 75,000 | 3.51 | 25,000 | |||||||||||
$1.63 | 200,000 | 4.24 | 100,000 | |||||||||||
$1.69 | 200,000 | 4.03 | 200,000 | |||||||||||
$1.70 | 75,000 | 3.90 | 75,000 | |||||||||||
$1.75 | 1,060,000 | 4.57 | 530,000 | |||||||||||
$1.80 | 675,000 | 3.68 | 450,000 | |||||||||||
$1.88 | 300,000 | 4.48 | 150,000 | |||||||||||
$2.00 | 450,000 | 1.07 | 450,000 | |||||||||||
$2.02 | 200,000 | 1.56 | 200,000 | |||||||||||
$2.73 | 225,000 | 4.74 | 75,000 | |||||||||||
$2.92 | 150,000 | 4.91 | 5,000 | |||||||||||
3,818,500 | 2,513,500 |
Merus Labs International Inc. |
Notes to Condensed Consolidated Interim Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
For the three and nine months ended June 30, 2015 and 2014 |
(h) Performance Share Unit Plan
In December 2014 the Company granted 800,000 Performance Share Units to an executive officer in connection with his employment agreement. The grant was subject to the Performance Share Unit Plan (the "Plan") being approved by the Board of Directors as well as regulatory and shareholder approval. In January 2015, the Board approved the Plan, subject to ratification by the shareholders, in addition to approving the grant of 150,000 Units to two other executive officers. The plan was approved by the Company's shareholders on March 26, 2015. During the three months ended June 30, 2015, 90,000 Units were forfeited in connection with a resignation, while 100,000 new Units were issued to a new executive, leaving 960,000 Units currently outstanding. Share based compensation expense in the amount of $293,748 was recognized in the nine months ended June 30, 2015 in connection with these grants. The purpose of the plan is to provide the Company with greater flexibility with respect to equity compensation arrangements.
9. | Preferred shares |
On July 11, 2014, the Company completed a private placement subscription agreement to issue $10,000,000 of Series A convertible preferred shares (the “Series A Preferred Shares”) to a large Canadian institutional investor.
The Series A Preferred Shares pay a dividend of 8% per annum, subject to adjustment if the Company does not redeem after October 31, 2019. At any time at the option of the holder, the Series A Preferred Shares may be converted into the Company’s common shares at a conversion price of $2.20 per share. The Series A Preferred Shares are redeemable at the option of the Company at any time after October 31, 2019. The Series A Preferred Shares are also redeemable by the Company at any time in the event of a change of control subject to payment of a change of control premium. Costs associated with this transaction were approximately $52,000. Dividends paid on the Preferred Shares are included in the Statements of Changes in Equity.
Merus Labs International Inc. |
Notes to Condensed Consolidated Interim Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
For the three and nine months ended June 30, 2015 and 2014 |
10. | Commitments and contingencies |
(a) Operating lease commitments
The Company has entered into non-cancellable operating lease agreements for office premises and equipment with minimum annual lease payments to expiry as follows:
June 30 2015 | September 30 2014 | |||||||
Less than 1 year | $ | 105,576 | $ | 114,295 | ||||
1 to 2 years | 105,576 | 105,576 | ||||||
2 to 3 years | 52,788 | 105,576 | ||||||
3 to 4 years | - | 26,394 | ||||||
Thereafter | - | - | ||||||
Total | $ | 263,940 | $ | 351,841 |
Lease expense recognized during the nine month period was $136,808 (2014: $194,699), which has been included in general and administrative expenses in the statements of operations.
(b) Legal proceedings
Notice of Allegation
In June 2014, Merus received notification from Apotex Inc. that it has filed with Health Canada an Abbreviated New Drug Submission seeking market approval for a generic version of Enablex for the Canadian marketplace. In connection with this filing, Merus received Notices of Allegation (“NOAs”) from Apotex against the Company’s Enablex patents listed on the Canadian patent register which expire in August of 2016 and beyond. The NOAs were issued under the Canada Patented Medicines (Notice of Compliance) Regulations. Enablex is currently protected in Canada by three issued patents listed on the Canadian patent register.
In March 2015, the Company entered into a settlement agreement with Apotex. The terms of the settlement agreement are confidential but are not financially material. The Company plans to continue with the marketing of Enablex® to urologists and other medical practitioners across Canada into the foreseeable future.
Arbitration Proceeding
In August 2014, Merus received notice of a request for arbitration from the original owner of Merus’ former Factive product. The request for arbitration is based on the original license agreement entered into by the original owner and Cornerstone Therapeutics, Inc. (now Chiesi USA, Inc.). The request for arbitration names Merus as a respondent together with Cornerstone and Vansen. The request for arbitration includes the allegation that Cornerstone did not have the legal right to transfer the Factive product to Merus. The original owner is seeking an award for damages relating to an alleged breach of contract, as well as disgorgement of revenues and other benefits derived by the Company from sales of Factive. The Company is defending the claim and has denied any liability to the original owner. The Company and Cornerstone have each asserted claims against the other, seeking indemnity and damages related to the original owner’s claim.
Merus Labs International Inc. |
Notes to Condensed Consolidated Interim Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
For the three and nine months ended June 30, 2015 and 2014 |
11. | Related party transactions |
At June 30, 2015, there were no amounts owing to or from related parties. The remuneration of directors and other members of key management personnel recorded in the general and administrative line of operating expenses are as follows:
Three months ended June 30 | Nine months ended June 30 | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Salaries | $ | 320,519 | $ | 290,815 | $ | 1,159,311 | $ | 877,516 | ||||||||
Share based compensation | 600,942 | 346,672 | 2,036,434 | 1,135,012 | ||||||||||||
$ | 921,461 | $ | 637,487 | $ | 3,195,745 | $ | 2,012,528 |
12. | Income taxes |
The major components of income tax expense for the three and nine months ended June 30, 2015 and 2014 are:
Three months ended June 30 | Nine months ended June 30 | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Income tax recognized in statements of operations | ||||||||||||||||
Current tax | $ | 118,616 | $ | 134,059 | $ | 370,948 | $ | 404,118 | ||||||||
Provision for income taxes | $ | 118,616 | $ | 134,059 | $ | 370,948 | $ | 404,118 |
The Company has recognized an estimated current tax expense based on an approximation of tax liabilities due with respect to its operations in Luxembourg.
Merus Labs International Inc. |
Notes to Condensed Consolidated Interim Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
For the three and nine months ended June 30, 2015 and 2014 |
13. | Management of capital |
The Company includes the following in its definition of capital:
June 30 | September 30 | |||||||
2015 | 2014 | |||||||
Debt comprised of: | ||||||||
Secured facility | $ | 66,372,952 | $ | 78,060,395 | ||||
Equity comprised of: | ||||||||
Share capital | 184,534,553 | 123,808,971 | ||||||
Equity reserve | 36,739,784 | 35,132,914 | ||||||
Preferred shares | 9,947,730 | 9,947,730 | ||||||
Deficit and AOCI | (56,201,208 | ) | (54,253,630 | ) | ||||
$ | 241,393,811 | $ | 192,696,380 |
The Company’s objectives when managing capital are:
(a) | to allow the Company to respond to changes in economic and/or marketplace conditions; |
(b) | to give shareholders sustained growth in shareholder value by increasing shareholders’ equity; |
(c) | to ensure that the Company maintains the level of capital necessary to meet the requirements of its long-term debt; |
(d) | to comply with financial covenants required under its debt facilities; and |
(e) | to maintain a flexible capital structure which optimizes the cost of capital at acceptable levels of risk |
The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of its underlying assets. The Company maintains or adjusts its capital level to enable it to meet its objectives by:
(a) | raising capital through equity financings; |
(b) | utilizing leverage in the form of third party debt; and |
(c) | realizing proceeds from the disposition of its investments |
The Company is not subject to any capital requirements imposed by a regulator. The Company is subject to certain capital requirements and negative covenants with respect to its Secured Facility (refer to note 7). There were no changes in the Company’s approach to capital management during the year. To date, the Company has not declared any cash dividends to its common shareholders as part of its capital management program. The Company’s management is responsible for the management of capital and monitors the Company’s use of various forms of leverage on a regular basis.
Merus Labs International Inc. |
Notes to Condensed Consolidated Interim Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
For the three and nine months ended June 30, 2015 and 2014 |
14. | Financial instruments and financial risk management |
a) Fair Value Estimation
The Company’s carrying value of cash and cash equivalents, short-term investments, trade and other receivables, loan receivable and accounts payable and accrued liabilities approximate their fair values due to the immediate or short term maturity of these instruments. The fair value of long-term liabilities is not materially different than its carrying value due to the recent issuance of these liabilities.
Carrying value and fair value of financial assets and liabilities are summarized as follows:
June 30, 2015 | ||||||||
Classification | Carrying value | Fair value | ||||||
Financial assets at FVTPL | $ | $ | ||||||
- Short-term investments | 5,568 | 5,568 | ||||||
Loans and receivables | ||||||||
- Cash and cash equivalents | 41,582,764 | 41,582,764 | ||||||
- Trade and other receivables | 6,804,792 | 6,804,792 | ||||||
Other financial liabilities | ||||||||
- Accounts payable and accrued liabilities | 3,416,308 | 3,416,308 | ||||||
- Derivative liabilities used for hedging | 304,732 | 304,732 | ||||||
- Long term debt | 66,372,952 | 67,813,823 |
September 30, 2014 | ||||||||
Classification | Carrying value | Fair value | ||||||
Financial assets at FVTPL | $ | $ | ||||||
- Short-term investments | 5,002 | 5,002 | ||||||
- Derivative assets used for hedging | 269,699 | 269,699 | ||||||
Loans and receivables | ||||||||
- Cash and cash equivalents | 14,358,567 | 14,358,567 | ||||||
- Trade and other receivables | 4,072,304 | 4,072,304 | ||||||
Other financial liabilities | ||||||||
- Accounts payable and accrued liabilities | 4,169,095 | 4,169,095 | ||||||
- Long term debt | 78,060,395 | 80,000,000 |
Merus Labs International Inc. |
Notes to Condensed Consolidated Interim Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
For the three and nine months ended June 30, 2015 and 2014 |
The Company is required to present information about its financial assets and liabilities with respect to the hierarchy of the valuation techniques the Company utilized to determine fair value. The different levels have been defined as follows:
- | Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities |
- | Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves |
- | Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability. |
At June 30, 2015, the Company’s financial assets and liabilities would be classified as follows:
Significant | Significant Other | Significant | ||||||||||||||
Observable | Observable | Unobservable | ||||||||||||||
Inputs | Inputs | Inputs | ||||||||||||||
June 30, 2015 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets: | ||||||||||||||||
Short-term investments | $ | 5,568 | $ | 5,568 | $ | - | $ | - | ||||||||
$ | 5,568 | $ | 5,568 | $ | - | $ | - | |||||||||
Liabilities: | ||||||||||||||||
Derivative liabilities | $ | 304,732 | $ | - | $ | 304,732 | $ | - | ||||||||
$ | 304,732 | $ | - | $ | 304,732 | $ | - |
At September 30, 2014, the Company’s financial assets and liabilities would be classified as follows:
Significant | Significant Other | Significant | ||||||||||||||
Observable | Observable | Unobservable | ||||||||||||||
Inputs | Inputs | Inputs | ||||||||||||||
September 30, 2014 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets: | ||||||||||||||||
Short-term investments | $ | 5,002 | $ | 5,002 | $ | - | $ | - | ||||||||
Derivative assets | 269,699 | - | 269,699 | - | ||||||||||||
$ | 274,701 | $ | 5,002 | $ | 269,699 | $ | - | |||||||||
Liabilities: | ||||||||||||||||
$ | - | $ | - | $ | - | $ | - | |||||||||
$ | - | $ | - | $ | - | $ | - |
The fair value of financial instruments traded in active markets is based on quoted market prices at the statement of financial position date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
Merus Labs International Inc. |
Notes to Condensed Consolidated Interim Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
For the three and nine months ended June 30, 2015 and 2014 |
The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2.
If one or more significant inputs are not based on observable market data, the instrument is included in Level 3.
b) | Financial Risk Factors |
The use of financial instruments can expose the Company to several risks, including market, credit and liquidity risks. Apart from the risks listed below, management is of the opinion that they are not exposed to any other significant risks. A discussion of the Company’s use of financial instruments and its risk management is provided below.
(i) | Liquidity risk |
Liquidity risk is the risk that the Company will not have sufficient cash resources to meet its financial obligations as they come due. The Company’s liquidity and operating results may be adversely affected if the Company’s access to the capital markets is hindered, whether as a result of a downturn in stock market conditions generally or related to matters specific to the Company. In order to mitigate this risk, the Company maintains a sufficient cash balance in order to satisfy short-term liabilities as they come due and actively pursues raising capital through various public and private financing mechanisms to satisfy longer term needs. |
The table below analyzes the Company’s non-derivative financial liabilities into relevant maturity groupings based on the remaining period at the statement of financial position date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows and do not include capitalized transaction costs.
Year ended September 30 | ||||||||||||||||
At June 30, 2015 | 2015 | 2016 | 2017 | Thereafter | ||||||||||||
Debt | $ | 4,000,000 | $ | 16,000,000 | $ | 16,000,000 | $ | 32,000,000 | ||||||||
Accounts payable and accrued liabilities | 3,416,308 | - | - | - | ||||||||||||
Income taxes payable | 1,358,674 | - | - | - | ||||||||||||
Total | $ | 8,524,982 | $ | 16,000,000 | $ | 16,000,000 | $ | 32,000,000 |
Merus Labs International Inc. |
Notes to Condensed Consolidated Interim Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
For the three and nine months ended June 30, 2015 and 2014 |
Year ended September 30 | ||||||||||||||||
At September 30, 2014 | 2015 | 2016 | 2017 | Thereafter | ||||||||||||
Debt | $ | 16,000,000 | $ | 16,000,000 | $ | 16,000,000 | $ | 32,000,000 | ||||||||
Accounts payable and accrued liabilities | 4,169,095 | - | - | - | ||||||||||||
Income taxes payable | 997,102 | - | - | - | ||||||||||||
Total | $ | 21,166,197 | $ | 16,000,000 | $ | 16,000,000 | $ | 32,000,000 |
(ii) | Market risk: |
Market risk is the risk that the fair value of, or future cash flows from, the Company’s financial instruments will significantly fluctuate because of changes in market prices. The value of the financial instruments can be affected by changes in interest rates, foreign exchange rates, and equity and commodity prices. The Company is not exposed to significant market risk given the low value of its investments. |
(iii) | Currency risk: |
The Company is subject to currency risk through its sales of products denominated in foreign currencies, purchases of inventory in US dollars and product acquisitions denominated in foreign currencies. As such, changes in the exchange rate affect the operating results of the Company. Dependent on the nature, amount and timing of foreign currency receipts and payments, the Company may from time to time enter into foreign currency derivative contracts to reduce its exposure to foreign currency risk as discussed in note 3.
The following financial assets and liabilities were denominated in foreign currencies at June 30, 2015 (U.S. dollar 1.2490, Euro 1.3911) and September 30, 2014:
June 30 2015 | September 30 2014 | |||||||
Denominated in U.S. dollars | ||||||||
Cash and cash equivalents | 10,949,466 | 3,738,885 | ||||||
Trade and other receivables | 3,698,148 | 970,087 | ||||||
Accounts payable and accrued liabilities | (180,286 | ) | (327,163 | ) | ||||
Net assets denominated in U.S. dollars | 14,467,328 | 4,381,809 | ||||||
Denominated in Euros | ||||||||
Cash and cash equivalents | 9,675,934 | 6,676,575 | ||||||
Trade and other receivables | 1,126,047 | 1,475,443 | ||||||
Accounts payable and accrued liabilities | (989,170 | ) | (2,204,374 | ) | ||||
Income taxes payable | (1,348,142 | ) | (997,102 | ) | ||||
Net assets denominated in Euros | 8,464,669 | 4,950,542 | ||||||
Merus Labs International Inc. |
Notes to Condensed Consolidated Interim Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
For the three and nine months ended June 30, 2015 and 2014 |
The following table shows the estimated sensitivity of the Company’s total comprehensive loss for the three and nine months ended June 30, 2015 from a change in foreign currencies with all other variables held constant as at June 30, 2015:
Change in net after-tax | Change in net after-tax | |||||||
Percentage change in | loss from % increase | loss from % decrease | ||||||
foreign currencies | in foreign currencies | in foreign currencies | ||||||
2% | $ | 180,420 | $ | (180,420 | ) | |||
4% | 360,840 | (360,840 | ) | |||||
6% | 541,260 | (541,260 | ) | |||||
8% | 721,680 | (721,680 | ) | |||||
10% | 902,100 | (902,100 | ) |
(iv) | Credit risk: |
Certain of the Company’s financial assets, including cash and cash equivalents and short-term investments are exposed to the risk of financial loss occurring as a result of default of a counterparty on its obligations to the Company. The Company may, from time to time, invest in debt obligations. The Company is also exposed, in the normal course of business, to credit risk from customer receivables. These amounts are continually monitored by management for collectability, and, in general, are lower risk as they are typically due from large institutions or multinational distributors.
(v) | Interest rate risk: |
Interest risk is the impact that changes in interest rates could have on the Company’s earnings and liabilities. The Company is exposed to variable interest rates as a result of its senior secured debt, which currently bears interest at the Canadian BA rate plus 4.5%. The Company's exposure to interest rate movements is limited through facilities under its credit agreement, whereby 50% of the loan value has been fixed through an interest rate swap through maturity. It is management’s opinion that the Company is not exposed to significant interest rate risk. At June 30, 2015, the Company held no interest-bearing investments.
Merus Labs International Inc. |
Notes to Condensed Consolidated Interim Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
For the three and nine months ended June 30, 2015 and 2014 |
15. | Segment information |
The Company operates in a single reportable segment focused on acquiring, in-licensing, marketing and distributing pharmaceutical products in Canada and internationally. The Company carries out business principally in Canada and Europe.
Revenues by geographic region are detailed as follows:
Three months ended June 30 | Nine months ended June 30 | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Canada | $ | 1,495,017 | $ | 1,721,856 | $ | 4,878,053 | $ | 6,515,265 | ||||||||
International | 8,010,466 | 5,463,053 | 27,935,893 | 13,617,151 | ||||||||||||
$ | 9,505,483 | $ | 7,184,909 | $ | 32,813,946 | $ | 20,132,416 |
Other than Canada, the Company derived more than 10% of its revenues in the nine months ended June 30, 2015 or nine months ended June 30, 2014 period from Germany, Spain, Netherlands and the UK. Revenues in Germany of $8,255,964 (2014: $3,921,303), Spain of $4,983,633 (2014: nil), Netherlands of $1,801,808 (2014: $2,569,561) and UK of $2,901,645 (2014: $2,300,909) are included in International in the table above.
Long-term assets by geographic region are comprised of product rights and patents and property and equipment, detailed as follows:
June 30 | September 30 | |||||||
2015 | 2014 | |||||||
Canada | $ | 3,332,582 | $ | 4,205,625 | ||||
International | 191,391,496 | 172,547,320 | ||||||
$ | 194,724,078 | $ | 176,752,945 |