Exhibit 99.2
Merus Labs International Inc.
Financial Statements
For the Nine Months Ended June 30, 2015 and 2014
Merus Labs International Inc.
Consolidated Financial Statements
June 30, 2015
(Expressed in Canadian Dollars)
TABLE OF CONTENTS
Page | |
Report of Independent Auditor | 3 |
Consolidated Statements of Financial Position as at June 30, 2015 and September 30, 2014 | 4 |
Consolidated Statements of Operations for the Nine Months ended June 30, 2015 and 2014 | 5 |
Consolidated Statements of Comprehensive (Loss) Income for the Nine Months ended June 30, 2015 and 2014 | 6 |
Consolidated Statements of Cash Flows for the Nine Months ended June 30, 2015 and 2014 | 7 |
Consolidated Statements of Changes in Equity for the Nine Months ended June 30, 2015 and 2014 | 8 |
Notes to Consolidated Financial Statements | 9 |
EXPLANATORY NOTE
Merus Labs International Inc. (the “Company”) has filed its audited consolidated financial statements for the nine months ended June 30, 2015 following the completion of a review by the Ontario Securities Commission (the “OSC”) of its continuous disclosure filings. The OSC concluded that the Company’s acquisition of the intellectual property rights to market, distribute and sell the Sintrom product in certain European countries in September 2014 triggered the requirement under National Instrument NI 51-102 “Continuous Disclosure Obligations” to file a business acquisition report including financial statements relating to the Sintrom product. In order to provide investors with audited information for Sintrom, and in lieu of a business acquisition report, the Company has prepared and filed audited consolidated financial statements of the Company for the nine months ended June 30, 2015 which incorporates nine months audited financial information for Sintrom.
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Merus Labs International Inc.:
We have audited the accompanying consolidated financial statements of Merus Labs International Inc. and its subsidiaries which comprise the consolidated statements of financial position as at June 30, 2015, and the consolidated statements of operations, consolidated statements of comprehensive income (loss), statements of changes in equity and consolidated statements of cash flows for the nine month period ended June 30, 2015, and a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audits to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluation of the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Merus Labs International Inc. and its subsidiaries as at June 30, 2015 and their financial performance and their cash flows for the nine month period ended June 30, 2015 in accordance with International Financial Reporting Standards.
Toronto, Ontario | Chartered Professional Accountants |
October 21, 2015 | Licensed Public Accountants |
ACCOUNTING › CONSULTING › TAX 111 RICHMOND STREET W, SUITE 300, TORONTO, ON M5H 2G4 1.877.251.2922P: 416.596.1711 F: 416.596.7894 mnp.ca |
3 |
Merus Labs International Inc. |
Consolidated Statements of Financial Position |
(Expressed in Canadian dollars) |
As at: | June 30 | September 30 | ||||||||
2015 | 2014 | |||||||||
Assets | ||||||||||
Current assets | ||||||||||
Cash and cash equivalents | note 2 | $ | 41,582,764 | $ | 14,358,567 | |||||
Short-term investments | 5,568 | 5,002 | ||||||||
Trade and other receivables | note 4 | 6,804,792 | 4,072,304 | |||||||
Inventories | note 5 | 3,321,122 | 2,606,568 | |||||||
Derivative assets | note 6 | - | 269,699 | |||||||
Prepaid expenses | 223,609 | 128,281 | ||||||||
51,937,855 | 21,440,421 | |||||||||
Non-current assets | ||||||||||
Property and equipment | note 7 | 114,970 | 128,593 | |||||||
Intangible assets | note 3, 8 | 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 6 | 304,732 | - | |||||||
Long term debt due within one year | note 10 | 15,247,658 | 15,348,386 | |||||||
20,327,372 | 20,514,583 | |||||||||
Non-current liabilities | ||||||||||
Provisions | note 9 | 188,408 | 330,789 | |||||||
Long term debt | note 10 | 51,125,294 | 62,712,009 | |||||||
Total liabilities | 71,641,074 | 83,557,381 | ||||||||
Equity | ||||||||||
Share capital | note 11 | 184,534,553 | 123,808,971 | |||||||
Equity reserve | note 11 | 36,739,784 | 35,132,914 | |||||||
Preferred shares | note 12 | 9,947,730 | 9,947,730 | |||||||
Accumulated deficit | (61,294,126 | ) | (61,033,735 | ) | ||||||
Accumulated other comprehensive income | note 13 | 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 14) | |
Approved on behalf of the Board: | |
(signed) | (signed) |
Tim Sorensen, | Dave Guebert, |
Director | Director |
The accompanying notes are an integral part of these consolidated financial statements
4 |
Merus Labs International Inc. |
Consolidated Statements of Operations |
(Expressed in Canadian dollars) |
Nine months ended June 30 | ||||||||||
2015 | 2014 | |||||||||
(Unaudited) | ||||||||||
Revenues | $ | 32,813,946 | $ | 20,132,416 | ||||||
Cost of goods sold | note 5 | 3,515,261 | 3,561,579 | |||||||
Gross margin | 29,298,685 | 16,570,837 | ||||||||
Operating expenses: | ||||||||||
Sales and marketing | 737,831 | 2,318,642 | ||||||||
General and administrative | notes 11, 14, 15 | 7,293,857 | 5,432,794 | |||||||
Amortization of intangible assets | note 8 | 17,853,026 | 9,191,164 | |||||||
Depreciation | note 7 | 11,524 | 3,193 | |||||||
Foreign exchange (gains) losses | note 6 | (1,445,584 | ) | 448,953 | ||||||
24,450,654 | 17,394,746 | |||||||||
Operating income (loss) | 4,848,031 | (823,909 | ) | |||||||
Interest expense, net | note 2 | 4,135,300 | 2,276,636 | |||||||
Investment (income) expense | (566 | ) | 7,949 | |||||||
Earnings (loss) before income taxes | 713,297 | (3,108,494 | ) | |||||||
Income tax expense | note 16 | 370,948 | 404,118 | |||||||
Net income (loss) for the period | $ | 342,349 | $ | (3,512,612 | ) | |||||
Earnings (loss) per share | ||||||||||
Basic | note 17 | $ | - | $ | (0.08 | ) | ||||
Diluted | note 17 | $ | - | $ | (0.08 | ) | ||||
Weighted average number of common shares outstanding - basic | 85,935,150 | 44,018,351 | ||||||||
Weighted average number of common shares outstanding - diluted | 85,935,150 | 44,018,351 |
The accompanying notes are an integral part of these consolidated financial statements
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Merus Labs International Inc. |
Consolidated Statements of Comprehensive (Loss) Income |
(Expressed in Canadian dollars) |
Nine months ended June 30 | ||||||||
2015 | 2014 | |||||||
(Unaudited) | ||||||||
Net income (loss) for the period | $ | 342,349 | $ | (3,512,612 | ) | |||
Other comprehensive (loss) income | ||||||||
Items that may be reclassified to income: | ||||||||
Currency translation differences | (1,687,187 | ) | 3,224,863 | |||||
Other comprehensive (loss) income for the period | (1,687,187 | ) | 3,224,863 | |||||
Total comprehensive (loss) income | $ | (1,344,838 | ) | $ | (287,749 | ) |
The accompanying notes are an integral part of these consolidated financial statements
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Merus Labs International Inc. |
Consolidated Statements of Cash Flows |
(Expressed in Canadian dollars) |
Nine months ended June 30 | ||||||||
2015 | 2014 | |||||||
(Unaudited) | ||||||||
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 consolidated financial statements
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Merus Labs International Inc. |
Consolidated Statements of Changes in Equity |
(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 11) | - | 1,135,012 | - | - | - | - | 1,135,012 | |||||||||||||||||||||
Net loss for the period | - | - | - | - | (3,512,612 | ) | - | (3,512,612 | ) | |||||||||||||||||||
Other comprehensive income | - | - | - | - | - | 3,224,863 | 3,224,863 | |||||||||||||||||||||
Balance, June 30, 2014 | $ | 56,014,232 | $ | 35,016,342 | $ | - | $ | 1,313,550 | $ | (56,484,649 | ) | $ | 8,906,409 | $ | 44,765,884 | |||||||||||||
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 11) | 59,562,323 | - | - | - | - | - | 59,562,323 | |||||||||||||||||||||
Share-based compensation (note 11) | - | 2,036,464 | - | - | - | - | 2,036,464 | |||||||||||||||||||||
Cancellation of shares in escrow (note 11) | (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 12) | - | - | - | - | (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 consolidated financial statements
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Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the 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 consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB) (“IFRS”) for financial statements. The consolidated financial statements have been prepared on a historical cost basis, except for items that are required to be accounted for at fair value. The policies set out below have been consistently applied to all the periods presented.
The consolidated financial statements were authorized for issue by the Company’s Board of Directors on October 21, 2015.
2. | Significant Accounting Policies |
(a) | Principles of consolidation |
The consolidated financial statements include the accounts of the Company and its subsidiaries, collectively known as Merus Labs International Inc. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. Intercompany balances, transactions, and revenues and expenses are eliminated on consolidation. The financial statements of the subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies.
Material subsidiaries of the Company as at June 30, 2015 and September 30, 2014:
June 30 | September 30 | ||
2015 | 2014 | Jurisdiction of | |
Company | % ownership | % ownership | incorporation |
Merus Labs Luxco S.a R.L. | 100.0 | 100.0 | Luxembourg |
Merus Labs Luxco II S.a R.L. | 100.0 | n/a | Luxembourg |
Merus Pharma Inc. | 100.0 | n/a | British Columbia |
Merus Labs Netherlands BV | 100.0 | 100.0 | Netherlands |
ECG Holdings (US) Inc. | 100.0 | 100.0 | Delaware |
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Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
(b) | Accounting judgments, estimates, and uncertainties |
Critical judgements
The following are the critical judgements, apart from those involving estimations (see below), that have been made in the process of applying the Company's accounting policies and that have the most significant effect on the amounts recognised in the consolidated financial statements.
Acquisition accounting
Management exercised judgement in determining that the product acquisitions of Salagen, Estraderm, and Sintrom were asset acquisitions. Management considered the guidance and definitions per IFRS 3 and IAS 38 in making these determinations. These transactions have been recorded in the consolidated financial statements based on management’s assessment of fair value for the acquired assets and liabilities.
Functional currency
Management has exercised judgement in selecting the functional currency of each of the entities that it consolidates based on the primary economic environment in which the entity operates and in reference to the various indicators as provided by IAS 21 –The effects of changes in foreign exchange rates. The consolidated financial statements of the Company are presented in Canadian dollars (“CAD”), which is the parent Company’s functional and presentation currency.
Use of estimates
In preparation of the Company’s consolidated financial statements in accordance with IFRS, management is required to make estimates and assumptions that affect the reported amount of assets, liabilities, and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates used in the Company’s consolidated financial statements and such differences could be material. Significant estimates include:
· | the allowance for inventory obsolescence; |
· | estimate for product returns; |
· | allocation of the purchase price and estimates of fair value for the acquired assets and liabilities; |
· | the estimated useful lives of property and equipment and intangible assets; |
· | impairment of financial and non-financial assets; |
· | the valuation of deferred tax assets and liabilities; |
· | the valuation of warrants and share-based compensation expense; and |
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Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
Significant estimates
The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year:
(i) | Inventory obsolescence |
The Company reviews the net realizable value of its inventory. The Company has determined that there are adequate sales to support the carrying amount for all inventories as at June 30, 2015. In addition, management reviews specific product and industry experience with returns in assessing if a write-down is required.
(ii) | Estimated product returns |
Revenue from product sales is recognized net of estimated sales discounts, credits, returns, rebates and allowances. The Company’s return policy is limited to damaged or expired product. The return allowance is determined based on an analysis of the historical rate of returns, industry return data, and current market conditions, which is applied directly against sales.
(iii) | Allocation of the purchase price and estimates of fair value for the acquired assets and liabilities |
The Company as part of its business combinations and product acquisitions performs a preliminary assessment of the fair value of all assets and liabilities acquired based on all current available information. As part of the measurement period to finalize the purchase price allocation, management updates the estimated fair values as information becomes available, support from third party market data becomes available, and where necessary, third party independent valuations are obtained. Management is ultimately responsible for concluding on the allocation of purchase price and estimates of fair value for the acquired assets and liabilities.
(iv) | Impairment of financial and non-financial assets |
Financial Assets
The Company assesses at each statement of financial position date whether there is objective evidence that a financial asset or group of financial assets is impaired.
If there is objective evidence that an impairment loss has occurred on an unquoted or not actively traded equity instrument that is not carried at fair value (because its fair value cannot be reliably measured), the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset and is recognized in profit or loss for the period. Reversals of impairment losses on assets carried at cost are not permitted.
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Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
For financial assets carried at amortized cost, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition).
Objective evidence of impairment of financial assets carried at amortized cost exists if the counterparty is experiencing significant financial difficulty, there is a breach of contract, concessions are granted to the counterparty that would not normally be granted, or it is probable the counterparty will enter into bankruptcy or a financial reorganization.
Non-Financial Assets
Determining whether goodwill is impaired requires an estimation of the recoverable amount of the cash generating units (“CGUs”) or groups of CGUs to which goodwill has been allocated. The determination of recoverable amount requires the Company to estimate the future cash flows expected to arise from these CGUs and a suitable discount rate in order to calculate the recoverable amount of the CGUs. If the recoverable amount of the CGUs is less than its carrying amount, an impairment loss is recorded. The Company currently has no goodwill.
At the end of each reporting period, the Company reviews property, plant and equipment and intangible assets for indicators of impairment. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Where it is not possible to estimate the recoverable amount of an individual asset, the assets are then grouped together into a CGU and a recoverable amount is estimated for that CGU. As at June 30, 2015, no indicators of impairment were identified.
During the fourth quarter of 2014, the Company’s Vancocin and Enablex intangible assets exhibited indicators of impairment, requiring the Company to assess these intangible assets for impairment. The Company carried out a review of the recoverable amount of the assets of each of its cash generating units (“CGUs”), which are defined at the product line level (Vancocin and Enablex). The carrying values of the CGUs at the impairment evaluation date of September 30, 2014 are included below:
Enablex | Vancocin | |||||||
September 30, 2014 | $ | 56,351,000 | $ | 9,507,000 |
The recoverable amount was calculated based on the CGUs’ fair value less costs to sell, determined using a discounted cash flow model. The assumptions in the discounted cash flow model that have the greatest estimation uncertainty include forecasted revenue and the discount rate which was based on the factors specific to each CGU, including risks inherent in the discounted cash flow models. The rates applied were as follows:
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Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
Vancocin | 13 | % | ||||
Enablex | 15 | % |
As a result of the review, the Company concluded that an impairment loss of approximately $4,212,000 was required for Vancocin, but no impairment loss was required for Enablex.
(v) | Useful lives of property, equipment and intangible assets |
The Company reviews the estimated useful lives of property, equipment and intangible assets at the end of each year, with the effect of any changes in estimates being accounted for on a prospective basis.
Depreciation on property, equipment, and intangible assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:
· | Furniture, fittings and equipment | 3 – 5 years |
· | Leasehold improvements | Over the term of the lease |
· | Product rights | 2 – 10 years |
· | Product patents | Remaining economic life of patent |
· | Manufacturing equipment | 5 – 10 years |
During the period ended June 30, 2015, the useful lives were considered reasonable.
(vi) | Valuation of deferred tax assets and liabilities |
The Company estimates the probability that taxable profits will be available against deductible temporary differences can be utilized and thus give rise to deferred tax assets. The Company has reviewed the expected profitability and determined that no deferred tax asset should be recognized at this time.
(vii) | Valuation of warrants and share-based compensation expense |
The Company estimates the fair value of warrants and share options issued for employment services based on the Black Scholes option-pricing model for warrants and share options with a service condition. These methods of valuation, which require management to use certain assumptions regarding inputs used, were applied to the equity transactions during the year.
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Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
(c) | Financial instruments |
The Company classifies all financial instruments as either fair value through profit or loss (“FVTPL”), available-for-sale (“AFS”), held-to-maturity (“HTM”), loans and receivables or other financial liabilities. Financial instruments are required to be measured at fair value on initial recognition. Measurement in subsequent periods depends on the financial instruments’ classification. Financial instruments classified as FVTPL are measured at fair value with unrealized gains and losses recognized in the results of operations. AFS instruments are measured at fair value with unrealized gains and losses recognized in other comprehensive income. HTM instruments, loans and receivables, and other financial liabilities are measured at amortized cost. Transaction costs for FVTPL financial instruments are expensed as incurred, whereas transaction costs for AFS, HTM, and other financial liability instruments are capitalized upon initial recognition of the instrument.
The Company has classified its financial instruments as follows:
Cash and cash equivalents | Loans and receivables |
Publicly-traded investments | Fair value through profit or loss |
Privately-held investments | Available-for-sale at cost |
Trade and other receivables | Loans and receivables |
Accounts payable and accrued liabilities | Other financial liability |
Derivative assets/liabilities | Fair value through profit or loss |
Long term debt | Other financial liability |
At each financial reporting period, the Company’s management estimates the fair value of investments based on the criteria below and reflects such valuations in the consolidated financial statements.
(i) Publicly-traded investments:
Securities which are traded on a recognized securities exchange and for which no sales restrictions apply are recorded at fair values based on quoted market prices at the consolidated statement of financial position dates or the closing price on the last day the security traded if there were no trades at the consolidated statement of financial position dates.
Securities which are traded on a recognized securities exchange but which are escrowed or otherwise restricted as to sale or transfer may be recorded at amounts discounted from market value. In determining whether a discount is appropriate for such investments, the Company considers the nature and length of the restriction, the business risk of the investee company, its stage of development, market potential, relative trading volume and price volatility and any other factors that may be relevant to the ongoing and realizable value of the investments.
(ii) Privately-held investments:
Securities in privately-held companies that are not considered equity investments are recorded at fair value upon acquisition and subsequently measured at their initial cost less impairment.
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Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
(iii) Other financial liabilities
Other financial liabilities (including debt and trade and other payables) are initially recorded at fair value less transaction costs and subsequently measured at amortized costs using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction cost and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition.
(d) | Derivative financial instruments and hedging activities |
Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Company designates certain derivatives as one of the following:
i) | Hedges of the fair value of recognized assets or liabilities or a firm commitment (fair value hedge); |
ii) | Hedges of a particular risk associated with a recognized asset or liability or a highly probable forecast transaction (cash flow hedge); or |
iii) | Hedges of a net investment in a foreign operation (net investment hedge). |
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in the statement of operations.
Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the forecast transaction is ultimately recognized in the statement of operations. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the statement of operations within foreign exchange (gains) losses.
The Company has not designated any of its derivatives as hedges as at June 30, 2015 and 2014.
15 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
(e) | Cash and cash equivalents |
Cash includes demand deposits with financial institutions of $41,582,764 and $14,358,567, at June 30, 2015 and September 30, 2014, respectively. Cash equivalents may consist of short-term, highly liquid investments purchased with original maturities of three months or less and were $nil and $nil, at June 30, 2015 and September 30, 2014, respectively. Interest earned on cash and cash equivalents was $754 and $23,665 (unaudited), for the period ended June 30, 2015 and 2014, respectively.
(f) | Inventories |
Inventories are comprised of raw materials, work-in-progress and finished goods of pharmaceutical products and are recorded at the lower of cost and net realizable value on a first-in first-out basis. Costs are comprised of raw materials (active pharmaceutical ingredient), conversion costs (contract manufacturing), and batch-specific stability testing. Net realizable value is the estimated selling price in the ordinary course of business less estimated costs of completion and applicable selling expenses. The Company writes down inventory to its estimated net realizable value based upon assumptions about future and market conditions when necessary.
(g) | Trade and other receivables |
Trade and other receivables are stated at their amortized cost and are non-interest bearing and unsecured. Management conducts a periodic review of the collectability of trade receivables. The Company records an allowance for doubtful accounts if any uncertainty exists with respect to the recoverability of certain amounts based on historical experience or economic climate.
(h) | Intangible assets |
Intangible assets include all costs incurred to acquire licensing and distribution agreements, product rights and patents. Intangible assets are recorded at cost and amortized on a straight-line basis over their estimated useful life of 2 to 10 years. Management has estimated the useful life based on industry data of similar products and patents. The Company conducts an annual assessment of the residual balances, useful lives and depreciation methods being used for intangible assets and any changes arising from the assessment are applied by the Company prospectively.
(i) | Business combinations and goodwill |
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at the acquisition date fair value. Acquisition costs incurred are expensed and included in acquisition costs.
16 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
Goodwill represents the price paid for acquisitions in excess of the fair market value of net tangible and identifiable intangible assets acquired. Goodwill is carried at cost, lessimpairment losses if any. Goodwill is tested for impairment at the end of each fiscal year or if events or changes in circumstances indicate a potential impairment. Determining whether goodwill is impaired requires an estimation of the recoverable amount of the cash generating units (“CGUs”) to which goodwill has been allocated.
For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the CGUs, or groups of CGUs, that is expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes.
(j) | Impairment of non-financial assets |
At the end of each reporting period, the Company reviews the carrying amounts of its property and equipment, intangible assets and goodwill to determine whether there is an indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. In addition, goodwill, intangible assets with indefinite useful lives and intangible assets not yet available for use, if any, are tested for impairment annually.
An impairment loss is recognized when the carrying amount of an asset, or its CGU, exceeds its recoverable amount. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
The recoverable amount is the greater of the asset’s or CGU’s fair value less costs to sell (“FVLCTS”) and value in use (“VIU”). In assessing VIU, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. In determining FVLCTS, a post-tax discounted cash flow model is used. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the CGU to which the asset belongs. If the recoverable amount of the asset or CGU is less than its carrying amount, an impairment loss is recognized immediately in the statement of operations.
Other than goodwill, where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. Goodwill impairment losses are not reversed.
(k) | Provisions |
Provisions are recorded when a present legal or constructive obligation exists as a result of past events where it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made.
17 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the statement of financial position date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount receivable can be measured reliably.
(l) | Income taxes |
Provision for income taxes consists of current and deferred tax expense. Tax is recognized in the statement of operations, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively.
Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at period end in the countries where the Company and its subsidiaries operate and generate taxable income, adjusted for amendments to tax payable with regards to previous years.
Deferred tax is recognized, using the liability method, on temporary differences between the carrying amounts of assets and liabilities on the consolidated statement of financial position and their corresponding tax values, using the enacted or substantively enacted, as applicable, income tax rates at each statement of financial position date.
Deferred tax assets also result from unused losses and other deductions carried forward. An assessment of the probability that a deferred tax asset will be recovered is made prior to any deferred tax asset being recognized. The valuation of deferred tax assets is reviewed on a quarterly basis and adjusted, if necessary, to reflect the estimated realizable amount.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
(m) | Foreign currency translation |
(i) | Functional and presentation currency |
Items included in the financial statements of each of the Company’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements of the Company are presented in Canadian dollars (“CAD”), which is the parent Company’s functional and presentation currency. The functional currency of Merus Labs Luxco S.a R.L., Merus Labs Luxco II S.a R.L., and Merus Labs Netherlands BV is Euros.
18 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
(ii) | Transactions and balances |
Foreign currency transactions are initiated by the Company’s entities at their respective functional currency using the exchange rates prevailing at the date of the transaction. At each statement of financial position date, monetary assets and liabilities are translated using the period-end foreign exchange rate. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when acquired. All gains and losses on translation of these foreign currency transactions are included in the statement of operations.
(iii) | Company’s subsidiaries |
On consolidation the assets and liabilities of foreign operations are translated into CAD at the rate of exchange prevailing at the reporting date and their statement of operations are translated at the average exchange rates prevailing during the period. The exchange differences arising on translation for consolidation are recognized in other comprehensive income. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognized in the consolidated statement of operations.
(n) | Revenue recognition and estimated product returns |
Revenue from product sales, including shipments to distributors, is recognized when the Company has transferred to the customer the significant risks and benefits of ownership or future obligations with respect to the product, it is probable that the economic benefits associated with the transaction will flow to the Company and the amount of revenue can be measured reliably. Revenue from product sales is recognized net of estimated sales discounts, credits, returns, rebates and allowances.
In connection with its acquisition of Salagen and Estraderm (note 3), the Company entered into a transition services and supply agreement with the vendor (Novartis Pharma AG, or “Novartis”) to facilitate the seamless and efficient transfer of these products to the Company. The agreement required that Novartis continue to distribute and promote the product until the Company obtained the necessary marketing authorizations to allow it to take over these functions as principal. Novartis provided the Company with a monthly reconciliation of revenues, cost of goods, and marketing and selling expenses for which the Company then billed Novartis for the net amount receivable. The Company relied on the financial information provided by Novartis to estimate the amounts due under this agreement. Based on the terms of this arrangement and the guidance per IAS 18 regarding agency relationships, for the period of this arrangement the Company recorded revenues relating to Salagen and Estraderm on a net basis in the statement of operations, net of cost of goods and marketing and selling expenses.
19 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
In connection with its acquisition of Sintrom (note 3), the Company entered into a transition services and supply agreement with the vendor (Novartis Pharma AG, or “Novartis”) to facilitate the seamless and efficient transfer of the product to the Company. The agreement required that Novartis continue to manufacture, distribute, and promote the product until the Company obtained the necessary marketing authorizations to allow it to take over these functions as principal. Novartis provided the Company with a monthly reconciliation of revenues, cost of goods, and marketing and selling expenses for which the Company then billed Novartis for the net amount receivable. The Company relied on the financial information provided by Novartis to estimate the amounts due under this agreement. Based on the terms of this arrangement and the guidance per IAS 18 regarding agency relationships, for the period of this arrangement the Company recorded revenues relating to Sintrom on a net basis in the statement of operations, net of cost of goods and marketing and selling expenses.
The Company’s return policy is limited to damaged or expired product. The return allowance is determined based on analysis of the historical rate of returns and current market conditions, which is applied directly against sales.
(o) | Share-based compensation |
From time to time, the Company grants options to directors, officers, employees and non-employees to purchase common shares. The Company accounts for its stock options using the fair-value method. Share-based payments, equal to the fair value of the options on the date of grant, are recognized in the statement of operations, with an offsetting credit to equity reserves, for stock options granted to employees, officers and directors over the period during which the related options vest. Share-based payments are recognized in the statement of operations, with an offsetting credit to equity reserves, for options granted to non-employees based on the fair value of the services received. Consideration paid upon exercise of stock options, along with the applicable amount of equity reserves, is credited to share capital.
(p) | Comprehensive income or loss |
Comprehensive income or loss is the change in net assets arising from transactions and other events and circumstances from non-owner sources, and comprises net income or loss and other comprehensive income or loss. Financial assets that are classified as available for sale will have revaluation gains and losses included in other comprehensive income or loss until the asset is removed from the statement of financial position.
(q) | Basic and diluted net earnings per share |
Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. The treasury stock method is used to compute the dilutive effect of equity instruments. Stock options, share purchase warrants, and other equity instruments are dilutive when the average market price of the common shares during the period exceeds the exercise price of the options, warrants and other equity instruments. The diluted earnings per share is equal to the basic earnings per share if the effects of the outstanding options and warrants are anti-dilutive.
20 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
(r) | Related parties |
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control. Related parties may be individuals or corporate entities. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.
(s) | Changes in accounting standards |
During the period ended June 30, 2015 the following new or amended standards were issued and are effective for annual periods beginning on or after January 1, 2014 (October 1, 2014 for the Company), unless otherwise noted.
Accounting standards implemented during the period ended June 30, 2015:
· | On October 1, 2014, the Company adopted the amendment to IAS 32,Financial Instruments: presentation ("IAS 32"). The amendment clarifies the meaning of 'currently has a legally enforceable right to set-off'. There was no impact to the consolidated Financial Statements as a result of adopting this standard. |
· | On October 1, 2014, the Company adopted the amendment to IAS 36,Impairment of Assets ("IAS 36"). The amendment reduces the circumstances in which the recoverable amount of assets or cash-generating units are required to be disclosed, clarifies the disclosures required, and introduces an explicit requirement to disclose the discount rate used in determining impairment. The impact to the consolidated Financial Statements as a result of adopting this standard resulted in additional disclosures in notes 2 and 8 of the consolidated financial statements. |
· | On October 1, 2014, the Company adopted the amendment to IAS 39,Financial Instruments: recognition ("IAS 39"). The amendment clarifies that there is no need to discontinue hedge accounting if a hedging derivative is novated, provided certain criteria are met. A novation indicates an event where the original parties to a derivative agree that one or more clearing counterparties replace their original counterparty to become the new counterparty to each of the parties. There was no impact to the consolidated Financial Statements as a result of adopting this standard. |
21 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
Future changes in accounting standards:
· | IFRS 9Financial Instruments. The IASB issued IFRS 9, “Financial Instruments” to replace IAS 39, “Financial Instruments: Recognition and Measurement”. IFRS 9 uses as a single approach to determine whether a financial asset is measured at amortized cost or fair value, and replaces the multiple rules in IAS 39. The approach in IFRS 9 focuses on how an entity manages its financial instruments in the context of its business model, as well as the contractual cash and cash equivalents flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods currently provided in IAS 39. In November 2013, the IASB has removed the mandatory effective date for IFRS 9. The new date will be determined when IFRS 9 is closer to completion. The effective date is for annual periods beginning on or after January 1, 2018. The Company is currently assessing the impact of this standard. |
· | IFRS 15Revenue from Contracts with Customers. The IASB issued IFRS 15 to establish principles for reporting the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The core principle of IFRS 15 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. IFRS 15 also includes a cohesive set of disclosure requirements that would result in an entity providing comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. This standard is effective for annual periods beginning on or after January 1, 2017 with earlier adoption permitted. The Company is currently assessing the impact of this standard. |
3. | 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 an acquisition of assets.
22 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
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 10). The transaction was accounted for as an acquisition of assets.
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 |
23 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
4. | Trade and other receivables |
June 30 2015 | September 30 2014 | |||||||
Trade receivables | $ | 6,466,565 | $ | 3,782,246 | ||||
Less: provision for doubtful accounts | - | - | ||||||
Trade receivables – net | 6,466,565 | 3,782,246 | ||||||
Other receivables | 338,227 | 290,058 | ||||||
Trade and other receivables | $ | 6,804,792 | $ | 4,072,304 |
The aging analysis of trade receivables is as follows:
June 30 2015 | September 30 2014 | |||||||
Current | $6,158,655 | $3,632,705 | ||||||
1 to 30 days overdue | 274,050 | 110,120 | ||||||
31 to 60 days overdue | 14,173 | 2,539 | ||||||
61 to 90 days overdue | 19,688 | - | ||||||
Greater than 90 days overdue | - | 36,882 | ||||||
Total trade receivables | $ | 6,466,565 | $ | 3,782,246 |
5. | Inventories |
June 30 2015 | September 30 2014 | |||||||
Raw materials | $ | 1,078,924 | $ | 870,799 | ||||
Work-in-progress | 92,131 | 135,230 | ||||||
Finished goods | 2,150,067 | 1,600,539 | ||||||
Total inventories | $ | 3,321,122 | $ | 2,606,568 |
The amount of inventories expensed in cost of goods sold during the period ended June 30, 2015 amounted to $3,056,435 (2014: $3,369,747 (unaudited)). During the period ended June 30, 2015, the Company recorded inventory impairments of $106,695 (2014:$52,011 (unaudited))
24 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
6. | Derivative financial instruments |
June 30 2015 | September 30 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 (unaudited)) 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 10), 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.
25 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
7. | Property and equipment |
Continuity of property and equipment as at June 30, 2015 was as follows:
Computer Equipment | Furniture and Fixtures | Manufacturing Equipment | Total | |||||||||||||
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 |
Continuity of property and equipment for the year ended September 30, 2014 was as follows:
Computer Equipment | Furniture and Fixtures | Manufacturing Equipment | Total | |||||||||||||
Cost at September 30, 2013 | $ | 2,572 | $ | 11,761 | $ | - | $ | 14,333 | ||||||||
Additions | - | - | 125,408 | 125,408 | ||||||||||||
Foreign exchange differences | 43 | 29 | (4,650 | ) | (4,578 | ) | ||||||||||
Cost at September 30, 2014 | $ | 2,615 | $ | 11,790 | $ | 120,758 | $ | 135,163 | ||||||||
Accumulated Amortization at September 30, 2013 | $ | 940 | $ | 2,102 | $ | - | $ | 3,042 | ||||||||
Amortization charge | 862 | 2,685 | - | 3,547 | ||||||||||||
Foreign exchange differences | (16 | ) | (3 | ) | - | (19 | ) | |||||||||
Accumulated Amortization at September 30, 2014 | $ | 1,786 | $ | 4,784 | $ | - | $ | 6,570 | ||||||||
Carrying amount at September 30, 2013 | $ | 1,631 | $ | 9,660 | $ | - | $ | 11,291 | ||||||||
Carrying amount at September 30, 2014 | $ | 829 | $ | 7,006 | $ | 120,758 | $ | 128,593 |
26 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
8. | 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 3) | 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 atJune 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 |
Continuity of intangible assets for the year ended September 30, 2014 was as follows:
Product Rights | Patents | Total | ||||||||||
Cost at September 30, 2013 | $ | 69,890,744 | $ | 21,600,365 | $ | 91,491,109 | ||||||
Product acquisitions | 121,512,827 | - | 121,512,827 | |||||||||
Additions arising from internal development | 607,971 | - | 607,971 | |||||||||
Foreign exchange differences | 797,039 | 361,558 | 1,158,597 | |||||||||
Cost at September 30, 2014 | $ | 192,808,581 | $ | 21,961,923 | $ | 214,770,504 | ||||||
Accumulated Amortization at September 30, 2013 | $ | 15,319,674 | $ | 5,843,295 | $ | 21,162,969 | ||||||
Amortization charge | 7,915,136 | 5,068,448 | 12,983,584 | |||||||||
Impairment charge | 4,212,441 | - | 4,212,441 | |||||||||
Foreign exchange differences | (122,778 | ) | (90,064 | ) | (212,842 | ) | ||||||
Accumulated amortization at September 30, 2014 | $ | 27,324,473 | $ | 10,821,679 | $ | 38,146,152 | ||||||
Carrying amount at September 30, 2013 | $ | 54,571,070 | $ | 15,757,070 | $ | 70,328,140 | ||||||
Carrying amount at September 30, 2014 | $ | 165,484,108 | $ | 11,140,244 | $ | 176,624,352 |
27 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
Vancocin – Product Rights
For the year ended September 30, 2014, management identified indicators of impairment with respect to the Vancocin product rights intangible asset as a result of actual results being lower than expectations due to the entry of a second generic competitor. The recoverable amount of the product rights was determined based on FVLCTS calculations using a discounted cash flow analysis. These calculations used post-tax cash flow projections covering a nine-year period plus terminal period based on management’s best estimate of the impact of a second generic entrant on Vancocin as at September 30, 2014. Cash flows beyond the projection period were extrapolated using an estimated rate of decline of 15.0%. A post-tax discount rate of 13.0% was applied. Based on this analysis, the carrying amount of the Vancocin product rights was reduced to its recoverable amount through recognition of an impairment charge at September 30, 2014 of approximately $4,212,000 against the product rights.
Enablex – Product Rights
For the year ended September 30, 2014, management identified an indicator of impairment with respect to the Enablex product rights intangible asset. Management became aware of an effort on the part of the Federal Joint Committee (G-BA) of Germany to implement reference pricing (maximum reimbursable price) for anticholinergic-based OAB products in the market. Germany is the Company’s largest market for Enablex. The recoverable amount of the product rights was determined based on FVLCTS calculations using a discounted cash flow analysis. These calculations used post-tax cash flow projections covering a nine-year period plus terminal period based on management’s best estimate of the impact of reference pricing in Germany. Cash flows beyond the projection period were extrapolated using an estimated rate of decline of 20.0%. A post-tax discount rate of 15.0% was applied. Based on this analysis, the FVLCTS for Enablex was found to be greater than its carrying value and no impairment charge was taken.
28 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
9. | 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.
10. | 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.
29 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
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.
11. | 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.
30 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 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.
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 vested on April 23, 2014.
31 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 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.
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 nine months ended June 30, 2015, using the Black-Scholes option pricing model, was $2,233,406 (2014: $1,434,194 (unaudited)). $1,742,716 was expensed in the financial statements during the nine months ended June 30, 2015 (2014: $1,135,012 (unaudited)) 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.
32 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
(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.
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 |
33 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
The range of exercise prices for outstanding and exercisable options at June 30, 2015 are as follows:
Exercise Price | Number Outstanding | Weighted Average Contractual Life | Number 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 |
(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 nine 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.
12. | 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.
34 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
13. | Accumulated other comprehensive income |
Translation | Total | |||||||
At September 30, 2012 | $ | 598,603 | $ | 598,603 | ||||
Currency translation differences, net of tax of $20,429 | 5,082,943 | 5,082,943 | ||||||
At September 30, 2013 | 5,681,546 | 5,681,546 | ||||||
Currency translation differences | 1,098,559 | 1,098,559 | ||||||
At September 30, 2014 | 6,780,105 | 6,780,105 | ||||||
Currency translation differences | (1,687,187 | ) | (1,687,187 | ) | ||||
At June 30, 2015 | $ | 5,092,918 | $ | 5,092,918 |
14. | 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 ended June 30, 2015 was $136,808 (2014: $194,699 (unaudited)), 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 receivedNotices 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.
35 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
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.
15. | 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:
Nine months ended June 30 | ||||||||
2015 | 2014 | |||||||
Salaries | $ | 1,159,311 | $ | 877,516 | ||||
Share based compensation | 2,036,434 | 1,135,012 | ||||||
$ | 3,195,745 | $ | 2,012,528 |
36 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
16. | Income taxes |
The major components of income tax expense for the period ended June 30, 2015 and 2014 are:
Nine months ended June 30 | ||||||||
Income tax recognized in profit or loss | 2015 | 2014 | ||||||
Current tax | ||||||||
Current period tax expense | $ | 370,948 | $ | 404,118 | ||||
Deferred tax: | ||||||||
Deferred tax expense | - | - | ||||||
Provision for income taxes | $ | 370,948 | $ | 404,118 |
A reconciliation between income tax expense and the product of accounting income multiplied by Canada’s domestic tax rate (26.47% for Merus) for the period ended June 30, 2015 and 2014 is as follows:
Nine months ended June 30 | ||||||||
2015 | 2014 | |||||||
Income (loss) from continuing operations before income taxes | $ | 713,297 | $ | (3,108,494 | ) | |||
Income tax expense (benefit) at the statutory income tax rate of 26.47% (2014: 26.47%) | 188,810 | (822,818 | ) | |||||
Non-deductible expenses for tax purposes | 541,079 | 333,274 | ||||||
Deductible temporary differences and unused tax losses not recognized, including impact of change in rate | 1,714,612 | 1,188,760 | ||||||
Effect of income taxes recorded at rates different from the Canadian tax rate | (2,073,553 | ) | (295,098 | ) | ||||
Other differences | - | - | ||||||
Income tax expense | $ | 370,948 | $ | 404,118 |
37 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
The following is an analysis of deferred tax assets, which are currently not being recognized in the consolidated statement of financial positions:
Nine months ended June 30 | ||||||||
2015 | 2014 | |||||||
Unrecognized deferred tax assets in relation to: | ||||||||
Unused non-capital losses | $ | 32,016,620 | $ | 27,162,691 | ||||
Unused net capital losses | 14,600,700 | 13,807,000 | ||||||
Capital and intangible assets | 6,867,839 | 5,744,782 | ||||||
Undeducted share and debt issuance costs | 6,628,209 | 5,393,934 | ||||||
$ | 60,113,368 | $ | 52,108,407 |
The net capital loss carry forward may be carried forward indefinitely, but can only be used to reduce capital gains. Share and debt issuance costs will be fully amortized in fiscal 2019. The remaining deductible temporary differences may be carried forward indefinitely. Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profit will be available against which the Company can utilize the benefits therefrom.
The aggregate amount of temporary differences associated with investments in subsidiaries, branches, associates and interest in joint arrangements is approximately $2,179,000. As the Company can control the dividend policies, it is able to control the timing of the reversal of the temporary differences associated with the investments noted above. It is also probable that the temporary difference will not reverse in the foreseeable future. Therefore, the deferred tax liabilities associated with the investments have not been recognized.
The Company has unused non-capital tax losses that may be applied against future taxable income for Canadian federal and provincial income tax purposes, which expire between 2025 and 2035 as follows:
Non-capital losses | Federal and provincial | |||
Expires in | ||||
2025 to 2029 | 12,744,610 | |||
2030 to 2035 | 19,272,010 | |||
Total | 32,016,620 |
38 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
17. | 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 10). 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 has however declared and paid cash dividends to its preferred shareholders. 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.
39 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
19. | 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 |
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 |
40 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
- | 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: | ||||||||||||||||
N/A | $ | - | $ | - | $ | - | $ | - | ||||||||
$ | - | $ | - | $ | - | $ | - |
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.
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.
41 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
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 |
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 |
42 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
(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 | 9,965,434 | 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 | 8,754,169 | 4,950,542 | ||||||
43 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
The following table shows the estimated sensitivity of the Company’s total comprehensive loss for the 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% | $ | 186,210 | $ | (186,210 | ) | |||
4% | 372,420 | (372,420 | ) | |||||
6% | 558,630 | (558,630 | ) | |||||
8% | 744,840 | (744,840 | ) | |||||
10% | 931,050 | (931,050 | ) |
(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.
44 |
Merus Labs International Inc. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
For the nine months ended June 30, 2015 and 2014 |
20. | 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:
Nine months ended June 30 | ||||||||
2015 | 2014 | |||||||
(unaudited) | ||||||||
Canada | $ | 4,878,053 | $ | 6,515,265 | ||||
International | 27,935,893 | 13,617,151 | ||||||
$ | 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 (unaudited)), Spain of $4,983,633 (2014: nil (unaudited)), Netherlands of $1,801,808 (2014: $2,569,561 (unaudited)) and UK of $2,901,645 (2014: $2,300,909 (unaudited)) 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 |
45 |