UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| (Mark One) | | |
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| þ | | ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2012 |
| o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from_______to_______
Commission File Number: 0-31198
TRIBUTE PHARMACEUTICALS CANADA INC.
(Exact name of registrant as specified in its charter)
| Ontario, Canada | | Not Applicable |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
151 Steeles Avenue East, Milton, Ontario, Canada, L9T 1Y1
(Address of principal executive offices) (Zip Code)
(519) 434-1540
(Registrant's telephone number)
(Former Name, Former Address and Former Fiscal Year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common Shares, no par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | o | Accelerated filer | o | Non-accelerated filer o | Smaller reporting company | þ |
| | | | | (Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates was $10,133,335, computed by reference to the closing price of the common stock on June 30, 2012. For purposes of the above statement only, all directors, executive officers and 10% shareholders are assumed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.
As of March 11, 2013 the registrant had 50,972,542 shares of Common Stock outstanding.
FORM 10-K
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| PART II | |
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General
In this annual report, “we”, “us”, “our”, “Tribute” and the “Company” refer to Tribute Pharmaceuticals Canada Inc., an Ontario, Canada corporation. All dollar amounts in this annual report are stated in Canadian Dollars unless stated otherwise. Certain terms used in this annual report are defined below in the section entitled “Glossary”. NeoVisc®, Uracyst® and Uropol® are trademarks owned by Tribute and are the subject of trademark registrations in certain jurisdictions. References to other products in this annual report are owned by third parties and certain of such other products have been trademarked and are the subject of trademark registrations in certain jurisdictions.
Forward-Looking Statements
This Report on Form 10-K for Tribute Pharmaceuticals Canada Inc. may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are characterized by future or conditional verbs such as "may," "will," "expect," "intend," "anticipate," believe," "estimate" and "continue" or similar words. You should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. Such statements are only predictions and our actual results may differ materially from those anticipated in these forward-looking statements. We believe that it is important to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Factors that may cause such differences include, but are not limited to, those discussed under Item 1A. Risk Factors and elsewhere in this Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission, including the uncertainties associated with product development, the risk that we will not obtain approval to market our products, the risks associated with dependence upon key personnel and the need for additional financing. We do not assume any obligation to update forward-looking statements as circumstances change.
Exchange Rate for Canadian Dollar
The accounts for Tribute are maintained in Canadian dollars which is the Company’s functional currency. All dollar amounts contained herein are expressed in Canadian dollars, except as otherwise indicated. As at March 11, 2013, the exchange rate for Canadian dollars/United States dollars was $1.00 (Cdn.) = $0.9739 (U.S.).
Set forth below are the exchange rates based on the Bank of Canada noon rates for the Canadian dollar equivalent expressed in United States currency during 2012 and 2011.
| | | Years ended December 31, |
| | | 2012 | | | 2011 | |
| At End of Year | | | 1.0051 | | | 0.9833 | |
| Average | | | 0.9995 | | | | 1.0110 | |
| High | | | 1.0285 | | | | 1.0583 | |
| Low | | | 0.9599 | | | | 0.9430 | |
PART I
OVERVIEW
Tribute Pharmaceuticals Canada Inc. is an emerging Canadian specialty pharmaceutical company with a primary focus on the acquisition, licensing, development and promotion of healthcare products in Canada. The Company targets several therapeutic areas in Canada but has a particular interest in products for the treatment of neurology, pain, urology, dermatology and endocrinology/cardiology. Tribute also sells Uracyst® and NeoVisc® internationally through a number of strategic partnerships.
Tribute’s current portfolio of assets includes nine product lines, eight of which are on the market in Canada, including: NeoVisc®, NeoVisc® Single Dose, Uracyst®, BladderChek®, Bezalip® SR, Soriatane®, Cambia®, Daraprim®, Collatamp G®, and MycoVa™. Each of these products has received regulatory approval in Canada, with the exception of MycoVa™. Furthermore, the Company is responsible for the Canadian selling, marketing and promotion of Gelfoam®, under an exclusive promotional arrangement with Pfizer Canada Inc.
Tribute markets its products in Canada through its own sales force and currently has licensing agreements for the distribution of select products in over 20 countries, and continues to expand this footprint. The Company’s focus on business development is twofold: utilizing in-licensing and out-licensing for immediate impact on its revenue stream, as well as product development for future growth and stability.
Tribute’s management team has a strong track record in senior management positions at companies such as Wyeth, Syntex/Roche, Astra-Zeneca, Amgen, Bayer, Novartis and Biovail. The team has extensive operational and business development experience and familiarity with the Canadian market and Canadian market dynamics.
The Company was incorporated under the Business Corporations Act (Ontario) on November 14, 1994 under the name “Stellar Pharmaceuticals Inc.” and on January 1, 2013 the Company changed its name from Stellar Pharmaceuticals Inc. to Tribute Pharmaceuticals Canada Inc. Previously, Stellar Pharmaceuticals Inc. acquired 100% of the outstanding shares of then privately held Tribute Pharmaceuticals Canada Ltd. and Tribute Pharma Canada Inc. (collectively, “Tribute Pharmaceuticals”) on December 1, 2011. The Company maintains two facilities including its head office located at 151 Steeles Ave. East, Milton, Ontario, Canada L9T 1Y1 and the Company’s operations facility at 544 Egerton Street, London, Ontario, Canada N5W 3Z8. The Company’s telephone number is (519) 434-1540, its facsimile number is (519) 434-4382 and its e-mail address is info@tributepharma.com.
2012 Highlights
Upon the completion of the acquisition of Tribute Pharmaceuticals in December 2011, the Company successfully entered into an agreement in January 2012 with Apricus Biosciences, Inc. (“Apricus Bio”) for the exclusive right to sell Apricus Bio's MycoVa™ a product for the treatment of onychomycosis (nail fungus) in Canada, following receipt of Canadian regulatory approval for such product. MycoVa is a topical formulation of terbinafine, the same active ingredient as Novartis’ Lamisil® oral onychomycosis product.
Onychomycosis is a chronic persistent fungal infection of the nail bed resulting in thickening and discoloration of the nail, which sometimes can be accompanied by serious pain and disability. According to the Merck Manual of Diagnosis & Therapy, the worldwide incidence rate of onychomycosis is approximately 10%. As described by Iorizzo and Piraccini (2007), the incidence has been increasing due to diabetes, immunosuppression and an aging population. While occurring in approximately 2.6% of children younger than 18 years, it occurs in as much as 90% of the elderly population (eMedicine.medscape.com). Based on data received in 2012 from IMS Health ("IMS"), the prescription market for onychomycosis is valued at approximately $30 million dollars. The Company anticipates that MycoVa™ will be filed with regulatory authorities in Canada in the second half of 2013.
In March 2012, Tribute received its Notice of Compliance (or marketing authorization) from Health Canada for Cambia® (diclofenac potassium for oral suspension) for the treatment of acute migraine with or without aura in adults over 18 years of age. Cambia was officially launched in Canada on October 1, 2012. Cambia is also commercially available in the United States and marketed by Tribute’s licensor, Nautilus Neurosciences. Cambia was first introduced in the United States in June of 2010.
Cambia is the first product other than a drug from the triptan class of drugs approved for the acute treatment of migraine in Canada in over fifteen years and is the only prescription non-steroidal anti-inflammatory drug available and approved for the acute treatment of migraine in Canada.
The prescription market for migraine medications in Canada is valued at more than $150 million dollars annually based on IMS data.
In June 2012 Tribute acquired the exclusive Canadian rights to Collatamp G® from Theramed Corporation. Theramed Corporation licensed the exclusive rights to Collatamp G from EUSA Pharma (Europe) Ltd. ("EUSA"), an international division of Jazz Pharmaceuticals in 2008. According to our licensor, Collatamp G is approved or used in over 50 countries for the local haemostasis of capillary, parenchymatous and seeping haemorrhages in areas with a high risk of infection and has been shown to reduce post-operative infections across a range of surgical disciplines, including a reduction of 53% in a large randomized controlled study in cardiac surgery. Based on internal data, we believe Collatamp G is currently used in over 100 hospitals and surgical centers across Canada.
Collatamp G, approved by Health Canada on August 1, 2007 and launched in Canada in 2008, is a lyophilized collagen implant impregnated with the aminoglycoside antibiotic gentamicin.
In August 2012, Tribute announced that it has signed an agreement granting Tribute the exclusive Canadian promotional rights for Gelfoam® from Pfizer Canada Inc. ("Pfizer") (NYSE:PFE).
Gelfoam is a medical device approved in Canada and the United States for use in surgical procedures as a haemostatic agent, when control of capillary, venous, and arteriolar bleeding by pressure, ligature, and other conventional procedures is either ineffective or impractical. Gelfoam is an absorbable haemostatic device used in hospitals and surgical centres across Canada. The addition of Gelfoam is another step forward as we expand our hospital, specialty care business, which is a target area of growth for Tribute.
The terms of the agreement extend the promotional, sales and marketing responsibilities of Gelfoam® to surgeons and other health care practitioners in Canada by Tribute while Pfizer continues to be responsible for all distribution, regulatory affairs and medical related activities. Tribute is paid a sales commission on all sales of Gelfoam® with a multiplier or higher commission paid on increased sales calculated on a tiered structure. Pfizer is responsible for all inventory, insurance, customer service and regulatory costs and Tribute is responsible for all costs of promotion in Canada.
Tribute also entered into an agreement with Midcap Financial LLC ("Midcap") in May 2012 for a US$6.0 million term loan. Under certain conditions, the loan is available in two tranches and the Company closed the first tranche of US$3.5 million in May 2012. The second tranche of the loan is available to Tribute i) if Tribute raises an amount not less than US$6 million from a combination of an equity raise or cash from an upfront payment associated with a pharmaceutical partnership or ii) in conjunction with the Company acquiring or in-licensing a product or products subject to Midcap’s review. Tranche 2 is available through March 31, 2013. The Company used the funds from the first tranche to expand its sales force and its promotional activities to enhance the growth of its existing Canadian product line, prepare for the launch of Cambia, and advance pending business development initiatives. The Midcap loan is secured by all assets of the Company and contains customary covenants that, among other things, generally restrict the Company's ability to incur additional indebtedness. On February 27, 2013, the Company entered into amended agreements with Midcap as a result of the Company's amalgamation with Tribute Pharmaceuticals Canada Ltd. and Tribute Pharma Canada Inc. on October 1, 2012.
Tribute also strengthened its senior management team in 2012 with the addition of Murray Roach as Vice President of Sales. Mr. Roach has nearly 20 years of pharmaceutical sales and marketing experience in Canada, including most recently where he served as Vice President, Sales and Marketing for Taro Pharmaceuticals in Canada. Prior to Taro Pharmaceuticals, Mr. Roach spent 15 years at Wyeth Canada in several senior sales and marketing positions.
Tribute also announced the appointment of Dr. Bernard Chiasson, Ph.D. to the newly created position of Chief Scientific Officer in December 2012. Dr. Chiasson is a trained neuroscientist and pharmacologist and will lead the scientific and regulatory affairs worldwide for Tribute's proprietary products as well as its growing portfolio of in-licensed products.
Dr. Chiasson recently served as Vice President, U.S. Strategic Regulatory and Global Medical Services at OptumInsight (Life Sciences Group), a division of UnitedHealth Group. Prior to his position at OptumInsight, he was Director, Regional Medical Liaisons and Medical Services, North American Scientific Affairs for Amgen Canada, a division of Amgen. Dr. Chiasson was also employed by Bayer Healthcare Canada, a division of Bayer AG, a global pharmaceutical company, as Director, Scientific Development Biologic Products for Canada, as part of the Canada, Japan and Developing Markets Group. In addition, he also served as Executive Director, Medical and Regulatory Affairs at the then publicly-held Draxis Health and began his industry career as a field-based Medical Liaison Specialist at Novartis Pharmaceuticals Canada, a division of Novartis AG, a NYSE listed healthcare company.
In 2012 we successfully expanded our product portfolio as well as our Canadian sales force, both of which enabled us to increase our revenues over 2011 levels. The Company also obtained approval for Cambia ® from Health Canada and successfully launched this important product to Canadian physicians in October 2012. We also added key management including a Vice President of Sales and a Chief Scientific Officer. These are the building blocks that provide infrastructure for our continued growth in 2013. We are actively looking to add more products to our domestic sales portfolio in Canada, which will be supported by our expanded sales force. We are also looking for further growth through distribution agreements for our internally developed products and products for which we have marketing rights in countries where we do not yet have distribution agreements.
Products
Approved & Marketed Products
Cambia®
Cambia (diclofenac potassium for oral suspension) was licensed from Nautilus Neurosciences, Inc. (“Nautilus”) in November 2010. Cambia was approved by the FDA in June 2009 and is currently marketed by Nautilus in the U.S. Cambia was approved by Health Canada in March 2012 and was commercially launched in Canada in October 2012. The market for prescription migraine products in Canada is valued at approximately $150 million dollars based on IMS data.
Cambia is classified as a non-steroidal anti-inflammatory (NSAID) drug indicated for the acute treatment of migraine attacks with or without aura in adults 18 years of age or older. Cambia is available as an oral solution in individual packets each designed to deliver a 50mg dose when mixed in water. Cambia is the only NSAID currently approved in Canada for the acute treatment of migraine with or without aura in adults 18 years or older. Furthermore, Cambia is the only approved prescription NSAID available that was studied and proven to be an effective treatment for migraine according to guidelines published by the International Headache Society that reached statistically significant results for all four co-primary endpoints including pain free response at two hours, nausea free, photophobia free (sensitivity to light) and phonophobia free (sensitivity to sound). In addition, Cambia provides fast migraine pain relief within 30 minutes of dosing due in part to the significant benefits of the proprietary Dynamic Buffering TechnologyTM (“DBT”). DBT provides for enhanced drug absorption and bioavailability. In fasting volunteers, measurable plasma levels were observed within five minutes of dosing with Cambia. Peak plasma levels were achieved at approximately 15 minutes, with a range of approximately 10 to 40 minutes. The use of some NSAIDs has been associated with an increased incidence of cardiovascular adverse events such as myocardial infarction, stroke or thrombotic events. The risk may increase with duration of use and patients should only take this medication as prescribed by a physician.
Migraine Treatment Options: There are a number of different treatment options for migraine in Canada. Acute migraine treatment options can be broken down to three main categories: (i) triptans or 5-HT1 receptor agonists (e.g. sumatriptan, rizatriptan); (ii) ergot alkaloids (e.g. ergotamine, dihydroergotamine); and (iii) NSAIDs (Cambia). Triptans may cause dizziness, nausea, weakness and chest discomfort and should not be used by patients with heart disease, uncontrolled high blood pressure, blood vessel disease or who have a history of stroke. Ergots may cause chest pain, tingling or burning sensations, nausea, vomiting, and cramps. Furthermore, ergots may reduce blood flow to the extremities (hands and feet) and may lead to tissue damage. Ergots should also not be used by anyone with heart disease, uncontrolled high blood pressure or blood vessel disease. NSAIDs such as Cambia, may increase the incidence of cardiovascular adverse events such as myocardial infarction, stroke or thrombotic events, gastrointestinal adverse events such as peptic/duodenal ulceration, perforation and gastrointestinal bleeding and are contraindicated in the third trimester of pregnancy.
Migraine in Canada: The annual prescription migraine market in Canada is valued at approximately $150 million dollars. It is estimated that three million women and one million men suffer from migraine headaches in Canada. The prevalence of migraine is greater than that of diabetes, asthma or osteoarthritis. 60 percent of those with migraine have one or more attacks per month while 25 percent of those with migraine have at least one attack per week. One Canadian study found that those with migraine lose 6.5 days of work each year resulting from their migraine. According to 1992 estimates, 7,000,000 working days are lost annually in Canada due to migraine and that direct and indirect cost in the workplace due to migraine is estimated at $500 million annually. It was also found that 48 percent of all women suffering from migraine have never consulted a physician for their headaches.
Bezalip® SR
Bezalip SR (bezafibrate) is a well-established pan-peroxisome proliferator-activated receptor (pan-PPAR) activator. Bezalip SR, used to treat hyperlipidemia, has over 25 years of therapeutic use globally with a good safety profile. Bezalip SR is under license with Actavis Group PTC ehf and is sold exclusively in Canada by Tribute. Tribute also has the development and licensing rights to Bezalip SR in the United States.
Bezalip SR is chemically known as bezafibrate, an anti-lipidemic agent that lowers cholesterol and triglycerides in the blood. Bezalip SR, available in a sustained-release 400mg tablet taken once-per-day, is a fibric acid derivative, or fibrate, and works differently from the other classes of existing therapies such as statin therapies. Bezalip SR is also very effective in lowering triglyceride levels and has shown to increase the levels of high density lipoproteins (“HDL”) or good cholesterol and lower low density lipoproteins (“LDL”) (the “bad” cholesterol) in most patients. Bezalip SR is contraindicated in patients with hepatic and renal impairment, pre-existing gallbladder disease, hypersensitivity to bezafibrate, or pregnancy or lactation.
Bezalip SR was developed and originally introduced in Canada in 1994 by Boehringer Mannheim. Boehringer Mannheim was acquired by Hoffman LaRoche in 1998 and Roche divested Bezalip SR on a global basis to Actavis in January 2008. Tribute licensed the Canadian rights to Bezalip SR from Actavis in 2008 and the U.S. rights in 2011. Tribute met with the FDA in 2012 to discuss the potential regulatory filing of Bezalip SR in the USA and will continue to work with its licensor and the agency in 2013 to seek an approval in this market. Bezalip SR is currently approved or used in more than 40 countries worldwide. The US fibrate market according to IMS, is estimated at nearly $4 billion dollars annually. Upon approval, should such an approval be obtained, Tribute would enjoy a five year market exclusivity period from the FDA extended to all new chemical entities. Tribute plans to file an IND with the FDA in 2013.
Hyperlipidemia Treatment Options: Hyperlipidemia, or high cholesterol, is a very common chronic condition and is characterized by an excess of fatty substances called lipids, mainly cholesterol and triglycerides, in the blood. It is also called hyperlipoproteinemia because these fatty substances travel in the blood attached to proteins. This is the only way that these fatty substances can remain dissolved while in circulation.
Hyperlipidemia, in general, can be divided into two subcategories:
| ● | Hypercholesterolemia, in which there is a high level of cholesterol; and |
| ● | Hypertriglyceridemia, in which there is a high level of triglycerides, the most common form of fat. |
Competitive Analysis: Cholesterol-lowering drugs include: statins, niacin, bile-acid resins, fibric acid derivatives (fibrates), and cholesterol absorption inhibitors. All classes of cholesterol-lowering medicines are most effective when combined with increased exercise and a low-fat, high-fiber diet. The statin class includes some of the largest-selling prescription products in the world (Lipitor®, Zocor®, Crestor®, etc.). Statins dominate single-agent prescribing for the treatment of lipid disorders. The niacin (nicotinic acid – vitamin B3) class includes brands such as Niaspan®, which work primarily on increasing HDL cholesterol. The fibrates class of cholesterol lowering treatments, and is composed of three competing molecules: gemfibrozil (Lopid®), bezafibrate (Bezalip SR), and fenofibrate (Lipidil® in Canada or Tricor® in the U.S.). Clinical studies have demonstrated that bezafibrate, the active ingredient in Bezalip SR was shown to be very effective in lowering high levels of triglycerides, raising HDL cholesterol and lowering LDL cholesterol.
Soriatane®
Soriatane (acitretin) is chemically known as acitretin, and is indicated for the treatment of severe psoriasis (including erythrodermic and pustular types) and other disorders of keratinization. Soriatane is a retinoid, an aromatic analog of vitamin A. The market for moderate to severe psoriasis in Canada is estimated by management to be greater than $200 million dollars for 2012.
Soriatane was approved in Canada in 1994 and is the first and only oral retinoid indicated for psoriasis. Soriatane is often used when milder forms of psoriasis treatments like topical steroids, emollients and topical tar-based therapies have failed.
According to treatment guidelines, Soriatane should be reserved for patients unresponsive to, or intolerant of standard treatment. In addition, Soriatane should only be prescribed by physicians knowledgeable in the use of systemic retinoids. Soriatane is teratogenic and should not be used by women who are pregnant or who are planning to become pregnant during or within three years after stopping treatment of Soriatane.
Psoriasis Treatment Options: There are a number of different treatment options for psoriasis. Typically, topical agents are used for mild disease, phototherapy for moderate disease, and oral systemic agents and biologicals for more severe disease.
The three main traditional systemic treatments are methotrexate, cyclosporine and retinoids. Unlike Soriatane, methotrexate and cyclosporine are immunosuppressant drugs. Methotrexate may cause a decrease in the number of blood cells made by bone marrow, may cause liver damage, lung damage, damage to the lining of the mouth, stomach or intestines, and may increase the risk of developing lymphoma (cancer that begins in the cells of the immune system), among other serious side effects. Methotrexate may also cause serious or life-threatening skin reactions. Cyclosporines may cause side effects that could be very serious, such as high blood pressure and kidney and liver problems. It may also reduce the body's ability to fight infections.
Competitive Analysis: Soriatane occupies a place on the continuum of care that a physician might look to when a patient’s disease increases in severity and a patient has not responded well to topical agents. Soriatane will typically be used in combination with other drugs such as topical steroids, emollients or tar-based therapies. Biologic therapies such as Enbrel®, Humira® and Remicade are effective in treating severe forms of the disease, but are very expensive and sometimes not reimbursed by government or other private drug plans.
Collatamp G®
Tribute acquired the exclusive Canadian licensing rights for Collatamp G (restorable gentamicin-collagen haemostat) from Theramed Corporation in June 2012. EUSA Pharma ("EUSA") owns the worldwide rights (except US) to Collatamp G for implant indication and licensed the product to Theramed in 2008. Collatamp G, approved by Health Canada on August 1, 2007 and launched in Canada in 2008, is a fully reasorbable gentamicin-collagen haemostat, used as a surgical implant for haemostasis and local delivery of high doses of gentamicin. The market in which Collatamp G competes in Canada is estimated at $20 million dollars based on best estimates from management.
Collatamp G is indicated for the local haemostasis of capillary, parenchymatous and seeping haemorrhages in areas with a high risk of infection and has been shown to reduce post-operative infections across a range of surgical disciplines, including a reduction of 53% in a large randomized controlled study in cardiac surgery. Based on management’s belief, Collatamp G is currently used in over 100 hospitals and surgical centers across Canada and is approved or used in over 50 countries throughout the world.
Collatamp G contains gentamicin sulphate at a locally effective dose and has been shown to be efficacious in the treatment and prevention of post-operative acquired infection across many surgical interventions including cardiac surgery, gastro-intestinal surgery, vascular surgery and orthopaedic surgery.
Collatamp G is a unique product within the surgical field as it is the only product in Canada which combines a hemostatic device with a locally acting antibiotic.
Gelfoam®
Gelfoam Sterile Sponge is a medical device intended for application to bleeding surfaces as a hemostatic. It is a water-insoluble, off-white, nonelastic, porous, pliable product prepared from purified pork Skin Gelatin USP Granules and Water for Injection, USP. Gelfoam is indicated in surgical procedures as a hemostatic device, when control of capillary, venous, and arteriolar bleeding by pressure, ligature, and other conventional procedures is either ineffective or impractical. On August 23, 2012 the Company announced that it had signed an agreement granting Tribute the exclusive Canadian promotional rights for Gelfoam from Pfizer Canada Inc. ("Pfizer") (NYSE:PFE). Gelfoam is a registered trademark of Pharmacia & Upjohn Company LLC, used under license by Pfizer Canada Inc. It is estimated that the market that Gelfoam competes in is valued at approximately $30 million dollars in Canada according to information obtained from the Canadian Health Institute for Health Information.
Gelfoam is an absorbable hemostatic device used in hospitals and surgical centers across Canada. Under the terms of the promotional agreement, Tribute is granted the exclusive Canadian promotional rights to Gelfoam by Pfizer. Throughout the term of the agreement, Tribute will act on behalf of Pfizer in the promotion, sales and marketing of Gelfoam to surgeons and other health care practitioners in Canada. Pfizer will continue to be responsible for all distribution, regulatory affairs and medical related activities.
Hemostatic treatment options: Within the larger classification of topical hemostatic agents, Gelfoam is subcategorized as an “absorbable agent” and further classified as “gelatin foam”. The “absorbable agent” sub-categorisation also includes oxidized cellulose and microfibrillar collagen based products. Other topical hemostatic agent subcategories consist of “physical agents” (bone wax and ostene), “biologic agents” (thrombin, fibrin sealants and platelet gel), “synthetic agents” (cyanoacrylates, polyethylene glycol hydrogel and glutaraldehyde cross-linked albumin) and “hemostatic dressings” (fibrin and chitosan). Each of the subcategories has a specific use within the field of surgical hemostasis and these product categories do not necessarily compete against each other.
Competitive Analysis: Gelfoam competes directly against other topical hemostatic agents such as Surgifoam® and Spongostan® (Ethicon) and Avitene® (Davol). Hospital usage of these topical hemostatic agents is often determined through a tendering process, generally organized by Canadian Group Purchasing Organizations and Shared Service Organizations. Topical hemostatic agents are also used in the dental market and are sold indirectly through specialty dental distributors throughout Canada.
NeoVisc® and NeoVisc® Single Dose
NeoVisc, is a proprietary product, developed by the Company and is available as a triple-dosed, 2 mL pre-filled syringe of sterile 1.0% sodium hyaluronate solution and a single dose 6 mL pre-filled syringe of sterile 1.0% sodium hyaluronate solution used for the temporary replacement of synovial fluid in osteoarthritic joints. NeoVisc is classified in Canada by the Therapeutic Products Directorate (“TPD”) as a “medical device” under the Medical Devices Regulations of the Food and Drugs Act (Canada). NeoVisc is administered by intra-articular injection, by injecting the product directly into the affected joint and may be administered either as a single 6 mL injection or three 2 mL injections given over a two week period. Management believes the market for NeoVisc in Canada is estimated at $30 million dollars.
This type of treatment, referred to as viscosupplementation, is a well-established treatment for osteoarthritis of the knee, having gained Canadian approval in 1992 and United States approval in 1997. Viscosupplementation has also been used since the mid-1980s in many European markets. Replacing or supplementing the joint fluid provides symptomatic relief from the pain of osteoarthritis of the knee for up to 12 months. Treatment may be repeated as needed depending on clinical response.. In late 2003, the first single dose product was launched in Canada and by 2009 there were four single dose therapies available in the Canadian market, including NeoVisc single dose. Single dose products like NeoVisc, offer convenience of a single injection but the clinical effect typically is shorter in duration than the triple dose administration.
Osteoarthritis and Treatment Options: Osteoarthritis (“OA”) is the most common form of chronic arthritis worldwide and is a key cause of pain and disability in older adults. According to the Arthritis Society of Canada, OA affects about 10% of the adult population. OA of the knee, about twice as common as OA of the hip is becoming an increasingly important condition with the aging population. OA risk factors include injury, prior joint inflammation, abnormalities of joint shape, and obesity. OA is a degenerative and sometimes painful disease associated with long term wear on weight-bearing joints. The market for OA is expected to grow significantly in future years as the average age of the population increases.
Current OA strategies and treatment goals include:
| 3. | Over the Counter (“OTC”) analgesics |
| 4. | Non-steroidal anti-inflammatory drugs (“NSAID”), such as diclofenac, naproxen and COX2 inhibitors such as Celebrex |
| 5. | Intra-articular viscosupplements, such as NeoVisc |
| 6. | Intra-articular steroids – Corticosteroids are also used to treat inflammation associated with OA |
| 8. | Joint Replacement – surgical replacement with artificial joints |
Products such as NeoVisc provide a non-pharmacological option in obtaining symptomatic improvements by supplementing the synovial fluid in the affected joint. NeoVisc can also be used in conjunction with other treatment strategies like, physical therapy, OTC medications and NSAIDs and as a result may reduce the amount of medication required and potentially delay joint replacement.
Competitive Analysis: There are a number of competitive viscosupplements to NeoVisc in Canada for both NeoVisc and NeoVisc Single Dose, including Genzyme’s products Synvisc® and Synvisc® One. The competitive landscape in the United States and other international markets is now very similar to the Canadian market. NeoVisc is an effective, technically engineered, highly purified, high molecular weight linear format, free of any avian peptides and available in a single or triple dose presentation. Furthermore, NeoVisc is the only marketed viscosupplement manufactured and packaged in Canada and marketed by a Canadian company.
Uracyst® (Uropol®)
Uracyst, developed by the Company, a sterile 2.0% sodium chondroitin sulfate solution available in a 20 mL vial. Uracyst is used in the treatment of certain forms of interstitial cystitis (“IC”) and non-common cystitis. This product is instilled by catheter directly into a patient’s bladder. According to the Global Data: Interstitial Cystitis Therapeutics – Pipeline Assessment and Market Forecasts to 2019; the global interstitial market size is estimated to be valued at approximately US$151 million dollars.
Uracyst provides symptomatic relief for patients suffering from glycosaminoglycan (“GAG”) deficient cystitis such as IC and non-common cystitis (including radiation-induced cystitis and hemorrhagic cystitis) by supplementing and replenishing deficiencies in the glycosaminoglycan lining of the bladder wall. This GAG lining acts as a protective barrier between urine and the bladder wall. It protects the bladder wall against irritants and toxins (e.g., micro crystals, carcinogens and acid) in the urine and serves as an important defense mechanism against bacterial adherence. Many researchers believe that a large number of IC patients (over 70%) have “leaky” or deficient GAG layers in their bladder.
Uracyst is typically instilled weekly for six weeks, then once a month until symptoms resolve. Because these types of cystitis are typically chronic diseases of no known cause, patients will usually require re-treatment after a variable period of time when symptoms recur.
The Company has been issued a patent in the United States, China, Japan, Australia and Canada for the use of Uracyst treatments and has international patents pending. Uracyst is classified in Canada by TPD as a medical device under the Medical Devices Regulations of the Food and Drugs Act (Canada).
Interstitial Cystitis and Treatment Options: Interstitial cystitis is a chronic inflammation of the bladder wall and is often associated with painful symptoms of the lower abdomen. Unlike common cystitis, IC is not caused by bacteria and does not respond to conventional antibiotic therapy. IC can affect people of any age, race or sex, but is more frequently diagnosed in women.
Interstitial cystitis causes some or all of the following symptoms:
| ● | Frequency: Day and/or night frequency of urination (up to 60 times a day in severe cases). In early or very mild cases, frequency is sometimes the only symptom; |
| ● | Urgency: Pain, pressure or spasms may also accompany the sensation of having to urinate immediately; |
| ● | Pain: Can be abdominal, urethral or vaginal. Pain is also frequently associated with sexual intercourse; and |
| ● | Other: Some patients also report experiencing symptoms such as muscle and joint pain, migraines, allergic reactions, colon and stomach problems, as well as the more common symptoms of IC described above. |
At present, there is neither a cure for IC nor is there an effective treatment which works for everyone. The following treatments have been used to relieve the symptoms of IC in some people: (i) diet, (ii) bladder distention, (iii) instilled dimethyl sulfoxide (“DMSO”), heparin or HA, (iv) anti-inflammatory drugs, (v) antispasmodic drugs, (vi) antihistamines and (vii) muscle relaxants.
In severe cases, several types of surgery have been performed including bladder augmentation and urinary diversion. Products available for treating IC vary in their effectiveness. Most work for short periods of time and, in general, are effective in about 30% to 40% of patients. Some therapies can take up to six months of active treatment before patients start to show symptomatic improvement.
Competitive Analysis: The treatment of IC is a relatively small niche market. Because of low efficacy rates and relatively expensive treatment costs for competitive products, management believes the treatment of IC remains an unsatisfied market with no dominant competitive product. Ortho McNeil Pharmaceutical, Inc. a competitor in the IC market, has marketed Elmiron® (pentosan polysulfate sodium) in Canada since 1993. Elmiron® is used as an oral GAG replenishment therapy. Side effects reported from the use of Elmiron® include hair loss, diarrhea and extreme to mild gastrointestinal discomfort.
Daraprim®
Daraprim (pyrimethamine) is a medication used for protozoal infections. It is commonly used as an antimalarial drug (for both treatment and prevention of malaria), and is also used (combined with sulfadiazine) in the treatment of Toxoplasma gondii infections in immunocompromised patients, such as HIV-positive individuals. Daraprim was licensed from CorePharma LLC in November 2010 and is sold exclusively in Canada by Tribute.
Unapproved and Non-Marketed Products
MycoVa
MycoVa (terbinafine topical suspension), developed by NexMed (a wholly owned subsidiary of Apricus Bio), combines an existing, approved drug for nail fungus, terbinafine, with the NexACT® technology that enhances the absorption of the drug through the skin or nail bed. A combined post-hoc analysis of two randomized, double-blind, vehicle controlled, multicenter, parallel group Phase III studies to assess the efficacy, safety and tolerability of MycoVa demonstrated statistically significant results in primary and secondary efficacy endpoints in favor of active treatment in patients who did not present with comorbid tinea pedis (athlete’s foot), as these patients are considered at higher risk of reinfection.
The advantage of Apricus Bio’s MycoVa product is that it is easy to apply, and is therefore expected to improve patient compliance. MycoVa is applied to the infected nails, typically at bedtime, with minimal preparation, such as simply washing with soap and water. The formulation allows significant amounts of the drug to penetrate through the nail plate to the nail bed and surrounding area where fungus is located without significant systemic exposure.
NexMed is expected to file MycoVa with the regulatory authorities in Canada with Tribute’s cooperation sometime in the second half of 2013.
Development Strategy
Tribute is an emerging specialty pharmaceutical company with a primary focus on the acquisition, licensing, development and promotion of healthcare products in Canada. In addition to growing the business in Canada, the Company is also building revenues through out-licensing its current products to international markets.
Tribute’s future product development efforts will be focused initially on developing strategic partners to assist Tribute in gaining regulatory approval in the United States and other key international markets for NeoVisc and Uracyst.
Tribute met with the FDA in 2012 to discuss the ongoing development initiatives for Bezalip SR in the U.S. market. Based on IMS data, the fibrate market alone is estimated at approximately US$4.0 billion annually in the U.S. and the Company will explore all possibilities to obtain a market authorization for Bezalip SR in the U.S.
Sales and Marketing
Tribute’s sales and marketing strategy is focused on the organic growth of existing marketed products through several key activities. First, our sales force ensures that it targets known prescribers of our medications or medications that compete with our products. We create demand by providing customers with reliable and trustworthy information from credible sources and by coordinating and facilitating continuing health education events in targeted areas. Second, we support our products by providing physicians and other healthcare practitioners with quality patient care materials. And third, we ensure that our products are easy to purchase through all major wholesalers and distributors in Canada and we manage our supply chain efficiently to ensure that we can always meet demand.
We consider our sales force to be very experienced and well trained. All of our representatives have experience from other pharmaceutical companies including many of the largest companies in the industry. Additionally, Tribute offers its representatives a competitive incentive plan based on the achievement of results.
During the year ended December 31, 2012, the Company had two significant pharmaceutical wholesale customers account for 54.7% of the Company’s sales. This is normal and customary in the Canadian pharmaceutical business. These are well known and highly respected customers that have a solid track record of paying all outstanding amounts owing on time.
Manufacturing
Tribute currently outsources the manufacturing of its proprietary products to special sterile facilities operated by third party contractors. These facilities are in compliance with applicable Health Canada, TPD division medical device guidelines and current Good Manufacturing Practice ("cGMP") regulations. The Company believes these facilities have sufficient excess capacity at present to meet the Company’s short and long term objectives. A significant interruption in the supply of any of the Company’s products could impair the successful marketing of such products.
Our licensed products are manufactured by authorized, third-party, contract manufacturing organizations in various places throughout the world. Our manufacturers are all cGMP compliant and approved fabricators of pharmaceutical products according to Health Canada.
The manufacture of the Company’s products involves the handling and use of substances that are subject to various environmental laws and regulations that impose limitations on the discharge of pollutants into the soil, air and water, and establish standards for their storage and disposal. The Company believes that the manufacturers of its products are in material compliance with such environmental laws and regulations.
The sale and use of the Company’s products entails risk of product liability and the Company presently carries product liability insurance. There can be no assurance that, despite testing by the Company, as well as testing by regulatory agencies, defects will not be found in new products after commencement of commercial shipments. The occurrence of such defects could result in the loss of, or delay in, market acceptance of the Company’s products, which could have a material adverse effect on the Company. Furthermore, litigation, regardless of its outcome, could result in substantial costs to the Company, divert management’s attention and resources from the Company’s operations and result in negative publicity that might impair the Company’s on-going marketing efforts.
Tribute is responsible for secondary packaging of its proprietary products at its London, Ontario facility. The Company’s licensed products are packaged by its third party contract manufactures.
The Company’s products are distributed in Canada by a third-party pharmaceutical logistics provider, which provides warehousing, distribution, customer service and accounts receivable directly to the Company.
The Company, as a common practice for all of its products maintains several months of inventory (including raw materials and finished good) at any given time to mitigate against any risks of potential manufacturing disruptions. The Company did not experience any product disruptions of any significance in 2012.
The Industry
The pharmaceutical industry is highly competitive and is characterized by rapidly changing technology. Tribute believes that competition in its markets is based on, among other things, product safety, product efficacy, convenience of dosing, reliability, availability and price. The market is dominated by a small number of highly-concentrated global competitors, many of which boast substantially greater resources than the Company. Given the size and scope of the competition, there can be no assurance that the Company will maintain or grow its current market position in its therapeutic areas, or that developments by others will not render the Company’s products or technologies non-competitive or obsolete. Also, many current and potential competitors of the Company may have greater name and brand recognition, or may enjoy more extensive customer relationships that could be leveraged to gain market share to the Company’s detriment. In addition, competitors may be able to complete the regulatory approval process more rapidly than the Company, and therefore may achieve market entry ahead of the Company’s products.
As such, and in order to maintain and improve its position in the industry, the Company is dedicated to enhancing its current products, developing or acquiring new products and product extensions and implementing a comprehensive domestic and international sales and distribution marketing strategy. If the Company is not able to compete effectively against current and future competitors, such failure may result in fewer customer orders, reduced gross margins and profitability and loss of market share, any of which would materially adversely affect the Company.
Competition
Tribute faces product competition from companies marketing competing pharmaceutical products and medical devices in Canada and potentially on new products that could be launched in the future. The introduction of generic products of Tribute’s products as well as lower priced, similar competing products could have a profound impact on the Company’s existing business.
Competitive Strengths
Management believes that Tribute maintains a high level of competitive advantage within its chosen therapeutic areas over other Canadian companies or multi-national subsidiaries seeking to license or acquire products in Canada. These include:
| ● | A well trained and skilled sales force and employees; |
| ● | Expertise in marketing new and existing products; |
| ● | Its ability to obtain regulatory approvals for new and existing products in Canada and abroad; |
| ● | Expertise in business development including sourcing, evaluation, negotiation and ability to complete business transactions to acquire or license new products for Canada; |
| ● | The ability to offer cost-effective pricing while maintaining acceptable gross profit margins with many of its products; |
| ● | The implementation and development of lifecycle management strategies; |
| ● | Clear and defendable patents for certain of its products; and |
| ● | The ability to obtain reasonable reimbursement and good pricing in Canada |
REGULATORY, QUALITY ASSURANCES, SAFETY AND MEDICAL INFORMATION
Tribute currently utilizes a combination of internal and outsourced resources to address all of its quality assurance, regulatory affairs, pharmacovigilance and medical information needs. Tribute’s London, Ontario facility is ISO 1345 approved and the Company remains compliant with all regulatory guidelines and reporting obligations.
Canadian Regulatory Overview
The Canadian Therapeutic Products Directorate (“TPD”) is the Canadian federal authority that regulates, evaluates and monitors the safety, effectiveness, and quality of drugs, medical devices, biologics and other therapeutic products available to Canadians. The TPD is part of Health Canada. The TPD’s regulatory process for review, approval and regulatory oversight of products is similar to the regulatory process conducted by the Food and Drug Administration (“FDA”) in the United States.
Prior to being given market authorization for a product, a manufacturer must present substantive scientific evidence of a product’s safety, efficacy and quality as required by the Food and Drugs Act and associated regulations. This information is submitted in the form of a New Drug Submission (“NDS”) in Canada.
The TPD performs a thorough review of the submitted information, sometimes using external consultants and advisory committees, to evaluate the potential benefits and risks of a drug. If, at the completion of the review, the conclusion is that the patient benefits outweigh the risks associated with the drug, the drug is issued a Notice of Compliance (“NOC”) and a Drug Identification Number (“DIN”) which permits the manufacturer to market the drug in Canada.
Currently, the process for the review of a drug typically takes an average of one to two years from the time that a manufacturer submits an NDS until the TPD approves a drug. The average time to approval varies but on average takes about fifteen to eighteen months.
All establishments engaged in the fabrication, packaging/labeling, importation, distribution, wholesale and operation of a testing laboratory relating to drugs are required to hold a Drug Establishment License unless expressly exempted under the Food and Drugs Regulations. The basis for the issuance of an Establishment License is compliance with current GMP as determined by inspection. Foreign sites whose products are being imported into Canada are also required to demonstrate GMP compliance.
Regulatory obligations and oversight continue following the initial market approval. The manufacturer must report any new information received concerning serious side effects, including the failure of a drug to produce the desired effect. The manufacturer must also notify the TPD of any new safety issues that it becomes aware of after the launch of a product.
Canadian Reimbursement Overview
After regulatory approval is received for a prescription drug, it can be sold to the public in accordance with prescription pharmaceutical regulations. Revenues are generated from prescription drug sales in Canada through one of three sources:
| ● | Cash: Patients will pay “out of pocket” at their sole expense. This portion of patients account for an estimated 10% of all prescription dollars spent in Canada. |
| ● | Private Insurance: Approximately 45% of prescription dollars spent in Canada is reimbursed via third-party private insurers, under plans generally provided by patients’ employers. Patients may be reimbursed a percentage of the cost of covered drugs minus deductibles or co-pays. The availability for reimbursement of drugs varies according to the type of reimbursement plan designed by the insurance company. There are a number of private insurers operating in Canada that provide employee plans to private and public sector employers. |
| ● | Government Drug Plans: Government drug plans cover the cost of nearly 45% of prescription dollars spent in Canada and generally serve patients over the age of 65 or patients for whom the cost of medications represents a significant financial burden such as families receiving social assistance. Each provincial government pays the cost of drugs that are listed on their own provincial formulary. |
After regulatory approval of a drug is granted, approval for reimbursement is typically sought from provincial governments and private insurance companies. Until provincial and private reimbursement is approved, the product is sold only via cash purchases. Decisions to list drugs for reimbursement on private and government formularies vary widely depending on the drug, indications, competitive products and price.
Hospital products or products dispensed in the hospital are treated differently in Canada. All medications taken while in a hospital are fully reimbursed by the provincial governments. If a patient leaves the hospital and is prescribed a drug to be taken at home, this prescription would be reimbursed either by cash, private insurance or public insurance plans.
Common Drug Review (CDR)
The CDR was implemented in 2003 to provide formulary listing recommendations for new drugs to participating publicly-funded federal, provincial and territorial drug benefit plans in Canada.
The CDR consists of:
| ● | A systematic review of the available clinical evidence and a review of the pharmacoeconomic data for the drug; and |
| ● | A listing recommendation made by the Canadian Expert Drug Advisory Committee. |
Based on the targeted timeframes of the CDR, a review should be completed approximately 20 to 26 weeks following receipt of a manufacturer’s submission, after which recommendations are made to participating drug plans.
At the provincial and territorial level, products are reviewed on the basis of their cost-effectiveness, comparable utility to other similar products, projected utilization and cost implications to the publicly-funded drug budget. Each submission is reviewed but there is wide variance in the formulary decisions and the time taken to make such decisions. Provinces and territories may utilize the recommendations of the CDR, or perform their own analysis.
Presently, all provinces and territories except Quebec use the CDR recommendations in their assessment, but make their formulary decisions independently from the CDR. In many provinces, the formulary committee may grant “restricted or limited use approvals” for a drug as a means of regulating the size of the patient population eligible for reimbursement for the cost of the drug and by encouraging physicians to use older generation products first before prescribing newer, sometimes more costly medications.
Patent and Proprietary Protection
Where deemed appropriate, Tribute files patent applications for technologies which it owns or in respect of which it has acquired a license and, if necessary, then further developed to make such technologies marketable. Licensed products often include rights to the intellectual property (“IP”) of the licensor. Such applications may cover composition of matter, the production of active ingredients and their novel applications.
The Company retains independent patent counsel where appropriate. Management of the Company believes that the use of outside patent specialists ensures prompt filing of patent applications, as well as the ability to access specialists in various areas of patents and patent law to ensure complete patent filings.
The patent position relating to medical devices and drug development is uncertain and involves many complex legal, scientific and factual questions. While the Company intends to protect its valuable proprietary information and believes that certain of its information is novel and patentable, there can be no assurance that: (i) any patent application owned by, or licensed to, the Company will issue to patent in all or any countries; (ii) proceedings will not be commenced seeking to challenge the Company’s patent rights or that such challenges will not be successful; (iii) proceedings taken against a third party for infringement of patent rights will be successful; (iv) processes or products of the Company will not infringe upon the patents of third parties; or (v) the scope of patents issued to, or licensed by, the Company will successfully prevent third parties from developing similar and competitive products. The cost of litigation to uphold the validity and prevent infringement of the patents owned by, or licensed to, the Company may be significant.
Issues may arise with respect to claims of others to rights in the patents or patent applications owned by or licensed to the Company. As the industry expands and more patents are issued, the risk increases that the Company’s processes and products may give rise to claims that they infringe the patents of others. Actions could be brought against the Company or its commercial partners claiming damages or an accounting of profits and seeking to enjoin them from clinically testing, manufacturing and marketing the affected product or process. If any such action were successful, in addition to any potential liability for damages, the Company or its commercial partners could be required to obtain a license in order to continue to manufacture or market the affected product or use the affected process. There can be no assurance that the Company or its commercial partners could prevail in any such action or that any license required under any such patent would be made available or, if available, would be available on acceptable terms. If no license is available, the Company’s ability to commercialize its products may be negatively affected. There may be significant litigation in the industry regarding patents and other intellectual property rights and such litigation could consume substantial resources. If required, the Company may seek to negotiate licenses under competitive or blocking patents, which it believes are required for it to commercialize its products.
Although the scope of patent protection ultimately afforded by the patents and patent applications owned by or licensed to the Company is difficult to quantify, management of the Company believes that such patents will afford adequate protection for it to ensure exclusivity in the conduct of its business operations as described in this Form 10-K. The Company also intends to rely upon trade secrets, confidential and unpatented proprietary know-how, and continuing technological innovation to develop and maintain its competitive position. To protect these rights, the Company whenever possible requires all employees and consultants to enter into confidentiality agreements with the Company. There can be no assurance, however, that these agreements will provide meaningful protection for the Company’s trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure. Further, in the absence of patent protection, the Company’s business may be adversely affected by competitors who independently develop substantially equivalent or superior technology.
The existence, scope and duration of patent protection vary among the Company’s products and among the different countries where the Company’s products may be sold. They may also change over the course of time as patents are granted or expire, or become extended, modified or revoked.
The Company currently has patents issued for Uracyst that include a low dose patent in both the United States (Patent No. 6,083,933 –- issued 07/04/2000) and Canada (Patent No. 2,269,260 – issued 04/16/1999). In addition, the Company has approved patents for its high dose product in Australia (Patent No. AU 2004212650 – issued 07/23/2009), Canada (Patent No. 2515512 – issued 07/10/2012), China (Patent No. ZL200480006467.1 – issued 05/26/2010), the United States (Patent No. US 7772210 – issued 08/10/2010, Patent No. US 8084441 – issued 12/27/2011 and Patent No. 834276 – issued 12/18/2012), and Japan (Patent JP 4778888 – issued 07/08/2011). Jurisdictions with patents pending related to the high dose Uracyst include: the United States, Europe, India, and Israel. Uracyst is classified as a medical device in all countries in which it currently has approval.
The Company also has rights to patents on Cambia through its licensing agreement with Nautilus Neuroscience (Patent No. 2,254, 144) and on MycoVa through our partner NexMed (U.S.A.) Inc. (Patent No. 2,178,594). There are also patents pending for both Cambia and MycoVa.
Pricing and Reimbursement
As pressures for cost containment increase, particularly in Canada, the United States and the EU, there can be no assurance that the prices the Company can charge for its products will be as favorable as historical pharmaceutical product prices. Reimbursement by government, private insurance organizations, and other healthcare payers has become increasingly important, as has the listing of new products on large formularies, such as those of pharmaceutical benefit providers and group buying organizations. The failure of one or more products to be included on formulary lists, or to be reimbursed by government or private insurance organizations, could have a negative impact on the Company’s results of operation and financial condition.
Product Pricing Regulation on Certain Patented Drug Products
Patented drug products in Canada are subjected to the regulation of the Patented Medicine Prices Review Board (“PMPRB”). The PMPRB’s objective is to ensure that prices of patented products in Canada are not excessive. For new patented products, the price in Canada is limited to either the cost of existing drugs sold in Canada or the median of prices for the same drug sold in other specified industrial countries. For existing patented products, prices cannot increase by more than the Consumer Price Index. The PMPRB monitors compliance through a review of the average transaction price of each patented drug product as reported by the Company over a recurring six-month reporting period.
The PMPRB does not approve prices for drug products in advance of their introduction to the market. The PMPRB provides guidelines from which companies like Tribute set their prices at the time they launch their products. All patented pharmaceutical products introduced in Canada are subject to the post-approval, post launch scrutiny of the PMPRB. Since the PMPRB does not pre-approve prices for a patented drug product in Canada, there may be risk involved in the determination of an allowable price selected for a patented drug product at the time of introduction to the market by the company launching such products in Canada. If the PMPRB does not agree with the pricing assumptions chosen by such company introducing a new drug product, the price chosen could be challenged by the PMPRB and, if it is determined that the price charged is excessive, the price of the product may be reduced and a fine may be levied against the company for any amount deemed to be in excess of the allowable price determined. Drug products that have no valid patents are not subject to review by the PMPRB.
Other Laws and Regulations
Tribute’s operations are or may be subject to various federal, provincial, state and local laws, regulations and recommendations relating to the marketing of products and relationships with treating physicians, data protection, safe working conditions, laboratory and manufacturing practices, the export of products to certain countries and the purchase, storage, movement, use and disposal of hazardous or potentially hazardous substances. Although the Company believes its safety procedures comply with the standards prescribed by federal, provincial, state and local regulations, the risk of contamination, injury or other accidental harm cannot be eliminated completely. In the event of an accident, the Company could be held liable for any damages that result. The amount of such damages could have a materially adverse effect on the Company’s results of operations and financial condition.
Employees
The Company currently employs forty employees including full-time, part-time and contract employees. Twenty-nine of these employees are in sales and marketing and the remainder are in management and administration positions. The Company may add additional staff in areas that its management may feel is necessary for the successful operation of the Company.
The Company is substantially dependent on the services of its key senior management personnel. The Company has entered into employment agreements with certain of its key officers, (see “Item 11 – Executive Compensation”). The loss of the services of any key management employee could have a materially adverse effect on the Company. The Company does not maintain key man life insurance on the life of its officers. In addition, the Company’s future success will depend in part upon its continuing ability to hire, train, motivate and retain key senior management and skilled technical and marketing personnel. The market for qualified personnel has historically been and the Company expects that it will continue to be very competitive.
Customers
During the year ended December 31, 2012, the Company had two significant pharmaceutical wholesale customers account for 54.7% of the Company’s sales. This is normal and customary in the Canadian pharmaceutical business. These are well known and highly respected customers that have a solid track record of paying all outstanding amounts owing on time.
Our Website
Our website address is www.tributepharma.com. Information found on our website is not incorporated by reference into this report. We make available free of charge through our website our Securities and Exchange Commission, or SEC, filings furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The Company will also make available all financial reports filed in accordance with US GAAP with SEDAR through its website. The Company invites investors and interested parties to sign up for “Email Alerts” on the Company’s website to receive information such as press releases as they become available.
You should carefully consider the risks described below together with all of the other information included in this annual report on Form 10-K before making an investment decision with regard to our securities. The statements contained in or incorporated into this annual report on Form 10-K that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business
We have incurred significant losses since inception of the Company. If we are unable to achieve and then maintain profitability, the market value of our common stock will likely decline.
As of December 31, 2012 we had an accumulated deficit of $7,723,556. While we expect to incur limited operating losses during the fiscal year ended December 31, 2012, because of the numerous risks and uncertainties associated with our products, we are unable to predict with any certainty the extent of any future losses or when we will become profitable. If we are unable to achieve and then maintain profitability, the market value of our common stock will likely decline.
We will require additional financing to expand our operations.
Management is seeking various alternatives to ensure that we can meet some of our operating cash flow requirements through financing activities, such as private placement of our common stock, preferred stock offerings and offerings of debt and convertible debt instruments as well as through merger or acquisition opportunities. In addition, management is actively seeking strategic alternatives, including strategic investments and divestitures.
We cannot provide any assurance that we will obtain the required funding. Our inability to obtain required funding in the near future or our inability to obtain funding on favorable terms will have a material adverse effect on our operations and our strategic development plan for future growth.
As a result of the weakened global economic situation, Tribute, along with all other pharmaceutical research and development entities, may have restricted access to capital, bank debt and equity, and is likely to face increased borrowing costs. Although our business and asset base have not changed, the lending capacity of all financial institutions has diminished and risk premiums have increased. As future operations will be financed out of funds generated from financing activities, our ability to do so is dependent on, among other factors, the overall state of capital markets and investor appetite for investments in the pharmaceutical industry and our securities in particular.
Should we elect to satisfy our cash commitments through the issuance of securities, by way of either private placement or public offering or otherwise, there can be no assurance that our efforts to raise such funding will be successful, or achieved on terms favorable to us or our existing shareholders. If adequate funds are not available on terms favorable to us, we may have to reduce substantially or eliminate expenditures, production and marketing of our proposed products, or obtain funds through arrangements with corporate partners that require us to relinquish rights to certain of our technologies or products. There can be no assurance that we will be able to raise additional capital if our current capital resources are exhausted.
Our quarterly operating results may fluctuate significantly.
We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous factors, including:
● | variations in the level of expenses related to our products; |
● | regulatory developments affecting our product candidates; |
● | our execution of any collaborative, licensing or similar arrangements, and the timing of payments we may make or receive under these arrangements; and |
● | the level of underlying demand for our products and wholesalers’ buying patterns. |
If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our common stock to fluctuate substantially.
If we make strategic acquisitions, we will incur a variety of costs and might never realize the anticipated benefits.
There are accretive and non-accretive acquisitions of pharmaceutical products. Since the valuations of product acquisitions are based on a forecast over a specified time-period, there is some risk inherent with all acquisitions. When appropriate opportunities become available, we might attempt to acquire approved products, additional drug candidates, technologies or businesses that we believe are a strategic fit with our business. If we pursue any transaction of that sort, the process of negotiating the acquisition and integrating an acquired product, drug candidate, technology or business might result in operating difficulties and expenditures and might require significant management attention that would otherwise be available for ongoing development of our business, whether or not any such transaction is ever consummated. Moreover, we might never realize the anticipated benefits of any acquisition or forecasted sales may not materialize. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities, or impairment expenses related to goodwill, and impairment or amortization expenses related to other intangible assets, which could harm our financial condition. However, some acquisitions are accretive in nature and for the completion of a successful accretive transaction the benefits may outweigh the risks.
We may not be able to compete with treatments now being marketed and developed, or which may be developed and marketed in the future by other companies.
Our products will compete with existing and new therapies and treatments and numerous pharmaceutical, biotechnology and drug delivery companies, hospitals, research organizations, individual scientists and nonprofit organizations are engaged in the development of alternatives to our technologies. Some of these companies have greater research and development capabilities, experience, manufacturing, marketing, financial and managerial resources than we do. Collaborations or mergers between large pharmaceutical or biotechnology companies with competing drug delivery technologies could enhance our competitors’ financial, marketing and other resources. Developments by other drug delivery companies could make our products or technologies uncompetitive or obsolete. Accordingly, our competitors may succeed in developing competing technologies, obtaining FDA approval for products or gaining market acceptance more rapidly than we can.
If government programs and insurance companies do not agree to pay for or reimburse patients for our pharmaceutical products, our success will be impacted.
Sales of our products will depend in part on the availability of reimbursement by third-party payers such as government health administration authorities, private health insurers and other organizations. Third-party payers often challenge the price and cost-effectiveness of medical products and services. Governmental approval of health care products does not guarantee that these third-party payers will pay for the products. Even if third-party payers do accept our product, the amounts they pay may not be adequate to enable us to realize a profit. Legislation and regulations affecting the pricing of pharmaceuticals may change before our products are approved for marketing and any such changes could further limit reimbursement.
Even if regulatory approvals are obtained for our products, such products will be subject to ongoing regulatory review. If we or a partner fail to comply with continuing Canadian, U.S. and foreign regulations, the approvals to market drugs could be lost and our business would be materially adversely affected.
Following any initial Health Canada, FDA or foreign regulatory approval of any drugs we or a partner may develop, such drugs will continue to be subject to regulatory review, including the review of adverse drug experiences, safety reports and clinical results that are reported after such drugs are made available to patients. This would include results from any post marketing tests or vigilance required as a condition of approval. The manufacturer and manufacturing facilities used to make any drug candidates will also be subject to periodic review and inspection by regulatory authorities, including Health Canada and/or the FDA. The discovery of any new or previously unknown problems with the product, manufacturer or facility may result in restrictions on the drug or manufacturer or facility, including withdrawal of the drug from the market. Marketing, advertising and labeling also will be subject to regulatory requirements and continuing regulatory review. The failure to comply with applicable continuing regulatory requirements may result in fines, suspension or withdrawal of regulatory approval, product recalls and seizures, operating restrictions and other adverse consequences.
We and our partners are subject to extensive Canadian, U.S. and foreign government regulation, including the requirement of approval before products may be manufactured or marketed.
We, our present and future collaboration partners, and the drug product candidates developed by us or in collaboration with partners are subject to extensive regulation by governmental authorities in Canada, the U.S. and other countries. Failure to comply with applicable requirements could result in, among other things, any of the following actions: warning letters, fines and other civil penalties, unanticipated expenditures, delays in approving or refusal to approve a product candidate, product recall or seizure, interruption of manufacturing or clinical trials, operating restrictions, injunctions and criminal prosecution.
The product candidates of us and our partners cannot be marketed in Canada, the U.S. or any other jurisdiction without regulatory approval from a regulatory authority such as Health Canada or the FDA (“Regulatory Authority”). Obtaining regulatory approval with any Regulatory Authority requires substantial time, effort, and financial resources, and may be subject to both expected and unforeseen delays, including, without limitation, citizen’s petitions or other filings with the Health Canada or FDA, and there can be no assurance that any approval will be granted on a timely basis, if at all, or that delays will be resolved favorably or in a timely manner by any Regulatory Authority. If our product candidates are not approved in a timely fashion, or are not approved at all, our business and financial condition may be adversely affected.
In addition, both before and after regulatory approval, we, our collaboration partners and our product candidates are subject to numerous requirements by any Regulatory Authority and foreign regulatory authorities covering, among other things, testing, manufacturing, quality control, labeling, advertising, promotion, distribution and export. These requirements may change and additional government regulations may be promulgated that could affect us, our collaboration partners or our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in Canada, the U.S. or abroad. There can be no assurance that neither we nor any of our partners will be required to incur significant costs to comply with such laws and regulations in the future or that such laws or regulations will not have a material adverse effect upon our business.
Materials necessary to manufacture our products may not be available on commercially reasonable terms, or at all, which may result in reduced revenues due to product shortages.
We rely on the third-party manufacturers to manufacture the Company’s products. Most of our third-party suppliers purchase, on the Company’s behalf, the materials necessary to produce the finished, final product for sales including the active pharmaceutical ingredients, or APIs, and other such materials necessary to produce finished, saleable products for the commercial distribution of our products. In the event that a suppliers of a product, ingredient or any materials the Company needs to manufacturer or package its products are not available or not for sale at the time the Company needs such ingredient or material in order to meet our required delivery schedule or on commercially reasonable terms, then the Company could be at risk of a product shortage or stock-out. The Company relies on our suppliers in many cases to ensure the adequate supply of ingredients, API’s and packaging material and for the timely delivery of orders placed by the Company. Should the Company experience a shortage in supply of a product, API, ingredient or any material sales of such product could be harmed or reduced and our ability to generate revenues from such product may be impaired.
Our product candidates, if approved for sale, may not gain acceptance among physicians, patients and the medical community, thereby limiting our potential to generate revenues.
If one of our product candidates is approved for commercial sale by the Regulatory Authority, the degree of market acceptance of any approved product by physicians, healthcare professionals and third-party payers and our profitability and growth will depend on a number of factors, including:
● | Demonstration of efficacy; |
● | Changes in the practice guidelines and the standard of care for the targeted indication; |
● | Relative convenience and ease of administration; |
● | The prevalence and severity of any adverse side effects; |
● | Budget impact of adoption of our product on relevant drug formularies and the availability, cost and potential advantages of alternative treatments, including less expensive generic drugs; |
● | Pricing and cost effectiveness, which may be subject to regulatory control; |
● | Effectiveness of our or any of our partners’ sales and marketing strategies; |
● | The final product labeling or product insert required by Regulatory Authority in other countries; and |
● | The availability of adequate third-party insurance coverage or reimbursement. |
If any product candidate that we acquire, license or develop does not provide a treatment regimen that is as beneficial as, or is perceived as being as beneficial as, the current standard of care or otherwise does not provide patient benefit, that product candidate, if approved for commercial sale by Regulatory Authority, likely will not achieve market acceptance. Our ability to effectively promote and sell any approved products will also depend on pricing and cost-effectiveness, including our ability to produce a product at a competitive price and our ability to obtain sufficient third-party coverage or reimbursement. If any product candidate is approved but does not achieve an adequate level of acceptance by physicians, patients and third-party payers, our ability to generate revenues from that product would be substantially reduced. In addition, our efforts to educate the medical community and third-party payers on the benefits of our product candidates may require significant resources, may be constrained by Regulatory Authority rules and policies on product promotion, and may never be successful.
Guidelines and recommendations published by various organizations can impact the use of our products.
Government agencies promulgate regulations and guidelines directly applicable to us and to our products. In addition, professional societies, practice management groups, private health and science foundations and organizations involved in various diseases from time to time may also publish guidelines or recommendations to the health care and patient communities. Recommendations of government agencies or these other groups or organizations may relate to such matters as usage, dosage, route of administration and use of concomitant therapies. Recommendations or guidelines suggesting the reduced use of our products or the use of competitive or alternative products that are followed by patients and health care providers could result in decreased use of our proposed products.
Our failure to successfully discover, acquire, develop and market additional product candidates or approved products would impair our ability to grow.
As part of our growth strategy, we intend to acquire, license or develop and market additional products and product candidates. We are pursuing various therapeutic opportunities through our pipeline. We may spend several years completing our development of any particular current or future internal product candidate, and failure can occur at any stage. The product candidates to which we allocate our resources may not end up being successful. In addition, because our internal research capabilities are limited, we may be dependent upon pharmaceutical and biotechnology and other researchers to sell or license products or technology to us. The success of this strategy depends partly upon our ability to identify, select, discover, license and/or acquire promising pharmaceutical product candidates and products for Canada. Failure of this strategy would impair our ability to grow.
The process of proposing, negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy and complex. Other companies, including some with substantially greater financial, marketing and sales resources, may compete with us for the license or acquisition of product candidates and approved products. We may devote resources to potential acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts. We may not be able to acquire the rights to additional product candidates on terms that we find acceptable, or at all.
In addition, future acquisitions may entail numerous operational and financial risks, including:
● | exposure to unknown liabilities; |
● | disruption of our business and diversion of our management’s time and attention to develop acquired products or technologies; |
● | incurrence of substantial debt, dilutive issuances of securities or depletion of cash to pay for acquisitions; |
● | higher than expected acquisition and integration costs; |
● | difficulty in combining the operations and personnel of any acquired businesses with our operations and personnel; |
● | increased amortization expenses; |
● | impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and |
● | inability to motivate key employees of any acquired businesses. |
Further, any product candidate that we acquire may require additional development efforts prior to commercial sale, including extensive clinical testing and approval by Regulatory Authorities. All product candidates are prone to risks of failure typical of pharmaceutical product development, including the possibility that a product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities.
We have limited manufacturing experience or resources, and we must incur significant costs to develop this expertise or rely on third parties to manufacture our products.
Tribute relies on several contract manufacturers for our supply of products. There are risks inherent in pharmaceutical manufacturing that could affect the ability of our contract manufacturers to meet our delivery time requirements or provide adequate amounts of material to meet our needs. Included in these risks are synthesis and purification failures and contamination during the manufacturing process, which could result in unusable product and cause delays in our development process, as well as additional expense to us. To fulfill our requirements, if any, we may also need to secure alternative suppliers for our products. In addition to the manufacture of certain of our products, we may have additional manufacturing requirements related to the technology required for any of our products. In some cases, the delivery technology we utilize is highly specialized or proprietary, and for technical and legal reasons, we may have access to only one or a limited number of potential manufacturers for such delivery technology. Failure by these manufacturers to properly formulate our products for delivery could also result in unusable product and cause delays in our discovery and development process, as well as additional expense to us.
The manufacturing process for any products based on our technologies that we or our partners may develop is subject to regulatory approvals from Regulatory Authorities and together with our partners the Company needs to contract with manufacturers who can meet all applicable regulatory guidelines. In addition, if we receive the necessary regulatory approval for any product candidate, we also expect to rely on third parties, including our commercial partners, to produce materials required for commercial supply. We may experience difficulty in obtaining adequate manufacturing capacity for our needs. If we are unable to obtain or maintain contract manufacturing for these product candidates, or to do so on commercially reasonable terms, we may not be able to successfully develop and commercialize our products.
To the extent that we enter into manufacturing arrangements with third parties, we will depend on these third parties to perform their obligations in a timely manner and consistent with regulatory requirements, including those related to quality control and quality assurance. The failure of a third-party manufacturer to perform its obligations as expected could adversely affect our business in a number of ways, including:
| ● | we may not be able to initiate or continue pre-clinical and clinical trials of products that are under development; |
| ● | we may be delayed in submitting regulatory applications, or receiving regulatory approvals, for our product candidates; |
| ● | we may lose the cooperation of our partners; |
| ● | our products could be the subject of inspections by Regulatory Authorities; |
| ● | we may be required to cease distribution or recall some or all batches of our products; and |
| ● | potentially we may not be able to meet commercial demands for our products. |
If a third-party manufacturer with whom we contract fails to perform its obligations, we may be forced to manufacture the materials ourselves, for which we may not have the capabilities or resources, or enter into an agreement with a different third-party manufacturer, which we may not be able to do on reasonable terms, if at all or within acceptable timelines. In some cases, the technical skills required to manufacture our product may be unique to the original manufacturer and we may have difficulty transferring such skills to a back-up or alternate supplier, or we may be unable to transfer such skills. In addition, if we are required to change manufacturers for any reason, we will be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. The delays associated with the verification of a new manufacturer could negatively affect our ability to develop product candidates in a timely manner or within budget. Furthermore, a manufacturer may possess technology related to the manufacture of our product candidate that such manufacturer owns independently. This would increase our reliance on such manufacturer or require us to obtain a license from such manufacturer in order to have another third party manufacture our products.
New products may not be accepted by the medical community or consumers.
The commercial success of any of our products is subject to a number of risks that may be outside of our control, including:
| ● | competition in relation to alternative treatments, including efficacy advantages and cost advantages |
| ● | the availability of coverage or reimbursement by third-party payers; |
| ● | uncertainties regarding marketing and distribution support; |
| ● | distribution or use restrictions imposed by Regulatory Authorities. |
Moreover, there can be no assurance that physicians, patients or the medical community will accept our product, even if it proves to be safe and effective and is approved for marketing by Regulatory Authorities. A failure to successfully market our product would have a material adverse effect on our revenue.
Our technologies may become obsolete.
The pharmaceutical industry is characterized by rapidly changing markets, technology, emerging industry standards and frequent introduction of new products. The introduction of new products embodying new technologies, including new manufacturing processes and the emergence of new industry standards may render our products obsolete, less competitive or less marketable. The process of developing our products is extremely complex and requires significant continuing development efforts and third party commitments. Our failure to develop new technologies and products and the obsolescence of existing technologies could adversely affect our business.
We may be unable to anticipate changes in our potential customer requirements that could make our existing technology obsolete. Our success will depend, in part, on our ability to continue to enhance our existing technologies, develop new technology that addresses the increasing sophistication and varied needs of the market, and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. The development of our proprietary technology entails significant technical and business risks. We may not be successful in using our new technologies or exploiting our niche markets effectively or adapting our businesses to evolving customer or medical requirements or preferences or emerging industry standards.
We face competition in our markets from a number of large and small companies, some of which have greater financial, research and development, production and other resources than we have.
Our products face competition from products which may be used as an alternative or substitute therefore. In addition we compete with several large companies in the healthcare industry. To the extent these companies, or new entrants into the market, offer comparable products at lower or similar prices, our business could be adversely affected. Our competitors can be expected to continue to improve the design and performance of their products and to introduce new products with competitive performance characteristics. There can be no assurance that we will have sufficient resources to maintain our current competitive position.
The current Canadian, U.S. and global economic conditions could materially adversely affect our results of operations and business condition.
Our operations and performance depend significantly on economic conditions. Over the past number of years, the Canadian, U.S. and global economy has experienced a prolonged economic downturn. While economic conditions have recently improved, there is continued uncertainty regarding the timing or strength of any economic recovery. If the current economic situation remains weak or deteriorates further, our business could be negatively impacted by reduced demand for our products or third-party disruptions resulting from higher levels of unemployment, government budget deficits and other adverse economic conditions. Any of these risks, among other economic factors, could have a material adverse effect on our financial condition and operating results, and the risks could become more pronounced if the problems in Canada, the U.S. and global economies become worse.
We are heavily dependent on our senior management, and a loss of a member of our senior management team or our failure to attract, assimilate and retain other highly qualified personnel in the future, could harm our business.
If we lose members of our senior management, we may not be able to find appropriate replacements on a timely basis, and our business could be adversely affected. Our existing operations and continued future development depend to a significant extent upon the performance and active participation of certain key individuals, including Rob Harris, our Chief Executive Officer and Scott Langille, our Chief Financial Officer, If we were to lose Mr. Harris and/or Mr. Langille, we may not be able to find appropriate replacements on a timely basis and our financial condition and results of operations could be materially adversely affected.
In addition, to execute our growth plan, we must attract and retain highly qualified personnel. Competition for these employees is intense, and we may not be successful in attracting and retaining qualified personnel. We could also experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. If we fail to attract new personnel, or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.
We are controlled by our current officer, directors and principal shareholders.
Our directors and executive and their affiliates own approximately 57% of the outstanding shares of common stock of the Company. Accordingly, our executive officers, directors and certain of their affiliates will have substantial influence on the ability to control the election of our Board of Directors and the outcome of issues submitted to our stockholders.
Our business may be affected by factors outside of our control.
Our ability to increase sales, and to profitably distribute and sell our products and services, is subject to a number of risks, including changes in our business relationships with our principal distributors, competitive risks such as the entrance of additional competitors into our markets, pricing and technological competition, risks associated with the development and marketing of new products and services in order to remain competitive and risks associated with changing economic conditions and government regulation.
Fluctuations in the exchange rate could have a material adverse effect upon our business.
We conduct our business primarily in Canadian, United States and EURO currencies. To the extent our future revenues are denominated in currencies other than the Canadian dollars, we would be subject to increased risks relating to foreign currency exchange rate fluctuations which could have a material adverse effect on our financial condition and operating results since our operating results are reported in Canadian dollars and significant changes in the exchange rate could materially impact our reported earnings.
Risks Related to Our Intellectual Property
It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection.
Our commercial success depends in part on obtaining and maintaining patent protection and trade secret protection of our products, and the methods used to manufacture them, as well as successfully defending these patents against third-party challenges. We will only be able to protect our products from unauthorized making, using, selling, offer to sell or importation by third parties to the extent that we have rights under valid and enforceable patents or trade secrets that cover these activities.
As of March 1, 2013 we have two issued United States patents. Additionally as of March 1, 2013, we have one pending United States patent applications and pending foreign patent applications covering high dose patents.
The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date in Canada and the United States. The biotechnology patent situation outside of Canada and the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in Canada and the United States and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our issued patents or in third-party patents.
The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:
● | others may be able to make compounds that are competitive with our product candidates but that are not covered by the claims of our patents; |
● | we might not have been the first to make the inventions covered by our pending patent applications; |
● | we might not have been the first to file patent applications for these inventions; |
● | others may independently develop similar or alternative technologies or duplicate any of our technologies; |
● | it is possible that our pending patent applications will not result in issued patents; |
● | we may not develop additional proprietary technologies that are patentable; or |
● | the patents of others may have an adverse effect on our business. |
We also may rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. While we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using our trade secrets, is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside of Canada and the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.
We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to protect our rights to, or use, our technology.
If we choose to litigate against someone else from using the inventions claimed in our patents, that individual or company has the right to ask the court to rule that these patents are invalid and/or should not be enforced against that third party. These lawsuits are expensive and would consume time and other resources even if we were successful in stopping the infringement of these patents. In addition, there is a risk that the court will decide that these patents are not valid and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of these patents is upheld, the court will refuse to stop the other party on the ground that such other party's activities do not infringe our rights to these patents.
Furthermore, a third party may claim that we are using inventions covered by the third party's patent rights and may go to court to stop us from engaging in our normal operations and activities, including making or selling our product candidates. These lawsuits are costly and could affect our results of operations and divert the attention of managerial and technical personnel. There is a risk that a court would decide that we are infringing the third party's patents and would order us to stop the activities covered by the patents. In addition, there is a risk that a court will order us to pay the other party damages for having violated the other party's patents. The biotechnology industry has produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our products or methods of use either does not infringe the patent claims of the relevant patent and/or that the patent claims are invalid, and we may not be able to do this. Proving invalidity, in particular, is difficult since it requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents.
Because some patent applications in Canada and the United States may be maintained in secrecy until the patents are issued, patent applications in Canada and the United States and many foreign jurisdictions are typically not published until eighteen months after filing, and publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our issued patents or our pending applications or that we were the first to invent the technology. Our competitors may have filed, and may in the future file, patent applications covering technology similar to ours. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Any such patent application may have priority over our patent applications and could further require us to obtain rights to issued patents covering such technologies. If another party has filed a United States patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the United States Patent and Trademark Office (“USPTO”), to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful, resulting in a loss of our United States patent position with respect to such inventions.
If product liability lawsuits are successfully brought against us, we may incur substantial liabilities and may be required to limit commercialization of our certain products.
We face an inherent risk of product liability lawsuits related to our products. Currently, we are not aware of any anticipated product liability claims with respect to our products. In the future, an individual may bring a liability claim against us if one of our products causes, or merely appears to have caused, an injury. If we cannot successfully defend ourselves against the product liability claim, we may incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
● | decreased demand for our products; |
● | injury to our reputation; |
● | withdrawal of clinical trial participants; |
● | costs of related litigation; |
● | initiation of investigations by regulators; |
● | substantial monetary awards to patients or other claimants; |
● | distraction of management’s attention from our primary business; |
● | the inability to commercialize our product candidates. |
Our current insurance coverage may prove insufficient to cover any liability claims brought against us. In addition, because of the increasing costs of insurance coverage, we may not be able to maintain insurance coverage at a reasonable cost or obtain insurance coverage that will be adequate to satisfy liabilities that may arise.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submissions, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.
Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information and may not adequately protect our intellectual property, which could limit our ability to compete.
Because we operate in the highly confidential environment, we rely in part on trade secret protection in order to protect our proprietary trade secrets and unpatented know-how. However, trade secrets are difficult to protect, and we cannot be certain that others will not develop the same or similar technologies on their own. We have taken steps, including entering into confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors, to protect our trade secrets and unpatented know-how. These agreements generally require that the other party keep confidential and not disclose to third parties all confidential information developed by the party or made known to the party by us during the course of the party's relationship with us. We also typically obtain agreements from these parties which provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, these agreements may not be honored and may not effectively assign intellectual property rights to us. Enforcing a claim that a party illegally obtained and is using our trade secrets or know-how is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside Canada and the United States may be less willing to protect trade secrets or know-how. The failure to obtain or maintain trade secret protection could adversely affect our competitive position.
Risks Related to Our Common Stock
There has not been an active public market for our common stock so the price of our common stock could be volatile and could decline at a time when you want to sell your holdings.
Our common stock is traded on the OTCQB under the symbol TBUFF. Our common stock is not actively traded and the price of our common stock may be volatile. Numerous factors, many of which are beyond our control, may cause the market price of our common stock to fluctuate significantly. These factors include:
| ● | our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our failure to meet the expectations of financial market analysts and investors; |
| ● | changes in financial estimates by us or by any securities analysts who might cover our stock; |
| ● | speculation about our business in the press or the investment community; |
| ● | significant developments relating to our relationships with our licensees and our advisors; |
| ● | stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the healthcare industry; |
| ● | customer demand for our products; |
| ● | investor perceptions of the pharmaceutical and medical device industry in general and our company in particular; |
| ● | the operating and stock performance of comparable companies; |
| ● | general economic conditions and trends; |
| ● | major catastrophic events; |
| ● | announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures; |
| ● | changes in accounting standards, policies, guidance, interpretation or principles; |
| ● | sales of our common stock, including sales by our directors, officers or significant stockholders; and |
| ● | additions or departures of key personnel. |
Securities class action litigation is often instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs to us and divert our management’s attention and resources.
Moreover, securities markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. These market fluctuations may adversely affect the price of our common stock and other interests in our company at a time when you want to sell your interest in us.
Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and operating results and stockholders could lose confidence in our financial reporting.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed. Failure to achieve and maintain an effective internal control environment, regardless of whether we are required to maintain such controls, could also cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price. Although we are not aware of anything that would impact our ability to maintain effective internal controls, we have not obtained an independent audit of our internal controls and, as a result, we are not aware of any deficiencies which would result from such an audit. Further, at such time as we are required to comply with the internal controls requirements of the Sarbanes-Oxley Act, we may incur significant expenses in having our internal controls audited and in implementing any changes which are required.
The market price of the common stock may be volatile and adversely affected by several factors.
The market price of our common stock could fluctuate significantly in response to various factors and events, including:
| ● | our ability to integrate operations, technology, products and services; |
| our ability to execute our business plan; |
| ● | announcements concerning product development results, including clinical trial results, or intellectual property rights of others; |
● | litigation or public concern about the safety of our potential products; |
| ● | our issuance of additional securities, including debt or equity or a combination thereof, which will be necessary to fund our operating expenses; |
| ● | announcements of technological innovations or new products by us or our competitors; |
| loss of any strategic relationship; |
| ● | industry developments, including, without limitation, changes in healthcare policies or practices or third-party reimbursement policies; |
● | economic and other external factors; |
● | period-to-period fluctuations in our financial results; and |
● | whether an active trading market in our common stock develops and is maintained. |
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
We have not paid cash dividends in the past and do not expect to pay cash dividends in the foreseeable future. Any return on investment may be limited to the value of our common stock.
We have never paid cash dividends on our capital stock and do not anticipate paying cash dividends on our capital stock in the foreseeable future. The payment of dividends on our capital stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as the board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if the common stock price appreciates.
Securities analysts may not initiate coverage or continue to cover our common stock, and this may have a negative impact on its market price.
The trading market for our securities could depend in part on the research and reports that securities analysts publish about our business and us. We do not have any control over these analysts. There is no guarantee that securities analysts will cover our securities. If securities analysts do not cover our securities, the lack of research coverage may adversely affect their market prices. If we are covered by securities analysts, and our securities are the subject of an unfavorable report, the prices for our securities would likely decline. If one or more of these analysts ceases to cover us or fails to publish regular reports on us, we could lose visibility in the financial markets, which could cause our stock price and/or trading volume to decline.
The exercise of options and warrants and other issuances of shares of common stock or securities convertible into or exercisable for shares of common stock will dilute the ownership interests of our current stockholders and may adversely affect the future market price of our common stock.
Sales of our common stock in the public market, either by us or by our current stockholders, or the perception that these sales could occur, could cause a decline in the market price of our securities. Nearly all of the shares of our common stock held by those of our current stockholders who are not affiliates may be immediately eligible for resale in the open market either in compliance with an exemption under Rule 144 promulgated under the Securities Act of 1933, as amended, or the Securities Act, or pursuant to an effective resale registration statement that we have previously filed with the SEC. Such sales, along with any other market transactions, could adversely affect the market price of our common stock.
In addition, as of December 31, 2012, there were outstanding options to purchase an aggregate of 3,212,952 shares of our common stock at exercise prices ranging from $0.38 per share to $1.00 per share, of which options to purchase 1,169,619 shares were exercisable as of such date. As of December 31, 2012, there were warrants outstanding to purchase 2,250,000 shares of our common stock, at exercise prices ranging from $0.56 per share to $2.45 per share, with a weighted average exercise price of $1.49 per share, all of which were exercisable as of December 31, 2012. The exercise of options and warrants at prices below the market price of our common stock could adversely affect the price of shares of our common stock. In addition, some of the warrants have anti-dilution protection which will require us to lower the exercise price in the event we sell securities in the future at a price lower than the exercise price, including sales in connection with this offering. Additional dilution may result from the issuance of shares of our common stock in connection with collaborations or manufacturing arrangements or in connection with other financing efforts.
Any issuance of our common stock that is not made solely to then-existing stockholders proportionate to their interests, such as in the case of a stock dividend or stock split, will result in dilution to each stockholder by reducing his, her or its percentage ownership of the total outstanding shares. Moreover, if we issue options or warrants to purchase our common stock in the future and those options or warrants are exercised, stockholders may experience further dilution. Holders of shares of our common stock have no preemptive rights that entitle them to purchase their pro rata share of any offering of shares of any class or series.
The issuance of shares through our stock compensation plans may dilute the value of existing stockholders and may affect the market price of our stock.
We may use stock options, stock grants and other equity-based incentives, to provide motivation and compensation to our officers, employees and key independent consultants. The award of any such incentives will result in an immediate and potentially substantial dilution to our existing stockholders and could result in a decline in the value of our stock price. The exercise of these options and the sale of the underlying shares of common stock and the sale of stock issued pursuant to stock grants may have an adverse effect upon the price of our stock.
A sale of a substantial number of shares of the common stock may cause the price of our common stock to decline.
If our stockholders sell, or the market perceives that our stockholders intend to sell for various reasons, including shares issued upon the exercise of outstanding options or warrants the market price of our common stock could fall. Sales of a substantial number of shares of our common stock may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. We may become involved in securities class action litigation that could divert management's attention and harm our business.
The stock markets have from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock of biotechnology and biopharmaceutical companies. These broad market fluctuations may cause the market price of our common stock to decline. In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology and biopharmaceutical companies have experienced significant stock price volatility in recent years.
ITEM 2. PROPERTIES.
The Company has relocated our corporate headquarters to a 3,500 square feet facility located at 151 Steeles Ave, Milton,Ontario and is subject to a lease which has a monthly rate of $8,000 and expires on August 31, 2017. The Company has incurred leasehold improvement expenses to date of $10,359 for renovations to this facility.
In 2004, the Company purchased the property and building located at 544 Egerton Street in London, Ontario, Canada for $450,000. In connection therewith, the Company has incurred costs to date of $258,300 for renovations to the office, packaging and warehouse space of approximately 10,600 square feet in the aggregate contained in the building. The London office’s primary function involves administrative offices and is used for secondary packaging of some of the Company’s products.
ITEM 3. LEGAL PROCEEDINGS.
From time to time we may be a defendant or plaintiff in various legal proceedings arising in the normal course of our business. We are unaware of any material, active, pending or threatened proceeding against us or our subsidiaries, nor are we involved as a plaintiff or defendant in any material proceeding or pending litigation.
ITEM 4. MINE SAFETY DISCLOSURES
N/A
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITES.
Market Prices
During the period December 2002 through February 22, 2011, the Company’s common shares traded on the OTC Bulletin Board (the “OTCBB”). As of February 23, 2011, the common shares ceased trading on the OCTBB and began trading on the middle tier of the OTC Markets Group Inc. (commonly referred to as the “OTCQB”) under the ticker symbol “SLXCF”. On January 1, 2013, the Company changed its name from Stellar Pharmaceuticals Inc. to Tribute Pharmaceuticals Canada Inc. In addition, effective January 1, 2013, the Company’s quotation symbol on the OTCQB was changed from “SLXCF” to “TBUFF”.
The following table shows the reported high and low closing prices per share for our common stock as reported on the OTCQB during the periods indicated.
| | | US$ High | | | US$ Low | |
| Year ended December 31, 2011 | | | | | | |
| First quarter | | $ | 0.61 | | | $ | 0.33 | |
| Second quarter | | $ | 0.72 | | | $ | 0.38 | |
| Third quarter | | $ | 0.75 | | | $ | 0.38 | |
| Fourth quarter | | $ | 0.68 | | | $ | 0.40 | |
| Year ended December 31, 2012 | | | | | | | | |
| First quarter | | $ | 0.70 | | | $ | 0.43 | |
| Second quarter | | $ | 0.65 | | | $ | 0.41 | |
| Third quarter | | $ | 0.51 | | | $ | 0.28 | |
| Fourth quarter | | $ | 0.48 | | | $ | 0.32 | |
| Year ending December 31, 2013 | | | | | | | | |
| First quarter (through March 11, 2013) | | $ | 0.42 | | | $ | 0.34 | |
Holders
As at March 11, 2013, there were 65 holders of record of our common stocks. However, beneficial holders who hold their shares in an account with an investment dealer or broker are represented by one nominee. Therefore, although the number of registered shareholders is only 65, the number of registered holders may not be representative of the number of beneficial owners.
Dividends
The Company currently intends to retain future earnings, if any, for use in its business. The Company does not anticipate paying dividends on the common shares in the foreseeable future. Any determination to pay any future dividends will remain at the discretion of the board of directors of the Company (the “Board of Directors”) and will be made taking into account the Company’s financial condition and other factors deemed relevant by the Board of Directors.
Equity Compensation Plan Information
The table set forth below provides information as of December 31, 2012 with respect to common shares that may be issued under the Company’s existing equity plans. For additional information, see “Item 11 – Executive Compensation”.
| Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted average exercise price of outstanding options, warrants and rights in Canadian Dollars | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
| | | (a) | | | (b) | | | (c) | |
| | | | | | | | | | | | | |
| Equity compensation plans approved by security holders | | | 3,212,952 | | | $ | 0.65 | | | | 748,052 | |
| Equity compensation plans not approved by security holders | | | - | | | | - | | | | - | |
| Total | | | 3,212,952 | | | $ | 0.65 | | | | 748,052 | |
Recent Sales of Unregistered Securities
In October 2010, the Company effected a non-brokered private placement of 1 million units for gross proceeds of $1,013,600. Each unit consists of one Common Share and one-half of a Series 1 Warrant, one-half of a Series 2 Warrant and one-half of a Series 3 Warrant. Each whole Series 1 Warrant entitles the holder to acquire one Common Share for a period of 18 months from the closing of the private placement at an exercise price of $1.50 (U.S.), subject to adjustment as set forth in the Series 1 Warrant. Each whole Series 2 Warrant entitles the holder to acquire one Common Share for a period of 18 months from the closing at an exercise price of $2.00 (U.S.), subject to adjustment as set forth in the Series 2 Warrant. Each whole Series 3 Warrant entitles the holder to acquire one Common Share for a period of 18 months from the closing at an exercise price of $2.50 (U.S.), subject to adjustment as set forth in the Series 3 Warrant. In establishing the pricing for the Units, the market price of the common shares in effect at the time of the private placement negotiations was considered. On April 5, 2012, the Company granted a one year extension on these warrants.
The units were offered and sold to a limited group of “accredited investors” (as defined in the Securities Act of 1933) in reliance on the exemptions from registration afforded by Section 4(2) and Regulation D of the Securities Act of 1933.
In the event that the Company at any time prior to the expiry of the aforesaid warrants issues any common shares or securities convertible into common shares to a person other than the holders of such Warrants (except (i) pursuant to options, warrants, or other obligations to issue shares outstanding on the Closing date as disclosed in the Company’s SEC filings; (ii) pursuant to options that may be issued under any management incentive stock option and/or any qualified stock option plan adopted by the Company; or (iii) pursuant to an acquisition by the Company (whether structured as an asset purchase, stock purchase or merger) for a consideration per share less than the warrant exercise price in effect at the time of such issuance, then the warrant exercise price will be reset, pro rata to reflect such lower issue price, at the time of issuance of such securities.
On May 11, 2012, the Company granted 750,000 warrants in connection with the long-term debt obligation, at an exercise price of US$0.56 ($0.56). Subsequently, the pro rata exercise price of the 1,500,000 warrants described above was adjusted due to the exercise rate of the 750,000 new warrants being lower than the original exercise price of the October 2010 warrants. The effect of this pro rata change was as follows: 500,000 at US$1.47 ($1.46), 500,000 at US$1.96 ($1.95) and 500,000 at US$2.46 ($2.45).
On February 27, 2013, the Company closed a private placement for US$3,374,900 ($3,459,273) at a price per Unit of US$0.40 ($0.41). Each Unit consists of one common share of the Company’s stock, one-half of one Series A common share purchase warrant (a "Series A Warrant") and one-half of one Series B common share purchase warrant (a “Series B Warrant”).
Each whole Series A Warrant entitles the holder thereof to acquire one common share of the Company, at any time during the period ending 24 months after the date of issuance, at a price of US$0.50 ($0.51) per common share. Each whole Series B Warrant entitles the holder thereof to acquire one common share of the Company, at any time during the period ending 60 months after the date of issuance, at a price of US$0.60 ($0.61) per common share.
The terms of the Series B Warrants provide the Company with a right to call the Series B Warrants at a price of US$0.001($0.001) per warrant if certain conditions are met. Such conditions include the Company’s common shares trading at a volume weighted average price for 20 out of 30 consecutive trading days at a price which exceeds US$1.20 ($1.23), with an average daily volume of at least US$30,000 ($30,750) during that period.
Participation in the private placement included an aggregate of US$2,375,000 ($2,442,688) in gross proceeds received from directors and management of the Company, who were issued a total of 5,937,500 in common shares and 2,968,750 in each of Series A and Series B common share purchase warrants.
The Company paid commission fees of US$185,600 ($190,240) and issued broker warrants equal to 2.5% of the total Units issued. One half of these warrants have terms substantially similar to the Series A Warrants and the remainder have terms substantially similar to the Series B Warrants.
On March 5, 2013, the Company closed a private placement of US$895,000 ($920,955), at a price per Unit of US$0.40 ($0.41). Each Unit consists of one common share of the Company’s stock, one-half of one Series A common share purchase warrant and one-half of one Series B common share purchase warrant under the same terms as provided the participants of the February 27, 2013 private placement issuance.. The Company paid commission fees of US$62,650 ($64,467) and issued broker warrants equal to 6.0% of the total Units issued. One half of these warrants have terms substantially similar to the Series A Warrants and the remainder have terms substantially similar to the Series B Warrants.
On March 11, 2013, the Company closed a private placement of US$275,000 ($282,370), at a price per Unit of US$0.40 ($0.41). Each Unit consists of one common share of the Company’s stock, one-half of one Series A common share purchase warrant and one-half of one Series B common share purchase warrant under the same terms as provided the participants of the February 27, 2013 private placement issuance. There are no commission fees to be paid in regards to this private placement.
Issuer Purchases of Equity Securities.
During the fourth quarter of 2012, neither Tribute nor any “affiliated purchaser” (as defined in Rule 10b-18 promulgated under the United States Securities Exchange Act of 1934, as amended) (the “Exchange Act”) purchased any common shares.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this discussion together with the Financial Statements, related Notes and other financial information included elsewhere in this Form 10-K. The following discussion contains assumptions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under "Risk Factors," and elsewhere in this Form 10-K. These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements. All amounts are stated in Canadian dollars unless otherwise stated and have been rounded to the nearest one hundredth dollar.
FORWARD-LOOKING STATEMENTS AND SUPPLEMENTARY DATA
Readers are cautioned that actual results may differ materially from the results projected in any “forward-looking” statements included in this annual report, which involve a number of risks and uncertainties. Forward-looking statements are statements that are not historical facts, and include statements regarding the Company’s planned research and development programs, anticipated future losses, revenues and market shares, planned clinical trials, expected future expenditures, the Company’s intention to raise new financing, sufficiency of working capital for continued operations, and other statements regarding anticipated future events and the Company’s anticipated future performance. Forward-looking statements generally can be identified by the words “expected”, “intends”, “anticipates”, “feels”, “continues”, “planned”, “plans”, “potential”, “with a view to”, and similar expressions or variations thereon, or that events or conditions “will”, “may”, “could” or “should” occur, or comparable terminology referring to future events or results.
The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of numerous factors, any of which could cause actual results to vary materially from current results or the Company's anticipated future results. The Company assumes no responsibility to update the information contained herein.
CRITICAL ACCOUNTING POLICIES
The SEC defines critical accounting policies as those that are, in management’s view, important to the portrayal of the Company’s financial condition and results of operations and require management’s judgment. The Company’s discussion and analysis of its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. The Company bases its estimates on experience and on various assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about its carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates. The Company’s critical accounting policies include:
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. License fees which are comprised of initial fees and milestone payments are recognized upon achievement of the milestones, provided the milestone is meaningful, and provided that collectability is reasonably assured and other revenue recognition criteria are met. Milestone payments are recognized into income upon the achievement of the specified milestones when the Company has no further involvement or obligation to perform services, as related to that specific element of the arrangement. Upfront fees and other amounts received in excess of revenue recognized are recorded as deferred revenues.
Revenues from the sale of products, net of trade discounts, returns and allowances, are recognized when legal title to the goods has been passed to the customer and collectability is reasonably assured. Revenues associated with multiple-element arrangements are attributed to the various elements, if certain criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered elements. Non-refundable up-front fees for the transfer of methods and technical know-how, not requiring the Company to perform additional research or development activities or other significant future performance obligations, are recognized upon delivery of the methods and technical know-how.
Royalty revenue is recognized when the Company has fulfilled the terms in accordance with the contractual agreement and has no material future obligation, other than inconsequential and perfunctory support, as would be expected under such agreements and the amount of the royalty fee is determinable and collection is reasonably assured.
A customer is obligated to pay for products sold to it within a specified number of days from the date that title to the products is transferred to the customer. The Company’s standard terms are typically 0.5% to 2% discount, 15 to 20 days net 30 from the date of invoice.
The Company has a product returns policy on some of its products, which allows the customer to return pharmaceutical products that have expired, for full credit, provided the expired products are returned within twelve months from the expiration date.
Transfer of title occurs and risk of ownership passes to a customer at the time of shipment or delivery, depending on the terms of the agreement with a particular customer. The sale price of the Company’s products is substantially fixed or determinable at the date of sale based on purchase orders generated by a customer and accepted by the Company. A customer’s obligation to pay the Company for products sold to it is not contingent upon the resale of those products. The Company recognizes revenues for the sale of products from the date the title to the products is transferred to the customer.
Acquisitions
On December 1, 2011, the Company acquired 100% of the outstanding shares of privately-held Tribute Pharmaceuticals, a Canadian-based specialty pharmaceutical company. Tribute's shareholders were paid 13,000,000 common shares of the Company, which were valued at $7,423,415 based on the then current stock price of $0.57, and $1,000,000 in cash consideration, with an additional $500,000 in cash consideration payable to Tribute shareholders on December 1, 2012. During the year ended December 31, 2012, $40,000 of this amount was paid, with the remaining balance outstanding. Upon approval by Health Canada for the marketing and sale of Cambia, Tribute shareholders were also entitled to an additional 2,000,000 common shares of the Company, which were issued during the year ended December 31, 2012 (Note 11 a). The estimated fair value of this contingent non-cash consideration as of the acquisition date was $1,142,064, based on the Company’s stock price of $0.57 on December 1, 2011. The Company estimated the fair value of the contingent consideration by assigning an achievement probability to each potential milestone and discounting the associated cash payment to its present value using a risk adjusted rate of return. The Company evaluates its estimates of fair value of contingent consideration liabilities at the end of each reporting period until the liability is settled. Any changes in the fair value of contingent consideration liabilities are included in change in fair value of contingent consideration on the statements of operations and comprehensive loss. The liability for these amounts payable, are reported together as “amount payable and contingent consideration due” on the balance sheet.
The Company expensed $671,112, in acquisition and restructuring costs during the year ended December 31, 2011 on the statement of operations and comprehensive loss.
In connection with the acquisition, the Company acquired assets with a fair value of $14,460,209. Assets consisted primarily of receivables and other current assets of $791,648, a licensing asset of $255,820, licensing agreements of $10,004,000 and goodwill of $3,408,741. The value of goodwill is not deductible for tax purposes. Liabilities were also assumed of $4,477,387 consisting of bank indebtedness of $36,107, accounts payable and accrued liabilities of $1,940,280 and deferred tax liability of $2,501,000. The license agreement asset relates to Cambia, an acute treatment for migraine attacks with or without aura in adults and an agreement with Actavis Group PTC ehf, which provides the rights and licensing to several products. The estimated fair value of the license agreement asset was determined based on the use of the discounted cash flow model using an income approach for the acquired licenses. Estimated revenues were probability adjusted to take into account the stage of completion and the risks surrounding successful development and commercialization. The license agreement assets are classified as indefinite-lived intangible assets until the successful completion and commercialization or abandonment of the associated marketing and development efforts. The licensing asset and licensing agreements relate to product license agreements having an estimated useful life of 7 to 15 years. During 2012, the Company recognized a $79,724 reduction of expense (2011 – charge of $57,996) related to the change in the estimated fair value of the contingent consideration liability on the statements of operations and comprehensive loss. As of December 31, 2011, the total estimated fair value of the contingent consideration of $1,200,060, based on the Company’s stock price of $0.60 on December 31, 2011, was included in “amount payable and contingent consideration due” on the balance sheet. The Company believes that the fair values assigned to the assets acquired, the liabilities assumed and the contingent consideration liabilities were based on reasonable assumptions.
Subsequent to the acquisition, a shareholder of Tribute and an individual with a controlling interest in Tribute became the Chief Executive Officer and Chief Financial Officer of the Company, respectively.
Theramed
On June 19, 2012, the Company closed an agreement with Theramed Corporation ("Theramed"), a privately-held medical device company, thereby acquiring the exclusive rights to Collatamp G® for Canada. The initial term of the agreement to the exclusive Canadian rights ends March 31, 2018. The purchase of the exclusive rights was accounted for as a business combination. In connection with the purchase of the assets, the Company paid $425,000. The Company acquired assets with a fair value of $500,026, consisting of inventories of $101,690, intangible assets of $208,000 and goodwill of $190,336. The value of goodwill is deductible for tax purposes. Liabilities of $75,026 were assumed in connection with the purchase. The acquisition of Collatamp G® will add significant benefit to the Company’s existing specialty care products, Neovisc® and Uracyst®. The addition of Collatamp G® will boost the synergies of the Company’s current portfolio of products and will also benefit the Company’s presence in the hospital and specialty care markets.
Long Term Debt and Debt Issuance Costs
On May 11, 2012, the Company entered into a loan and security agreement (the "Loan Agreement") with MidCap Funding III, LLC (the "Lender") for a 36 month term loan that is due May 11, 2015. The term loan allows for a total advancement of US$6,000,000 ($5,969,400). An amount of US$3,500,000 ($3,482,150) was drawn on execution of the Loan Agreement and the remainder will be advanced if the Company raises an amount of not less than US$6,000,000 ($5,969,400) from any combination of: an equity issuance; upfront payments associated with a pharmaceutical partnership; or upfront payments in conjunction with the acquisition or in-licensing of pharmaceutical products. Advancement of the remainder of the loan is available until March 31, 2013, and subject to Lender review. The Loan Agreement is secured by all assets of the Company and contains customary covenants that, among other things, generally restrict the Company’s ability to incur additional indebtedness. The Loan Agreement includes a financial covenant to raise not less than US$3,000,000 ($2,984,700) by March 31, 2013 in the form of an equity raise or cash from an upfront payment associated with a pharmaceutical partnership. As of December 31, 2012, the Company was in compliance with all Loan Agreement covenants, which included minimum revenue targets. The Loan Agreement is secured by all assets of the Company and contains customary covenants that, among other things, generally restrict the Company's ability to incur additional indebtedness. On February 27, 2013, the Company entered into amended agreements with Midcap as a result of the Company's amalgamation with Tribute Pharmaceuticals Canada Ltd. and Tribute Pharma Canada Inc. on October 1, 2012.
Payments are due monthly, with the first six (6) payments being interest-only, with principal and interest payments due thereafter. Interest is calculated at the higher of 4% or the thirty (30) day London Inter Bank Offered Rate ("LIBOR") plus 7%.
In connection with the Loan Agreement, the Company granted warrants to purchase an aggregate of 750,000 common shares in the capital of the Company at an exercise price of US$0.56 ($0.56). The grant date fair value of the warrants was $312,000. Of this amount, $208,000 for 500,000 warrants was recorded as a warrant liability, with an equal amount recorded as a discount to the carrying value of the loan in the accompanying financial statements. The remaining $104,000 was in respect of 250,000 warrants which were granted for compensation of the transaction and has been classified as debt issuance costs and recorded as a warrant liability. The discount to the carrying value of the loan is being amortized as a non-cash interest expense over the term of the loan using the effective interest rate method. The grant date fair value of the warrants was determined using the Black-Scholes model with the following assumptions: expected volatility of 124.6%, a risk-free interest rate of 1.48%, an expected life of five years, and no expected dividend yield.
During the year ended December 31, 2012, the Company accreted $64,383 (2011 - $nil) in non-cash accretion expense in connection with the long term loan, which is included in accretion expense on the statements of operations and comprehensive loss.
The Company also incurred $341,489 in financing fees and legal costs related to closing the Loan Agreement. These fees and costs are classified as debt issuance costs, and are included in long-term assets on the balance sheets. These assets are being amortized as a non-cash interest expense over the term of the outstanding loan using the effective interest rate method. During the year ended December 31, 2012, the Company amortized $147,186 (2011 – $nil) in non-cash interest expense, which is included in amortization expense on the statements of operations and comprehensive loss.
During the year ended December 31, 2012, the Company made principal repayments of US$218,750 ($217,569) and interest payments of US$217,164 ($216,795) under the Loan Agreement. The Company is scheduled to make the following principal and interest payments over the next three years ended December 31:
| | | 2013 | | 2014 | | 2015 |
| | | | | | | |
| Principal payments | | US$1,312,500 ($1,305,840) | | US$1,312,500 ($1,305,40) | | US$656,250 ($652,903) |
| Interest payments | | US$298,776 ($297,252) | | US$152,396 ($151,619) | | US$20,587 ($20,482) |
Stock-Based Consideration
The Company uses the fair value based method of accounting for all its stock-based compensation in accordance with FASB Accounting Standards Codification ("ASC") ASC 718 “Compensation – Stock Compensation”. The estimated fair value of the options that are ultimately expected to vest based on performance related conditions, as well as the options that are expected to vest based on future service, is recorded over the option’s requisite service period and charged to stock-based compensation. In determining the amount of options that are expected to vest, the Company takes into account, voluntary termination behavior, as well as trends of actual option forfeitures.
Stock options and warrants which are indexed to a factor which is not a market, performance or service condition, in addition to the Company’s share price, are classified as liabilities and re-measured at each reporting date based on the Black-Scholes option pricing model with a charge to operations, until the date of settlement. Some warrants have been reflected as a liability as they are indexed to a factor which is not a market performance or service condition.
RESULTS FOR THE YEAR ENDED DECEMBER 31, 2012
Total revenue for the year ended December 31, 2012 increased by 218.9% to $12,342,800 compared to $3,869,900 in 2011. The underlying increase in sales was attributable to increases in licensed domestic product net sales of $7,750,700 as a result of the acquisition of Tribute as well as other domestic and international product sales of 22.4% or $736,500.
The net loss before taxes for the year ended December 31, 2012 was $4,629,400 compared to a loss of $1,498,600 for the year ended December 31, 2011. The increase in the net loss of $3,130,800 was primarily due to a significant investment in the expansion of the Company’s sales force and marketing expenses amounting to $5,835,900 to grow its existing products, marketing and sales expenses related to the launch of Cambia® on October 1, 2012 as well as an increase in business development activities. Significant movements included:
Factors decreasing net loss for 2012 compared to the prior year:
| ● | Increased gross profit of $2,742,300 or 113.0% due to higher sales of $8472,900 or 218.9%; |
| ● | A non-cash loss on disposal of equipment of $259,600 in 2011; |
| ● | Costs related to the acquisition of Tribute, which were expensed in 2011 at $671,100; |
| ● | A reduction in research and development expense of $28,600 compared to the prior year; |
| ● | A favorable increase in non-cash change in the warrant liability for a credit of $247,500 compared to $214,300 in the prior year; |
| ● | Decrease in the fair value of contingent consideration liability, a credit of $79,700 compared to an increase in the fair value of contingent consideration liability, an expense of $58,000 in 2011; |
Factors increasing the net loss for 2012 compared to the prior year:
| ● | An increase in selling, general and administrative expenses of $5,835,900, explained below; |
| ● | An increase in amortization of assets of $641,400; |
| ● | Cost of extending the warrant expiration of $135,200; |
| ● | An increase in accretion expense of $133,300; |
| ● | Increase in interest expense (net) of $258,100. |
Excluding non-operating expenses in 2012 of $208,700, the 2012 net loss from operations was $4,420,700. This compares to the prior year net loss from operations of $686,200. The net operational loss represents higher selling, general and administrative costs offset in part by increases in product margins, detailed below.
Gross Profit and Cost of Sales
Gross profit for the year ended December 31, 2012 was $5,168,900, higher by 113.0%, or $2,742,300 compared to 2011. Underlying improvements in gross profit in 2012 were due to additional gross profit of $2,318,300 from licensed domestic product net sales as a result of the acquisition of Tribute and incremental gross profit of $448,500 from other domestic and international product sales, offset in part by higher inventory write downs in 2012 of $10,200 and lower royalty and licensing revenues of $14,200.
Research and Development
For the year ended December 31, 2012, the Company recorded $21,400 (2011 - $50,000) in research and development expenses before tax credits. Government tax credits are recorded as a reduction of the expense when reasonable assurance exists that the Company has complied with the terms and conditions for the approval of the credit. In prior years, the Company determined the collection of the tax credit was less than likely. No tax credits were recorded in 2012 or 2011.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December 31, 2012 were $8,870,600 compared to $3,034,700 in 2011. The increase of $5,835,900 or 192.3% is primarily due to a significant investment in the expansion of the Company’s sales force and marketing expenses to grow its existing products, marketing and sales expenses related to the launch of Cambia® on October 1, 2012 as well as an increase in business development. There was also increase of $257,400 in costs related to non-cash expenses for stock options issued to directors, officers and employees of the Company (2012 - $589,900 and 2011 - $332,500).
Warrant Liability
The revaluation of the warrant liability at December 31, 2012, has resulted in a positive effect on warrant expense with a credit of $247,500 (2011 - $214,300 credit) being recorded. Since the warrants are denominated in US dollars and the Company’s functional currency is in Canadian dollars, the fair market value of the warrants fluctuates from period to period. The fair market value is based on the current stock price, volatility, the risk free interest rate, time remaining until expiry and changes in the exchange rate between the US and Canadian dollar. In connection with a private placement offering in October 2010, the Company granted 1,500,000 warrants to the participants, each exercisable into one common share as follows: 500,000 at US$1.50 ($1.49), 500,000 at US$2.00 ($1.99) and 500,000 at US$2.50 ($2.49) each for a period of 18 months, which ended on April 8, 2012. On April 5, 2012, the Company granted a one year extension on these warrants and recorded $135,157 to cost of extending the warrant expiration.
Contingent Consideration Liability
As at December 31, 2011, the Company had recorded 2,000,000 common shares as a contingent liability. These shares were issued during the year ended December 31, 2012. The difference between the fair value of these shares at December 31, 2011 and the fair value on the date of issuance in 2012 was a credit of $79,700 (2011 - $58,000 expense) which was recorded as a reduction of expense to change in fair value of contingent consideration on the statements of operations and comprehensive loss.
Loss on Disposal of Equipment
During the year ended December 31, 2012, the Company did not write off any obsolete manufacturing and computer equipment, compared to a loss on disposal of equipment in the prior year of $259,600.
Interest and Other Income
Interest and other income during year ended December 31, 2012 was $13,900 (2011 - $18,900). These amounts include interest received on short-term investments for both 2012 and 2011. In 2012, interest earned on the Company’s short-term investments was an average of 0.84% compared to an average of 0.84% in 2011.
Deferred Income Tax Recovery
During the year ended December 31, 2012, the Company recorded a deferred income tax recovery of $1,209,300 related to tax assets not previously recognized (2011 –$976,800). The Company expects to be able to use its deferred tax assets to offset the tax liability acquired.
Net Income (Loss)
The net loss for the year was $3,349,000, compared to a net loss in the prior year of $521,800. This equates to a loss of $(0.09) per share for the year compared to a loss of $(0.02) per share in 2011.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s cash and cash equivalents position amounted to $2,283,900 at December 31, 2012 compared with $2,228,000 at December 31, 2011. The change was due to the new long term debt facility offset by losses from operations and the acquisition of the exclusive rights to Collatamp G® for Canada and intangible assets milestone payments.
Cash used by operations during the year ended December 31, 2012 was $1,557,700 for (2011 - $1,011,400) mainly as a result a significant investment in the expansion of the Company’s sales force and marketing expenses to grow its existing products, to prepare for the launch of Cambia® which occurred on October 1, 2012, as well as an increase in business development activities. Also included are changes in non-cash operating assets and liabilities, which increased to $1,690,500 for the period (2011- $113,600 decrease).
Cash used in investing activities for the year ended December 31, 2012 was $1,307,200 which relates to the acquisition of the license rights to Collatamp G® for $425,000, Milestone payments related to the acquisition of intangible assets for US$750,000, fixed asset purchases of $49,300 and capital expenditures related to patent filings of $42,900 and payment of the contingent liabilities of $40,000.
Cash provided by financing activities for the year ended December 31, 2012 related to a new long term debt facility for $3,500,000, less financing costs of $341,500. Cash used in financing activities included principal repayments on the long term debt facility of $217,600.
Long-Term Contractual Obligations
The Company’s only long-term contractual obligations are operating leases as detailed below:
| | | Payments Due By Period | |
| Contractual Obligations | | Total | | | Less Than 1 Year | | | 1 – 3 Years | | | 3 – 5 Years | | | More Than 5 years | |
| Operating lease obligations | | $ | 475,478 | | | $ | 97,491 | | | $ | 204,654 | | | $ | 173,333 | | | $ | — | |
The Company may seek additional funding, primarily by way of one or more equity offerings, to carry out its business plan and to minimize risks to its operations. The market for equity financing for companies such as Tribute is challenging and there can be no assurance that additional funding will become available by way of equity financing. Any additional equity financing may result in significant dilution to the existing shareholders at the time of such financing. The Company may also seek additional funding from other sources, including licensing, co-development collaborations and other strategic alliances. Such funding, if obtained, may reduce the Company’s interest in its projects or products. Regardless, there can be no assurance that any alternative sources of funding will be available to the Company.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
RELATED PARTY TRANSACTIONS
Fees were paid to LMT Financial Inc. ("LMT"), a company beneficially owned by a director and former interim officer of the Company, and his spouse, for consulting services. For year ended, December 31, 2012, the Company recorded and paid $150,000 (2011 - $191,200) as selling, general and administrative expense in the statements of operations and comprehensive loss.
During the year ended December 31, 2012, the Company paid $nil (2011- $87,600) to a law firm in which one of the directors of the Company is a partner, of which $nil (2011 - $8,000) have been recorded as selling, general and administrative expense and $nil (2011 - $79,600) was recorded as acquisition and restructuring costs in the statements of operations and comprehensive loss.
SIGNIFICANT CUSTOMERS
During the years ended December 31, 2012, the Company had two significant wholesale customers that represented 54.7% of product sales compared to one significant wholesale customer that represented 31.4% of product sales for the same period in the prior year. This is normal and customary in the Canadian pharmaceutical business. These are well known and highly respected customers that have a solid track record of paying all outstanding amounts owing on time.
As at December 31, 2012, the Company had three customers which made up 53.1% of the outstanding accounts receivable, in comparison to four customers which made up 65.1% at December 31, 2011. For 2012, all outstanding accounts receivables were related to product sales, of which $466,000 or 38.9% were related to two wholesale accounts and $177,200 or 14.5% was related to one international customer. For 2011, all outstanding accounts receivables were related to product sales, of which $383,900 or 50.3% were related to three wholesale accounts and $113,200 or 14.8% were related to one international customer.
OUTLOOK
In 2012 we successfully expanded our product portfolio as well as our Canadian sales force, both of which enabled us to increase our revenues over 2011 levels. We also added key management including a Vice President of Sales and a Chief Scientific Officer. These are the building blocks that provide infrastructure for our continued growth in 2013. We are actively looking to add more products to our domestic sales portfolio in Canada, which will be supported by our expanded sales force. We are also looking for further growth through distribution agreements for our internally developed products and products for which we have marketing rights in countries where we do not yet have distribution agreements.
SUBSEQUENT EVENTS
On February 6, 2013, the Company granted 282,500 options to an officer and employees of the Company. The weighted average exercise price of these options is $0.40 (US$0.40). These options having a quarterly vesting term of 25% on each of March 31, June 30, September 30 and December 31, 2014, upon achieving certain financial objectives.
On February 27, 2013, the Company closed a private placement for US$3,374,900 ($3,459,273) at a price per Unit of US$0.40 ($0.41). Each Unit consists of one common share of the Company’s stock, one-half of one Series A common share purchase warrant (a "Series A Warrant") and one-half of one Series B common share purchase warrant (a “Series B Warrant”).
Each whole Series A Warrant entitles the holder thereof to acquire one common share of the Company, at any time during the period ending 24 months after the date of issuance, at a price of US$0.50 ($0.51) per common share. Each whole Series B Warrant entitles the holder thereof to acquire one common share of the Company, at any time during the period ending 60 months after the date of issuance, at a price of US$0.60 ($0.61) per common share.
The terms of the Series B Warrants provide the Company with a right to call the Series B Warrants at a price of US$0.001($0.001) per warrant if certain conditions are met. Such conditions include the Company’s common shares trading at a volume weighted average price for 20 out of 30 consecutive trading days at a price which exceeds US$1.20 ($1.23), with an average daily volume of at least US$30,000 ($30,750) during that period.
Participation in the private placement included an aggregate of US$2,375,000 ($2,442,688) in gross proceeds received from directors and management of the Company, who were issued a total of 5,937,500 in common shares and 2,968,750 in each of Series A and Series B common share purchase warrants.
The Company paid a sales commission of US$185,600 ($190,240) and issued broker warrants equal to 2.5% of the total Units issued. One half of these warrants have terms substantially similar to the Series A Warrants and the remainder have terms substantially similar to the Series B Warrants.
On March 5, 2013, the Company closed a private placement of US$895,000 ($920,955), at a price per Unit of US$0.40 ($0.41). Each Unit consists of one common share of the Company’s stock, one-half of one Series A common share purchase warrant and one-half of one Series B common share purchase warrant. The Company paid a sales commission of US$62,650 ($64,467) and issued broker warrants equal to 6.0% of the total Units issued. One half of these warrants have terms substantially similar to the Series A Warrants and the remainder have terms substantially similar to the Series B Warrants.
On March 11, 2013, the Company closed a private placement of US$275,000 ($282,370), at a price per Unit of US$0.40 ($0.41). Each Unit consists of one common share of the Company’s stock, one-half of one Series A common share purchase warrant and one-half of one Series B common share purchase warrant under the same terms as provided the participants of the February 27, 2013 private placement issuance. There are no sales commissions to be paid in regards to this private placement.
N/A
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The full text of our audited financial statements as of December 31, 2012 and 2011, begins on page F-1 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures.
We maintain "disclosure controls and procedures," as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
As of December 31, 2012, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in our periodic reports is recorded, processed, summarized and reported, within the time periods specified for each report and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting.
Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP.
Our internal control over financial reporting includes those policies and procedures that:
| ● | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; |
| ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| ● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Management has conducted, with the participation of our Chief Executive Officer and our Chief Financial Officer, an assessment, including testing of the effectiveness of our internal control over financial reporting as of December 31, 2012. Management’s assessment of internal control over financial reporting was based on the framework in Internal Control over Financial Reporting – Guidance for Smaller Public Companies issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, Management concluded that our system of internal control over financial reporting was effective as of December 31, 2012.
This Annual Report on Form 10-K does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management's report in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting for the quarterly period ended December 31, 2012 identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
The following table sets forth certain information regarding the directors and executive officers of Tribute as of March 11, 2013:
| Name | | Age | | Positions |
| Robert Harris | | 57 | | Director, President and Chief Executive Officer |
| Arnold Tenney | | 70 | | Chairman of the Board |
| Steven H. Goldman | | 57 | | Director |
| John M. Gregory | | 60 | | Director |
| John Kime | | 70 | | Director |
| F. Martin Thrasher | | 61 | | Director |
| Scott Langille | | 56 | | Chief Financial Officer |
| Janice Clarke | | 52 | | VP of Finance and Administration |
Set forth below are brief biographies of the Company’s directors and officers. All of the directors and executive officers of the Company have held their principal occupations indicated below for the past five years unless otherwise noted.
Robert (Rob) Harris, Director, President and Chief Executive Officer. Mr. Harris was appointed to this role upon the Company’s acquisition of Tribute on December 1, 2011. Mr. Harris has 30 years of pharmaceutical industry experience in both Canada and the United States in sales, marketing, business development and general management. Prior to co-founding Tribute Pharmaceuticals, Mr. Harris was the President & CEO of Legacy Pharmaceuticals Inc. Mr. Harris also has previous experience at Biovail Corporation where, as VP of Business Development, he was involved in, led and successfully concluded numerous business development transactions, including the licensing of new chemical entities, the acquisition of mature products, the completion of co-promotion deals, distribution agreements, product development and reformulation transactions. Mr. Harris joined Biovail in 1997 as the GM of Biovail Pharmaceuticals Canada at a time when the company experienced rapid growth in the Canadian division. Before Biovail, Mr. Harris worked in various senior commercial management positions during his twenty-year tenure at Wyeth (Ayerst) and has been involved in numerous product launches during his career.
Arnold Tenney, Chairman of the Board. Mr. Tenney stepped down as interim President and Chief Executive Officer upon the appointment of Mr. Harris after the acquisition of Tribute. Mr. Tenney is continuing his role as Chairman and as a corporate director. Mr. Tenney was a financial consultant at Devine Entertainment Corporation ("Devine"), a children and family film production and development company from 2002 to 2011. Prior to his position at Devine, Mr. Tenney was Chief Executive Officer of ARC International Corporation from 1978 to 2000. ARC International Corporation was a developer of indoor ice arenas and tennis clubs, as well as an investment company involved in entertainment and cable television. Mr. Tenney was a director and Chairman of the Board of Cabletel Communications from 1985 to 2000, which is a leading supplier of broadband equipment to the cable television industry whose shares currently trade on both the Toronto and American Stock Exchanges. Mr. Tenney was a director of Ballantyne of Omaha, Inc. from 1988 to 2000 and served as Chairman of the Board from 1992 to 2000. Ballantyne of Omaha, Inc. is a leading manufacturer of commercial motion picture projection equipment whose shares trade on the American Stock Exchange. Mr. Tenney served as a director for Phillip Services Inc., a Canadian metal recycling company, from 1998 to 2000. He served in such capacity as a representative of Mr. Carl Icahn. Mr. Tenney was chosen to be a Director in light of his experience as a public company director and officer.
John J. Kime, Director. Mr. Kime has been a Director since December 2000. Mr. Kime is the President and CEO of iBD Advisors Inc., a privately-owned Canadian company providing guidance to Canadian and international companies on site location needs and business considerations connected with their plans to locate and expand in North America. Prior to assuming his responsibilities at iBD Advisors, Mr. Kime was the President and CEO of the London Economic Development Corporation, a public/private partnership with responsibility for providing economic development services to the city of London, Ontario, Canada. From 1991 to 1998, Mr. Kime served as Director of International Development for Big ‘O’ Inc., a company engaged in the development of manufacturing technologies used in the control and containment of water, chemicals and other substances. Mr. Kime has a BA from The University of Western Ontario. Mr. Kime has been chosen to be a Director in light of his significant business operating, accounting and financial experience.
John M. Gregory, Director. Mr. Gregory is managing partner of SJ Strategic Investments, LLC. a private, family-owned investment vehicle with a diverse portfolio of public and private investments. Mr. Gregory’s leadership as chairman and CEO of King Pharmaceuticals helped the company grow from a 90-employee family business to an S&P 500 Index company on the New York Stock Exchange with revenues exceeding $1 billion. Mr. Gregory is a graduate from the University of Maryland with a degree in pharmacy. Mr. Gregory was chosen to be a Director in light of his extensive pharmaceutical and business experience.
F. Martin Thrasher, Director. Mr. Thrasher is a seasoned international executive. After graduating from the Richard Ivey School of Business in Toronto, Mr. Thrasher spent over 30 years working around the globe for companies such as General Foods, McCormick & Co, Campbell Soup Co. and ConAgra Foods Inc. Mr. Thrasher lived and worked in Canada, Australia, Belgium and the U.S.. His responsibilities with Campbell Soup Co. included positions as President, International Grocery and President, North America Grocery. At ConAgra Foods Inc., he was President of the Retail Products Co, a $9 billion business with over 30,000 employees. Currently, Mr. Thrasher is President of FMT Consulting, a boutique advisory and consulting firm. Mr. Thrasher was chosen as a Director in light of his significant international business experience with Fortune 500 companies.
Steven H. Goldman, Director. Mr. Goldman is an accomplished lawyer and business leader who became a Director in April 2010. He is currently a partner in the Toronto law firm of Goldman Hine LLP. Before joining that firm, he successfully led the restructuring and turnaround of the Speedy Auto Service and Minute Muffler franchise systems as their President and CEO from December 2007 until December 2009. Mr. Goldman graduated from Carleton University in 1976 (BA, President’s Medal) and from Queen’s University in 1980 (LLB). Mr. Goldman was called to the Bar in Ontario in 1982. He is a member of the Law Society of Upper Canada, the American Bar Association Forum on Franchising, the Ontario Bar Association (Franchise section) and the Turnaround Management Association. Mr. Goldman was a Director and member of the Company’s audit committee from December 2000 until June 2005, and is a former director of Alegro Health Corp. (now known as Centric Health Corp.). Mr. Goldman was chosen as a Director in light of his practical business and legal experience.
Scott Langille, Chief Financial Officer. Mr. Langille was appointed as the Chief Financial Officer of the Company upon its acquisition of Tribute on December 1, 2011. Prior to co-founding and serving as the CFO of Tribute Pharmaceuticals, Mr. Langille had over 20 years’ experience in the pharmaceutical industry in both Canada and the United States. Prior to joining Tribute, he was CFO of Virexx Medical Corp, a Canadian public biotech company. Mr. Langille was responsible for strategic direction, business development initiatives, investor relations, corporate financing activities and financial operations. His past financial experience also includes Director, Corporate Finance at Biovail Corporation, Director of Finance at Biovail Pharmaceuticals Canada and Vice President at Biovail Pharmaceuticals Inc. in the United States. His other prior management positions were at AltiMed Pharmaceuticals and Zimmer Canada. Mr. Langille has a professional accounting designation and MBA from the University of Toronto.
Janice M. Clarke, VP of Finance and Administration. After the acquisition of Tribute Pharmaceuticals, Ms. Clarke assumed the newly created position of VP of Finance and Administration for Tribute and Tribute Pharmaceuticals. Ms. Clarke has over twenty years of office administration and financial management experience with proven abilities to implement and manage various financial systems and office procedures. Ms. Clarke joined Stellar Pharmaceuticals Inc. in August 2000 and currently manages its administrative and financial processes.
Board of Directors
The Board of Directors consists of six members. Directors serve for terms of one year or until their successors are duly elected or appointed.
Director Independence
Our board of directors has determined that a majority of the board consists of members are currently "independent" as that term is defined under current listing standards of NASDAQ.
Committees of the Board of Directors
The Company has established an Audit Committee and a Compensation Committee of the Board of Directors.
Audit Committee
The Audit Committee consists of Messrs. Kime, Thrasher and Goldman, and is responsible for recommending the firm to be appointed as auditors to audit financial statements and to perform services related to the audit; reviewing the scope and results of the audit with the auditors; reviewing with management and the auditors the Company’s annual operating results; and considering the adequacy of the internal accounting procedures and the effect of such procedures on the auditors’ independence. Mr. Kime who chairs this committee provides financial expertise to the Audit Committee. Each Audit Committee member is an independent director of the Company. A copy of the audit committee charter was filed as an exhibit to the Company’s definitive proxy statement filed with the SEC on June 6, 2011.
Compensation Committee
The Compensation Committee consists of Messrs. Kime and Tenney. The Compensation Committee is responsible for evaluating, reviewing and supervising the procedures of the Company with regard to human resources; assessing the performance of the officers of the Company; reviewing annually the remuneration of the officers; and recommending to the Board of Directors general remuneration policies regarding salaries, bonuses and other forms of remuneration for the directors and executive officers of the Company. The Company currently does not have a compensation committee charter.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee is an officer or employee of the Company. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.
Audit Committee Financial Expert
The Board of Directors has determined that Mr. Kime is an audit committee financial expert as defined by Item 401(h) of Regulation S-K of the Securities Exchange Act of 1934 and is independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the Securities Exchange Act of 1934.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, requires Tribute’s executive officers, directors and persons who beneficially own more than 10% of the common shares (“reporting persons”) to file initial reports of ownership and reports of changes of ownership with the SEC. Executive officers, directors and greater than 10% beneficial owners are required to furnish Tribute with copies of all Section 16(a) forms they file.
The Company believes that all of its officers and directors have filed reports required by Section 16(a) of the Securities Exchange Act of 1934 during the year ended December 31, 2012.
Code of Ethics
We have adopted a formal Code of Ethics applicable to all employees, officers, directors and consultants. A copy of our Code of Ethics is available on the Company’s website at www.tributepharma.com/investors. The Company intends to disclose any changes in or waivers from its code of ethics by posting such information on its website or by filing a Form 8-K.
Compensation of Directors
Directors are expected to timely and fully participate in all regular and special board meetings, and all meetings of committees that they serve on.
The following table shows information regarding the compensation earned or paid during 2012 to Non-Employee Directors who served on the Board during the year.
| Name | Fees earned or paid in cash ($) | Option-based awards ($) | All other compensation ($) | Total ($) |
Steven Goldman (1) | 13,500 | 24,600 | Nil | 38,100 |
| John Gregory | 10,000 | 24,600 | Nil | 34,600 |
John Kime (1)(2) | 18,500 | 24,600 | Nil | 43,100 |
Arnold Tenney (2) | Nil | 28,700 | 150,000 (3) | 178,700 |
F. Martin Thrasher (1) | 14,000 | 24,600 | Nil | 38,600 |
Options are converted (option based awards)
| (1) | Audit committee member |
| (2) | Compensation committee member |
| (3) | The Company entered into a financial advisory and consulting agreement with LMT, in consideration for services provided under this agreement, LMT earned a fee of $150,000 (Cdn.) in 2012. |
Compensation Philosophy and Objectives
The compensation philosophy of the Company is to provide market competitive pay to employees and reward them for their contribution to the operating and financial performance of the Company and the success in implementing the Company’s short-term and long-term strategies.
The objectives of the compensation program are: (i) to attract and retain individuals critical to the success of the Corporation; (ii) to reward performance of individuals by recognizing their contribution to the Company; (iii) to align the interests of the executive officers and the broader management group with shareholders' interest and the execution of the Company’s strategic plan; and (iv) to compensate individuals based on their performance and, to the extent applicable, on similar compensation for companies at a comparable stage of development.
Compensation Committee
The Company has established a Compensation Committee which is composed of two directors, Arnold Tenney and John Kime, one of whom is independent of management.
The Compensation Committee provides guidance with respect to, and the purpose and principles behind, the Company’s compensation decisions and overall compensation philosophy and objectives; oversees the Company’s compensation policies, plans and programs; and reviews and determines executive officer compensation. The Compensation Committee annually evaluates the performance and determines the compensation of the Chief Executive Officer of the Company based upon a mix of factors including the achievement of corporate goals, achievement of individual goals, overall individual performance, and comparisons with other companies selected based on size and similar business.
The Compensation Committee makes recommendations to the Board regarding various other matters, and the Board then determines whether to adopt such recommendations as submitted or otherwise.
Total Compensation
Total compensation for executive officers (the “Named Executive Officers”) listed in the Summary Compensation Table below is based on the following components: (i) fixed compensation, which includes base salary and benefits; (ii) performance based compensation, which includes annual and long-term incentives; and (iii) other compensation.
Fixed Compensation
Fixed Compensation includes:
| 1. | Base Salary Base salary is determined through formal job evaluation, salary survey data and market comparators. Salary ranges are reviewed annually. Base salaries for all employees are typically increased at contract renewal based on a cost of living factor, such factor being sourced from publicly available salary survey data. |
| 2. | Benefits Each of the Named Executive Officers and other members of the Company’s senior management are enrolled in a benefits plan offering medical, dental, life and long-term disability benefits. |
Performance Based Compensation
Performance based compensation includes annual and long-term incentives.
| 1. | Annual Incentives The Chief Executive Officer's annual incentive is approved by the Compensation Committee and is dependent upon corporate and individual performance, measured against the strategic plan approved by the Board. The annual incentive pay for the Chief Financial Officer and other senior management is recommended to the Compensation Committee by the Chief Executive Officer based on corporate, divisional and individual performance measured against the strategic plan. |
| 2. | Long-Term Incentives – Stock Option Plan The Company’s stock option plan (the “Stock Option Plan”) was adopted to provide the Company with a share ownership incentive program to attract, retain and motivate qualified directors, officers, full-time employees and consultants of the Company (collectively, "Service Providers"). The Stock Option Plan rewards those Service Providers for their contributions toward the long-term goals of the Company. The Stock Option Plan is designed to have common shares acquired as long-term investments.
The Stock Option Plan is administered by the Board, and at its option, the Compensation Committee of the Board. Subject to the provisions of the Stock Option Plan, the Board is authorized in its sole discretion to make decisions regarding the administration of the Stock Option Plan. Recommendations for stock options are prepared by management and presented to the Board for approval. The Board reviews the proposal, the individual or individuals involved and the terms and conditions proposed before approving the recommendations. |
Summary Compensation Table
The following table provides certain summary information concerning compensation awarded to, earned by or paid to our Chief Executive Officer, Chief Financial Officer and two other highest paid executive officers whose total annual salary and bonus exceeded $100,000 (collectively, the "named executive officers") for fiscal year 2012.
| | | | | | | | Option-based | | | Non-equity incentive plan compensation | | | Pension | | | All other | | | Total | |
| Name and principal position | | Year | | | | | awards ($) | | | Annual incentive plans | | | Long-term incentive plans | | | value ($) | | | compensation ($) | | | compensation ($) | |
| Rob Harris | | 2012 | | | 273,061 | (1) | | | 62,084 | | | | Nil | | | | Nil | | | | Nil | | | | Nil | | | | 335,145 | |
| President and Chief Executive Officer | | 2011 | | | 22,533 | | | | Nil | | | | Nil | | | | Nil | | | | Nil | | | | Nil | | | | 22,533 | |
| Scott Langille | | 2012 | | | 218,033 | (1) | | | 50,773 | | | | Nil | | | | Nil | | | | Nil | | | | Nil | | | | 268,806 | |
| Chief Financial Officer | | 2011 | | | 17,867 | | | | Nil | | | | Nil | | | | Nil | | | | Nil | | | | Nil | | | | 17,867 | |
| Janice Clarke | | 2012 | | | 161,804 | | | | 26,550 | | | | Nil | | | | Nil | | | | Nil | | | | Nil | | | | 188,354 | |
| VP of Finance and Admin | | 2011 | | | 179,714 | | | | 17,650 | | | | Nil | | | | Nil | | | | Nil | | | | Nil | | | | 197,364 | |
| (1) | Auto allowance of $14,400 has been included in the salary. |
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information for the named executive officers regarding the number of shares subject to both exercisable and unexercisable stock options and restricted stock, as well as the exercise prices and expiration dates thereof, as of December 31, 2012.
| Option Awards |
| Name | | Number of Securities Underlying Unexercised Options (#) Exercisable | | | Number of Securities Underlying Unexercised Options (#) Unexercisable | | | Number of Securities Underlying Unexercised Unearned Options (#) | | | Option Exercise Price (Cdn$) | | Option Expiration Date |
| Rob Harris | | | 129,341 | (1) | | | -- | | | | 905,385 | (1) | | | 0.57 | | 12/1/2016 |
| Scott Langille | | | 105,778 | (2) | | | -- | | | | 740,448 | (2) | | | 0.57 | | 12/1/2016 |
| Janice Clarke | | | - | | | | - | | | | 20,000 | | | | 0.40 | | 2/6/2018 |
| | | | - | | | | 20,000 | | | | -- | | | | 0.57 | | 3/29/2017 |
| | | | 12,500 | | | | - | | | | 12,500 | | | | 0.57 | | 12/1/2016 |
| | | | 30,000 | | | | - | | | | -- | | | | 0.41 | | 6/22/2016 |
| | | | 10,000 | | | | - | | | | -- | | | | 0.68 | | 4/14/2016 |
| | | | 37,500 | | | | - | | | | 7,500 | | | | 0.95 | | 6/30/2015 |
| | | | 15,000 | | | | - | | | | -- | | | | 1.00 | | 12/9/2014 |
| | | | 20,000 | | | | - | | | | -- | | | | 0.84 | | 12/9/2014 |
| (1) | In connection with his employment agreement described below, Mr. Harris was granted an option to purchase 1,034,726 shares of the Company’s common stock. Of these options, 50% are time based and vest in 36 equal quarterly installments on the first day of January, April, July and October, with the first installment vesting on April 1, 2012. The remaining 50% of these options are performance based and will vest in 36 equal quarterly installments on the last day of March, June, September and December, with the first installment vesting on March 31, 2013. |
| (2) | In connection with his employment agreement described below, Mr. Langille was granted an option to purchase 846,226 shares of the Company’s common stock. Of these options, 50% are time based and vest in 36 equal quarterly installments on the first day of January, April, July and October, with the first installment vesting on April 1, 2012. The remaining 50% of these options are performance based and will vest in 36 equal quarterly installments on the last day of March, June, September and December, with the first installment vesting on March 31, 2013. |
| (3) | Ms. Clarke has received 60,000 as employee performance based options, 90,000 as options provided in her role as board secretary and 25,000 options in connection with her employment agreement signed December 1, 2011. |
Employment Agreements and Change in Control Agreements
RH Executive Employment Agreement
In connection with his appointment as a director, President and Chief Executive Officer, Rob Harris (“RH” and the Company entered into an Executive Employment Agreement, the term of which commenced on December 1, 2011 and ends on December 31, 2014, with automatic three year renewal periods unless written notice of non-renewal is provided by RH upon no less than 90 days prior to the end of that term or by the Company upon no less than 180 days prior to the end of that term. For the first three year term, RH shall be paid an annual base salary of CND$250,000 for his services. RH’s annual salary for future terms shall be reviewed by the Company’s Board of Directors. The Company also has agreed to provide RH with a monthly automobile allowance of $1,200 during the term of the Agreement. RH shall be entitled to an initial grant of options governed by the terms of the Company’s stock option plan to purchase an aggregate of 1,034,276 common shares of the Company, which shall vest as follows:
(i) 50% of the options will be subject to a time vesting schedule beginning on April 1, 2012 and irrespective of RH’s continued employment with the Company as follows:
| Date of Vesting | Number of Options Vested |
| April 1, 2012 | 8 1/3rds % of total options granted in (i) |
| July 1, 2012 | 8 1/3rds % of total options granted in (i) |
| October 1, 2012 | 8 1/3rds % of total options granted in (i) |
| January 1, 2013 | 8 1/3rds % of total options granted in (i) |
| April 1, 2013 | 8 1/3rds % of total options granted in (i) |
| July 1, 2013 | 8 1/3rds % of total options granted in (i) |
| October 1, 2013 | 8 1/3rds % of total options granted in (i) |
| January 1, 2014 | 8 1/3rds % of total options granted in (i) |
| April 1, 2014 | 8 1/3rds % of total options granted in (i) |
| July 1, 2014 | 8 1/3rds % of total options granted in (i) |
| October 1, 2014 | 8 1/3rds % of total options granted in (i) |
| January 1, 2015 | 8 1/3rds % of total options granted in (i) |
The options in (i) above shall have an exercise price (converted to Canadian dollar using the Bank of Canada noon rate) equivalent to the closing price of the Company’s common shares on the day immediately preceding December 1, 2011 and an expiry date five years from the date of grant.
(ii) 25% of the options will be granted upon the quarterly achievement of either of the Gross Revenue or EBITDA targets, each as defined below, with a total of 50% of the options granted if both targets are achieved, during the three year term of the Executive Employment Agreement which shall vest as follows:
| Date of Grant / Vesting | Number of Options Granted | Number of Options Vested |
| March 31, 2013 | (a) 33 1/3rd % of total performance based options granted in (ii) above | 25% of (a) |
| June 30, 2013 | | 25% of (a) |
| September 30, 2013 | | 25% of (a) |
| December 31, 2013 | | 25% of (a) |
| March 31, 2014 | (b) 33 1/3rd % of total performance based options granted in (ii) above | 25% of (b) |
| June 30, 2014 | | 25% of (b) |
| September 30, 2014 | | 25% of (b) |
| December 31, 2014 | | 25% of (b) |
| March 31, 2015 | (c) 33 1/3rd % of total performance based options granted in (ii) above | 25% of (c) |
| June 30, 2015 | | 25% of (c) |
| September, 2015 | | 25% of (c) |
| December 31, 2015 | | 25% of (c) |
● | Gross revenue and EBITDA targets for calendar 2012 to 2014 are to be contained in the budgets for 2012, 2013 and 2014 as approved by the Board of Directors of the Company. |
The options referred to in clause (ii) above shall have an exercise price (converted to Canadian dollar using the Bank of Canada noon rate) equivalent to the closing price of the Company’s common shares on the day immediately preceding the date of grant and an expiry date five years from the date of grant.
Additionally, at the end of calendar 2012, and annually thereafter during the term of the Executive Employment Agreement, RH will be eligible for performance-based compensation equal to up to 50% of his annual salary in each calendar year upon the achievement of the above gross revenue and EBITDA targets for each calendar year as set out above. Should only one of the targets, either gross revenue or EBITDA, be achieved for a calendar year, then RH shall be eligible for 50% of the performance based compensation in such calendar year. In addition, RH shall receive employee benefits comparable to those provided to other executive officers of the Company, a monthly automobile allowance of $1,200, and six weeks of vacation per calendar year.
If RH’s employment is terminated by the Company for Just Cause or is terminated by RH other than for Good Reason (as such terms are defined in the Executive Employment Agreement), RH shall not be entitled to any further compensation, termination allowance or severance payment. If RH’s employment is terminated during the initial three year term by the Company for any reason other than for Just Cause or death, by the Company because of RH’s Disability (as such term is defined in the Executive Employment Agreement), or by RH for Good Reason, RH shall be entitled to the balance of the remuneration owing for the remainder of the initial three year term. If RH’s employment is renewed beyond the initial three year term and if his employment is then for a fixed term and if his employment is then terminated by the Company for any reason other than for Just Cause or death, by the Company because of RH’s Disability, or by RH for Good Reason, RH shall be entitled to the balance of the remuneration he would have earned for the balance of the fixed term. If RH is terminated while he is employed on an indefinite basis by the Company for any reason other than for Just Cause or death, by the Company because of RH’s Disability, or by RH for Good Reason, RH shall be entitled to an amount equal to twice RH’s annual salary, subject to any applicable deductions, and all outstanding and accrued regular and vacation pay and expenses to the date of termination. If RH’s employment is terminated and he holds any options, rights, warrants or other entitlements for the purchase or acquisition of shares in the capital of the Company, all such rights shall vest immediately and continue to be available for exercise for a period of 30 days following the date of termination, after which any such rights shall be void and of no further force and effect. In the event of termination of RH’s employment for any reason within nine months of a Control Change (as such terms are defined in the Executive Employment Agreement), RH shall automatically be entitled to the following severance payments:
| ● | if the Control Change occurs during the initial three year term, RH shall be entitled to the balance of the remuneration owing for the remainder of the initial three year term; |
| ● | if RH’s employment is renewed beyond the initial three year term and if his employment is then for a fixed term and if the Control Change occurs during the fixed term, RH shall be entitled to the balance of the remuneration he would have earned for the balance of the fixed term; or |
● | if the Control Change occurs while RH is employed on an indefinite basis, he shall be entitled to an amount equal to twice the annual salary, subject to any applicable deductions, and all outstanding and accrued regular and vacation pay and expenses to the date of termination. |
RH is subject to customary non-competition and non-solicitation restrictive covenants in favor of the Company.
Scott M. Langille Executive Employment Agreement
In connection with his appointment as Chief Financial Officer, Scott Langille and the Company entered into an Executive Employment Agreement, the term of which commenced on December 1, 2011 and ends on December 31, 2014, with automatic three year renewal periods unless written notice of non-renewal is provided by Mr. Langille upon no less than 90 days prior to the end of that term or by the Company upon no less than 180 days prior to the end of that term. For the first three year term, Mr. Langille shall be paid an annual base salary of CND$200,000 for his services. Mr. Langille’s annual salary for future terms shall be reviewed by the Company’s Board of Directors. The Company also has agreed to provide Mr. Langille with a monthly automobile allowance of $1,200 during the term of the Agreement. Mr. Langille shall be entitled to an initial grant of options governed by the terms of the Company’s stock option plan to purchase an aggregate of 846,226 common shares of the Company, which shall vest as follows:
(i) 50% of the options will be subject to a time vesting schedule beginning on April 1, 2012 and irrespective of Mr. Langille’s continued employment with the Company as follows:
| Date of Vesting | Number of Options Vested |
| April 1, 2012 | 8 1/3rds % of total options granted in (i) |
| July 1, 2012 | 8 1/3rds % of total options granted in (i) |
| October 1, 2012 | 8 1/3rds % of total options granted in (i) |
| January 1, 2013 | 8 1/3rds % of total options granted in (i) |
| April 1, 2013 | 8 1/3rds % of total options granted in (i) |
| July 1, 2013 | 8 1/3rds % of total options granted in (i) |
| October 1, 2013 | 8 1/3rds % of total options granted in (i) |
| January 1, 2014 | 8 1/3rds % of total options granted in (i) |
| April 1, 2014 | 8 1/3rds % of total options granted in (i) |
| July 1, 2014 | 8 1/3rds % of total options granted in (i) |
| October 1, 2014 | 8 1/3rds % of total options granted in (i) |
| January 1, 2015 | 8 1/3rds % of total options granted in (i) |
The options in (i) above shall have an exercise price (converted to Canadian dollar using the Bank of Canada noon rate) equivalent to the closing price of the Company’s common shares on the day immediately preceding December 1, 2011 and an expiry date five years from the date of grant.
(ii) 25% of the options will be granted upon the quarterly achievement of either of the Gross Revenue or EBITDA targets, each as defined below, with a total of 50% of the options granted if both targets are achieved, during the three year term of the Executive Employment Agreement which shall vest as follows:
| Date of Grant / Vesting | Number of Options Granted | Number of Options Vested |
| March 31, 2013 | (a) 33 1/3rd % of total performance based options granted in (ii) above | 25% of (a) |
| June 30, 2013 | | 25% of (a) |
| September 30, 2013 | | 25% of (a) |
| December 31, 2013 | | 25% of (a) |
| March 31, 2014 | (b) 33 1/3rd % of total performance based options granted in (ii) above | 25% of (b) |
| June 30, 2014 | | 25% of (b) |
| September 30, 2014 | | 25% of (b) |
| December 31, 2014 | | 25% of (b) |
| March 31, 2015 | (c) 33 1/3rd % of total performance based options granted in (ii) above | 25% of (c) |
| June 30, 2015 | | 25% of (c) |
| September, 2015 | | 25% of (c) |
| December 31, 2015 | | 25% of (c) |
| | ● Gross revenue and EBITDA targets for calendar 2012 to 2014 are to be contained in the budgets for 2012, 2013 and 2014 as approved by the Board of Directors of the Company. |
The options referred to in clause (ii) above shall have an exercise price (converted to Canadian dollar using the Bank of Canada noon rate) equivalent to the closing price of the Company’s common shares on the day immediately preceding the date of grant and an expiry date five years from the date of grant.
Additionally, at the end of calendar 2012, and annually thereafter during the term of the Executive Employment Agreement, Mr. Langille will be eligible for performance-based compensation equal to up to 40% of his annual salary in each calendar year upon the achievement of the above gross revenue and EBITDA targets for each calendar year as set out above. Should only one of the targets, either gross revenue or EBITDA, be achieved for a calendar year, then Mr. Langille shall be eligible for 50% of the performance based compensation in such calendar year. In addition, Mr. Langille shall receive employee benefits comparable to those provided to other executive officers of the Company, a monthly automobile allowance of $1,200, and six weeks of vacation per calendar year.
If Mr. Langille’s employment is terminated by the Company for Just Cause or is terminated by Mr. Langille other than for Good Reason (as such terms are defined in the Executive Employment Agreement), Mr. Langille shall not be entitled to any further compensation, termination allowance or severance payment. If Mr. Langille’s employment is terminated during the initial three year term by the Company for any reason other than for Just Cause or death, by the Company because of Mr. Langille’s Disability (as such term is defined in the Executive Employment Agreement), or by Mr. Langille for Good Reason, Mr. Langille shall be entitled to the balance of the remuneration owing for the remainder of the initial three year term. If Mr. Langille’s employment is renewed beyond the initial three year term and if his employment is then for a fixed term and if his employment is then terminated by the Company for any reason other than for Just Cause or death, by the Company because of Mr. Langille’s Disability, or by Mr. Langille for Good Reason, Mr. Langille shall be entitled to the balance of the remuneration he would have earned for the balance of the fixed term. If Mr. Langille is terminated while he is employed on an indefinite basis by the Company for any reason other than for Just Cause or death, by the Company because of Mr. Langille’s Disability, or by Mr. Langille for Good Reason, Mr. Langille shall be entitled to an amount equal to twice Mr. Langille’s annual salary, subject to any applicable deductions, and all outstanding and accrued regular and vacation pay and expenses to the date of termination. If Mr. Langille’s employment is terminated and he holds any options, rights, warrants or other entitlements for the purchase or acquisition of shares in the capital of the Company, all such rights shall vest immediately and continue to be available for exercise for a period of 30 days following the date of termination, after which any such rights shall be void and of no further force and effect. In the event of termination of Mr. Langille’s employment for any reason within nine months of a Control Change (as such terms are defined in the Executive Employment Agreement), Mr. Langille shall automatically be entitled to the following severance payments:
| ● | if the Control Change occurs during the initial three year term, Mr. Langille shall be entitled to the balance of the remuneration owing for the remainder of the initial three year term; |
| ● | if Mr. Langille’s employment is renewed beyond the initial three year term and if his employment is then for a fixed term and if the Control Change occurs during the fixed term, Mr. Langille shall be entitled to the balance of the remuneration he would have earned for the balance of the fixed term; or |
● | if the Control Change occurs while Mr. Langille is employed on an indefinite basis, he shall be entitled to an amount equal to twice the annual salary, subject to any applicable deductions, and all outstanding and accrued regular and vacation pay and expenses to the date of termination. |
Mr. Langille is subject to customary non-competition and non-solicitation restrictive covenants in favor of the Company.
Janice M. Clarke Amended and Restated Executive Employment Agreement
In connection with the resignation of Janice Clarke, the Chief Financial Officer and VP of Administration of the Company, and appointment of Ms. Clarke as VP of Finance and Administration, Ms. Clarke and the Company entered into an Amended and Restated Executive Employment Agreement, which commenced on December 1, 2011. Ms. Clarke shall be paid an annual base salary of CND$160,000 for her services. Ms. Clarke also received a one-time cash bonus of $25,000 on December 1, 2011, and is entitled to stock options to purchase 25,000 common shares of the Company. The stock options shall expire on the fifth anniversary of their date of issuance and shall have an exercise price (converted to Canadian dollar using the Bank of Canada noon rate) equal to the closing price of the Company’s common shares on the day preceding the date of grant. The options shall vest over a period of two years in equal installments at the end of every fiscal quarter. In addition, upon meeting objectives set by the Chief Financial Officer of the Company, Ms. Clarke shall be entitled to an annual bonus of up to 30% of her annual base salary. Ms. Clarke shall receive employee benefits comparable to those provided to other executive officers of the Company and five weeks of vacation per calendar year.
If Ms. Clarke’s employment is terminated by the Company for any other reason other than for Just Cause, Disability or death (as such terms are defined in the Amended and Restated Executive Employment Agreement), by Ms. Clarke for Good Reason (as such term is defined in the Amended and Restated Executive Employment Agreement), or by Ms. Clarke with or without reason during the six month period immediately following a Control Change (as such terms are defined in the Amended and Restated Executive Employment Agreement), Ms. Clarke shall be entitled to an amount equal to eighteen months of Annual Salary (as such term is defined in the Amended and Restated Executive Employment Agreement) at the time of termination, and all outstanding and accrued regular and vacation pay and expenses to the date of termination. Furthermore, if Ms. Clarke holds any options, rights, warrants or other entitlements for the purchase or acquisition of shares in the capital of the Company, all such rights shall vest immediately and continue to be available for exercise for a period of 30 days following the date of termination, after which any such rights shall be void and of no further force and effect.
Ms. Clarke is subject to customary non-competition and non-solicitation restrictive covenants in favor of the Company.
The following table sets forth certain information regarding beneficial ownership of shares of our common stock as of March 11, 2013 by (i) each person known to beneficially own more than 5% of our outstanding common stock, (ii) each of our directors, (iii) our named executive officers and (iv) all directors and executive officers as a group. Except as otherwise indicated, the persons named in the table have sole voting and investment power with respect to all shares beneficially owned, subject to community property laws, where applicable. Unless otherwise indicated, the address of each beneficial owner listed below is c/o Tribute Pharmaceuticals Canada Inc., 151 Steeles Avenue East, Milton, Ontario, Canada, L9T 1Y1.
| | Number of Shares | | | Percentage (1) | |
| Executive officers and directors: | | | | | | |
Robert Harris (2) | | | 9,715,568 | | | | 18.8 | |
Arnold Tenney (3) | | | 1,565,450 | | | | 3.0 | |
Steven H. Goldman (4) | | | 3,850,146 | | | | 7.4 | |
John M. Gregory (5) | | | 10,731,294 | | | | 20.0 | |
John Kime (6) | | | 267,500 | | | | * | |
F. Martin Thrasher (7) | | | 2,642,500 | | | | 5.0 | |
Scott Langille (8) | | | 7,051,297 | | | | 13.8 | |
Janice Clarke (9) | | | 227,297 | | | | * | |
| | | | | | | | | |
| All Officers and Directors as a Group (8 persons) | | | 36,051,052 | | | | | |
_____
*less than 1%
| (1) | Applicable percentage ownership is based on 50,972,542 shares of common stock outstanding as of March 11, 2013, together with securities exercisable or convertible into shares of common stock within 60 days of March 11, 2013, for each stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock that are currently exercisable or exercisable within 60 days of March 11, 2013, are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. |
| (2) | Includes (i) 4,750,000 shares of common stock held by Mr. Harris, (ii) 4,125,000 shares of common stock held by Mr. Harris’s spouse, (iii) 215,568 shares of common stock issuable upon exercise of outstanding options to purchase shares of common stock, and (iv) 625,000 shares of common stock issuable to Mr. Harris upon exercise of outstanding warrants to purchase shares of common stock. In connection with his employment agreement, Mr. Harris was granted an option to purchase 1,034,726 shares of the Company’s common stock. Of these options, 50% are time based and vest in 36 equal quarterly installments on the first day of January, April, July and October, with the first installment vesting on April 1, 2012. The remaining 50% of these options are performance based and will vest in 36 equal quarterly installments on the last day of March, June, September and December, with the first installment vesting on March 31, 2013. |
| | |
| (3) | Includes (i) 942,700 shares of common stock held by LMT Financial Inc., (ii) 126,500 shares of common stock held by Arnmat Investments Limited, (iii) 85,000 shares of common stock held by Mr. Tenney’s spouse, (iv) 161,250 shares of common stock issuable upon exercise of outstanding options to purchase shares of common stock, and (v) 250,000 shares of common stock issuable to LMT Financial upon exercise of outstanding warrants to purchase shares of common stock. Mr. Tenney has sole voting and dispositive power over the shares held by LMT Financial, Inc. and Arnmat Investments Limited. |
| | |
| (4) | Includes (i) 100,000 shares of common stock held by Mr. Goldman, (ii) 615,540 shares of common stock held by Mr. Goldman by RBC Securities in Mr. Goldman’s RRSP, (iii) 958,206 shares of common stock held by Lambent Corp., (iv) 806,400 shares of common stock held by Mr. Goldman’s spouse, (v) 120,000 shares of common stock issuable upon exercise of outstanding options to purchase shares of common stock, (vi) 550,000 shares of common stock issuable to Mr. Goldman in his RRSP, upon exercise of outstanding warrants to purchase shares of common stock, and (vii) 700,000 shares of common stock issuable to Mr. Goldman’s spouse upon the exercise of outstanding warrants to purchase common shares. Mr. Goldman has sole voting and dispositive power over the shares held Lambent Consulting Corp. |
| (5) | Includes (i) 625,000 shares of common stock held by Mr. Gregory, (ii) 6,438,794 shares of common stock held by SJ Strategic Investments, LLC, (iii) 1,025,000 shares of common stock held by Kingsway Charities Inc., (iv) 142,500 shares of common stock issuable upon exercise of outstanding options to purchase shares of common stock, (v) 625,000 shares of common stock issuable to Mr. Gregory upon exercise of outstanding warrants to purchase shares of common stock (vi) 625,000 shares of common stock issuable to Kingsway Charities Inc. upon exercise of outstanding warrants to purchase shares of common stock and 1,250,000 shares of common stock issuable to SJ Strategic Investments, LLC upon exercise of outstanding warrants to purchase shares of common stock . Mr. Gregory has sole voting and dispositive power over the shares held by SJ Strategic Investments, LLC and Kingsway Charities Inc. |
| | |
| (6) | Includes (i) 125,000 shares of common stock, and (ii) 142,500 shares of common stock issuable upon exercise of outstanding options to purchase shares of common stock. |
| | |
| (7) | Includes (i) 1,250,000 shares of common stock held by 2089636 Ontario Ltd., (ii) 142,500 shares of common stock issuable upon exercise of outstanding options to purchase shares of common stock, and (iii) 1,250,000 shares of common stock issuable to 2089636 Ontario Ltd. upon exercise of outstanding warrants to purchase shares of common stock. Mr. Thrasher has sole voting and dispositive power over the shares held by 2089636 Ontario Ltd. |
| | |
| (8) | Includes (i) 6,812,500 shares of common stock held by Elora Financial Inc., (ii) 176,297 shares of common stock issuable upon exercise of outstanding options to purchase shares of common stock, and (iii) 62,500 shares of common stock issuable to Elora Financial Inc. upon exercise of outstanding warrants to purchase shares of common stock. Mr. Langille has sole voting and dispositive power over the shares held by Elora Financial Inc. In connection with his employment agreement, Mr. Langille was granted an option to purchase 846,226 shares of the Company’s common stock. Of these options, 50% are time based and vest in 36 equal quarterly installments on the first day of January, April, July and October, with the first installment vesting on April 1, 2012. The remaining 50% of these options are performance based and will vest in 36 equal quarterly installments on the last day of March, June, September and December, with the first installment vesting on March 31, 2013. |
| (9) | Includes (i) 80,422 shares of common stock held by Ms. Clarke, (ii) 10,000 shares of common stock held by her spouse, and (iii) 136,875 shares of common stock issuable upon exercise of outstanding options to purchase shares of common stock. |
Except as described below, since the beginning of our fiscal year 2012, there has not been, and there is not currently proposed any transaction or series of similar transactions in which the amount involved exceeded or will exceed the lesser of $120,000 and in which any related person, including any director, executive officer, holder of more than 5% of our capital stock during such period, or entities affiliated with them, had or will have a direct or indirect a material interest and is outside of the scope of our operations.
Fees were paid to LMT Financial Inc. ("LMT", a company beneficially owned by a director and former interim officer of the Company, and his spouse) for consulting services. For the twelve month period ended, December 31, 2012, the Company recorded and paid $150,000 (2011 - $191,200) as selling, general and administrative expense in the statements of operations and comprehensive loss.
During the twelve month periods ending December 31, 2012, the Company paid $Nil (2011- $87,586) to a law firm in which one of the directors of the Company is a partner, which $nil (2011 - $8,000) have been recorded as selling, general and administrative expense and $nil (2011 - $79,600) was recorded as acquisition and restructuring costs in the statements of operations and comprehensive loss.
Director Independence
Our board of directors has determined that a majority of the board consists of members are currently "independent" as that term is defined under current listing standards of NASDAQ.
The shareholders have appointed McGovern, Hurley, Cunningham LLP as the Company’s independent auditors for the fiscal years ended December 31, 2012 and 2011. The following table shows the fees recorded by the Company for the audit and other services provided by McGovern, Hurley, Cunningham LLP for 2012 and 2011:
| | | 2012 | | | 2011 | |
| Audit Fees | | $ | 209,000 | | | $ | 119,000 | |
| Audit-Related Fees | | | - | | | | - | |
| Totals | | $ | 209,000 | | | $ | 119,000 | |
As defined by the securities regulations (i) “audit fees” are fees for professional services rendered by the Company’s principal accountant for the audit of the Company’s annual financial statements and review of financial statements included in our Form 10-Q filings, or for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years; (ii) “audit-related fees” are fees for assurance and related services by the Company’s principal accountant that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported under “audit fees”; (iii) “tax fees” are fees for professional services rendered by the Company’s principal accountant for tax compliance, tax advice, and tax planning; and (iv) “all other fees” are fees for products and services provided by the Company’s principal accountant, other than the services reported under “audit fees”, “audit-related fees”, and “tax fees”.
Audit Fees.
Audit fees consist of fees recorded for professional services rendered for the audit of the Company’s financial statements and services that are normally provided in connection with statutory and regulatory filings. The aggregate fees recorded by the Company for the 2011 and 2010 audit were approximately $209,000 and $119,000, respectively.
Audit-Related Fees.
Audit-related fees are fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not under “Audit Fees”. There were no audit-related fees in 2012 and 2011.
All Other Fees.
Fees related to the review of the interim financial statements included in quarterly reports and services that are normally provided in connection with statutory and regulatory filings. There were no fees that fell in this category during either 2012 or 2011.
Tax Fees.
We do not engage the Company’ principal accountant to assist with the preparation or review of the Company’s annual tax filings. We do, however, engage an outside tax consultant to provide this service. The Company recorded expense of $3,800 and $2,000 for 2012 and 2011, respectively.
Engagement of the Independent Auditor.
The Audit Committee is responsible for approving every engagement of McGovern, Hurley, Cunningham LLP to perform audit or non-audit services for the Company before McGovern, Hurley, Cunningham LLP is engaged to provide those services. Under applicable laws, the Audit Committee is required to pre-approve the audit and non-audit services performed by the independent auditors in order to ensure that they do not impair the auditors’ independence. Applicable laws specify the types of non-audit services that an independent auditor may not provide to its audit client and establish the Audit Committee’s responsibility for administration of the engagement of the independent auditors.
Consistent with the applicable laws, the Audit Committee Charter requires that the Audit Committee review and pre-approve all audit services and permitted non-audit services provided by the independent auditors to the Company or any of the Company’s subsidiaries. The Audit Committee may delegate pre-approval authority to a member of the Audit Committee and if it does, the decisions of that member must be presented to the full Audit Committee at its next scheduled meeting.
| (a) | List of Documents Filed as a Part of This Report: |
| | |
| Index to Financial Statements | F-1 |
| Report of Independent Registered Public Accounting Firm | F-2 |
| Balance Sheets as of December 31, 2012 and 2011 | F-3 |
| Statement of Changes in Stockholder's Equity (Deficit) for the years ended December 31, 2012 and December 31, 2011 | F-4 |
| Statement of Operations and Comprehensive Loss for the years ended December 31, 2012 and 2011 | F-5 |
| Statements of Cash Flows for each of the years ended December 31, 2012 and 2011 | F-6 |
| Notes to Financial Statements | F-7 - F-31 |
| (b) | Index to Financial Statement Schedules: |
All schedules have been omitted because the required information is included in the financial statements or the notes thereto, or is not applicable or required.
The Exhibits listed below are identified by numbers corresponding to the Exhibit Table of Item 601 of Regulation S-K. The Exhibits designated by an asterisk (*) are management contracts or compensatory plans or arrangements required to be filed pursuant to Item 15.
| Exhibit No. | | Description of Exhibit |
| 2.1 | | Share Purchase Agreement, dated December 1, 2011, between Stellar Pharmaceuticals Inc., Elora Financial Management Inc., Mary-Ann Harris, Rob Harris and Scott Langille (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 14, 2013 and incorporated herein by reference). |
| 3.1 | | Articles of Incorporation of the Company (filed as Exhibit 3(i)A to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference). |
| 3.2 | | First Articles of Amendment (filed as Exhibit 3(i)B to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference). |
| 3.3 | | Second Articles of Amendment (filed as Exhibit 3(i)C to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference). |
| 3.4 | | Articles of Amalgamation, effective January 1, 2013, changing the Company’s name from Stellar Pharmaceuticals Inc. to Tribute Pharmaceuticals Canada Inc. (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on January 2, 2013 and incorporated herein by reference). |
| 3.5 | | By-Laws of the Company (filed as Exhibit 3(ii) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference). |
| 3.6 | | Specimen Form of Common Share Certificate (filed as Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference). |
| 4.1 | | Form of Extension of Expiry Time, dated April 5, 2012 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 12, 2012 and incorporated herein by reference). |
| 4.2 | | Form of Series A/B Warrant, dated February 27, 2013 (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on March 5, 2013 and incorporated herein by reference). |
| 4.3 | | Form of Series A/B Warrant, dated March 5, 2013 (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on March 8, 2013 and incorporated herein by reference). |
| 4.4 | | Form of Series A/B Warrant, dated March 11, 2013 (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on March 14, 2013 and incorporated herein by reference). |
| 4.5 | | Secured Promissory Note, dated May 11, 2012 issued to Midcap Funding III, LLC.* |
| 4.6 | | Warrant, dated May 11, 2012 issued to Midcap Funding III, LLC.* |
| 4.7 | | Amended and Restated Secured Promissory Note, dated February 27, 2013 issued to Midcap Funding III, LLC.* |
| 4.8 | | Amended and Restated Warrant, dated February 27, 2013 issued to Midcap Funding III, LLC.* |
| 10.1 | | United States Patent No. 6,083,933 (filed as Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference). |
| 10.2 | | Canadian Patent No. 2,269,260 (filed as Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference). |
| 10.3 | | Consulting Agreement dated February 21, 2001 between the Company and LMT Financial Inc. (filed as Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference). |
| 10.4 | | Amended Agreement dated January 1, 2004 between the Company and LMT Financial Inc. (filed as Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference). |
| 10.5 | | Amending Consulting Agreement dated December 10, 2004 between the Company & LMT Financial Inc. (filed as Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference). |
| 10.6 | | Option Plan (filed as Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference). |
| 10.7 | | Amendment to Option Plan – 2001 (filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference). |
| 10.8 | | Amendment to Option Plan – 2004 (filed as Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference). |
| 10.9 | | Amendment to Option Plan – 2005 (filed as Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference). |
| 10.10 | | Uracyst Services Agreement dated October 10, 2003 between the Company and Dalton Chemical Laboratories Inc. (filed as Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference). |
| 10.11 | | Uracyst License (i) and Supply Agreements (ii) dated March 24, 2004 the Company and SJ Pharmaceuticals, Inc. (filed as Exhibit 10.17 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004 and incorporated herein by reference). |
| 10.12 | | Uracyst License and Supply Agreements dated December 13, 2006 the Company and Watson Pharma, Inc. (filed as Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference). |
| 10.13 | | License Agreement dated December 21, 2001 between the Company and G. Pohl-Boskamp GmbH & Co. (filed as Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference). |
| 10.14 | | NeoVisc License (i) and Supply Agreements (ii) dated March 24, 2004 between the Company and SJ Pharmaceuticals, Inc. (filed as Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference). |
| 10.15 | | NeoVisc Services Agreement dated April 20, 2004 between the Company and Dalton Chemical Laboratories Inc. (filed as Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference). |
| 10.16 | | Employment Agreement Peter Riehl (filed as Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference). |
| 10.17 | | Executive Employment Agreement, dated January 12, 2011, by and between Stellar Pharmaceuticals Inc. and Janice Clarke (filed as Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and incorporated herein by reference). |
| 10.18 | | Settlement Agreement, dated January 17, 2011, by and between Stellar Pharmaceuticals Inc. and Peter Riehl (filed as Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and incorporated herein by reference). |
| 10.19 | | Consulting Agreement between the Company and LMT Financial Inc. (filed as Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and incorporated herein by reference). |
| 10.20 | | Chinese Patent No. 1758920 B (filed as Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and incorporated herein by reference). |
| 10.21 | | Australian Patent No. 10/367,970 B2 (filed as Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and incorporated herein by reference) |
| 10.22 | | United States Patent No. 7,772,210 B2 (filed as Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and incorporated herein by reference) |
| 10.23 | | Amendment to Option Plan – 2011 dated June 22, 2011.* |
| 10.24 | | Japanese Patent No. 4778888 dated July 8, 2011.* |
| 10.25 | | Executive Employment Agreement, effective December 1, 2011, by and between Stellar Pharmaceuticals Inc. and Rob Harris (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed with the Commission on February 11, 2013 and incorporated herein by reference). † |
| 10.26 | | Executive Employment Agreement, effective December 1, 2011, by and between Stellar Pharmaceuticals Inc. and Scott Langille (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K/A filed with the Commission on February 11, 2013 and incorporated herein by reference). † |
| 10.27 | | Consulting Agreement, effective December 1, 2011, by and between Stellar Pharmaceuticals Inc. and Arnold Tenney (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K/A filed with the Commission on February 11, 2013 and incorporated herein by reference). |
| 10.28 | | Amended and Restated Executive Employment Agreement, effective December 1, 2011, by and between Stellar Pharmaceuticals Inc. and Janice Clarke (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K/A filed with the Commission on February 11, 2013 and incorporated herein by reference). |
| 10.29 | | Loan Agreement, dated June 14, 2010, between Tribute Pharma Canada Inc. and the Bank of Montreal in the amount of CND$500,000 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K/A filed with the Commission on February 11, 2013 and incorporated herein by reference). |
| 10.30 | | Security Agreement, dated June 14, 2010, by Tribute Pharma Canada Inc. in favor of the Bank of Montreal (filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K/A filed with the Commission on February 11, 2013 and incorporated herein by reference). |
| 10.31 | | Personal Guarantee, dated June 14, 2010 in favor of the Bank of Montreal by Mary-Ann Harris, Rob Harris and Scott Langille (filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K/A filed with the Commission on February 11, 2013 and incorporated herein by reference). |
| 10.32 | | Form of Securities Purchase Agreement, dated February 27, 2013 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 5, 2013 and incorporated herein by reference). |
| 10.32 | | Form of Registration Rights Agreement, dated February 27, 2013 (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on March 5, 2013 and incorporated herein by reference). |
| 10.33 | | Form of Securities Purchase Agreement, dated March 7, 2013(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 8, 2013 and incorporated herein by reference). |
| 10.34 | | Form of Registration Rights Agreement, dated March 7, 2013(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on March 8, 2013 and incorporated herein by reference). |
| 10.35 | | Form of Securities Purchase Agreement, dated March 11, 2013 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 14, 2013 and incorporated herein by reference). |
| 10.36 | | Form of Registration Rights Agreement, dated March 11, 2013 (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on March 14, 2013 and incorporated herein by reference). |
| 10.37 | | Loan and Security Agreement, dated May 11, 2012, by and between Stellar Pharmaceuticals Inc., Tribute Pharma Canada Inc., Tribute Pharmaceuticals Canada Ltd. and Midcap Funding III, LLC. † |
| 10.38 | | General Security Agreement, dated May 11, 2012, by and between Stellar Pharmaceuticals Inc., and Midcap Funding III, LLC.* |
| 10.39 | | General Security Agreement, dated May 11, 2012, by and between Tribute Pharma Canada Inc.,. and Midcap Funding III, LLC.* |
| 10.40 | | General Security Agreement, dated May 11, 2012, by and between Tribute Pharmaceuticals Canada Ltd. and Midcap Funding III, LLC.* |
| 10.41 | | Intellectual Property Security Agreement, dated May 11, 2012, by and between Stellar Pharmaceuticals Inc., Tribute Pharma Canada Inc., Tribute Pharmaceuticals Canada Ltd. and Midcap Funding III, LLC.* |
| 10.42 | | Canadian Collateral Pledge Agreement, dated May 11, 2012, by and between Stellar Pharmaceuticals Inc. and Midcap Funding III, LLC.* |
| 10.43 | | Confirmation of Security Agreement, dated February 27, 2013, by and between Tribute Pharmaceuticals Canada Inc. and Midcap Funding III, LLC* |
| 10.44 | | Confirmation of Intellectual Property Security Agreement, dated February 27, 2013, by and between Tribute Pharmaceuticals Canada Inc. and Midcap Funding III, LLC* |
| 10.45 | | Termination of Canadian Collateral Pledge Agreement, dated February 27, 2013, by and between Tribute Pharmaceuticals Canada Inc. and Midcap Funding III, LLC* |
| 31.1 | | Certification of Chief Executive Officer required under Rule 13a-14(a)/15d-14(a) under the Exchange Act* |
| 31.2 | | Certification of Principal Financial Officer required under Rule 13a-14(a)/15d-14(a) under the Exchange Act* |
| 32.1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
| 32.2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
| 101.INS | | XBRL Instance Document** |
| 101.SCH | | XBRL Taxonomy Extension Schema Document** |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document** |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document** |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document** |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document** |
_____________
* Filed herewith
** Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
† Confidential treatment is requested for certain confidential portions of this exhibit pursuant to Rule 24b-2 under the Exchange Act. In accordance with Rule 24b-2, these confidential portions have been omitted from this exhibit and filed separately with the Commission.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
| | TRIBUTE PHARMACEUTICALS CANADA INC. |
| | (Registrant) |
| | | |
| Date: March 21, 2013 | By: | /s/Rob Harris | |
| | | Rob Harris |
| | | Chief Executive Officer |
| | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| | | | |
| | | | | |
| /s/ Rob Harris | | President and Chief Executive Officer | | March 21, 2013 |
| | (Principal Executive Officer) | | |
| | | | | |
| /s/ Scott M. Langille | | Chief Financial Officer | | March 21, 2013 |
| Scott M. Langille | | (Principal Financial and Accounting Officer) | | |
| | | | | |
| /s/Arnold Tenney | | Chairman of the Board | | March 21, 2013 |
| Arnold Tenney | | | | |
| | | | | |
| /s/Steven Goldman | | Director | | March 21, 2013 |
| Steven Goldman | | | | |
| | | | | |
| /s/John M. Gregory | | Director | | March 21, 2013 |
| John M. Gregory | | | | |
| | | | | |
| /s/John J. Kime | | Director | | March 21, 2013 |
| John J. Kime | | | | |
| | | | | |
| /s/F. Martin Thrasher | | Director | | March 21, 2013 |
| F. Martin Thrasher | | | | |
| | | | | |
| /s/Janice M. Clarke | | VP of Finance and Administration (Chief Accounting Officer) | | March 21, 2013 |
| Janice M. Clarke | | | | |
(formerly Stellar Pharmaceuticals Inc.)
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
TABLE OF CONTENTS
PART I – FINANCIAL STATEMENTS
CONTENTS
| | | PAGE | |
| FINANCIAL STATEMENTS | | | |
| | | | |
| REPORT BY INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | | F-2 | |
| | | | |
| | F-3 | |
| | | | |
| | F-4 | |
| | | | |
| | F-5 | |
| | | | |
| | F-6 | |
| | | | |
| | F-7 to F-31 | |
McGovern, Hurley, Cunningham, LLP
Chartered Accountants
| | 2005 Sheppard Avenue East, Suite 300 |
| | Toronto, Ontario |
| | M2J 5B4, Canada |
| | |
| | |
| | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Tribute Pharmaceuticals Canada Inc. (formerly Stellar Pharmaceuticals Inc.)
We have audited the accompanying balance sheets of Tribute Pharmaceuticals Canada Inc. (formerly Stellar Pharmaceuticals Inc.) (the “Company”) as of December 31, 2012 and 2011 and the related statements of changes in shareholders’ equity, operations and comprehensive (loss) , and cash flows for each of the years in the two-year period ended December 31, 2012. Tribute Pharmaceuticals Canada Inc.’s (formerly Stellar Pharmaceuticals Inc.) management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tribute Pharmaceuticals Canada Inc. (formerly Stellar Pharmaceuticals Inc). as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.
| | McGOVERN, HURLEY, CUNNINGHAM, LLP | |
| |  | |
| | Chartered Accountants Licensed Public Accountants | |
TORONTO, Canada March 13, 2013
(formerly Stellar Pharmaceuticals Inc.)
BALANCE SHEETS
(Expressed in Canadian dollars)
| | | As at December 31, 2012 | | | As at December 31, 2011 | |
| ASSETS | | | | | | |
| Current | | | | | | |
| Cash and cash equivalents (Note 4) | | $ | 2,283,868 | | | $ | 2,227,973 | |
| Accounts receivable, net of allowance of $nil (2011 - $nil) | | | 1,205,087 | | | | 763,810 | |
| Inventories (Note 5) | | | 1,000,557 | | | | 870,630 | |
| Taxes recoverable | | | 261,400 | | | | 180,160 | |
| Loan receivable | | | 15,814 | | | | 15,814 | |
| Prepaid expenses and other receivables (Note 6) | | | 118,910 | | | | 124,101 | |
| Total current assets | | | 4,885,636 | | | | 4,182,488 | |
Property, plant and equipment, net (Note 7) | | | 1,159,375 | | | | 1,207,462 | |
Intangible assets, net (Note 8) | | | 10,883,179 | | | | 10,409,744 | |
Goodwill (Notes 2 and 9) | | | 3,599,077 | | | | 3,408,741 | |
Debt issuance costs, net (Note 10) | | | 301,265 | | | | - | |
| Total assets | | $ | 20,828,532 | | | $ | 19,208,435 | |
| | | | | | | | | |
| LIABILITIES | | | | | | | | |
| Current | | | | | | | | |
| Accounts payable and accrued liabilities (Notes 2 and 16) | | $ | 5,455,664 | | | $ | 2,684,542 | |
| Amount payable and contingent consideration due (Note 2) | | | - | | | | 1,624,289 | |
| Current portion of long term debt (Note 10) | | | 1,305,840 | | | | - | |
| Total current liabilities | | | 6,761,504 | | | | 4,308,831 | |
| Warrant liability (Note 11 c) | | | 202,213 | | | | 2,543 | |
Long term debt (Note 10) | | | 1,815,791 | | | | - | |
Deferred tax liability (Note 17) | | | 314,900 | | | | 1,524,200 | |
| Total liabilities | | | 9,094,408 | | | | 5,835,574 | |
| | | | | | | | | |
| Contingencies and commitments (Note 14) | | | | | | | | |
| | | | | | | | | |
| SHAREHOLDERS’ EQUITY | | | | | | | | |
| Capital Stock | | | | | | | | |
| AUTHORIZED | | | | | | | | |
| Unlimited Non-voting, convertible redeemable and retractable preferred shares with no par value | | | | | | | | |
| Unlimited Common shares with no par value | | | | | | | | |
| ISSUED (Note 11 a) | | | | | | | | |
| Common shares 39,610,042 (2011 – 37,610,042) | | | 17,589,957 | | | | 16,469,621 | |
| Additional paid-in capital options (Note 11 b) | | | 1,867,723 | | | | 1,277,830 | |
| Deficit | | | (7,723,556 | ) | | | (4,374,590 | ) |
| Total shareholders’ equity | | | 11,734,124 | | | | 13,372,861 | |
| Total liabilities and shareholders’ equity | | $ | 20,828,532 | | | $ | 19,208,435 | |
See accompanying notes to the financial statements.
(formerly Stellar Pharmaceuticals Inc.)
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Expressed in Canadian dollars)
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
| | | Number of Common Shares | | | Common Shares | | | Additional Paid-in Capital Options | | | Deficit | |
| | | | # | | | $ | | | $ | | | $ | |
| BALANCE, | | | | | | | | | | | | | | | | |
| January 1, 2011 | | | 24,585,040 | | | | 9,055,982 | | | | 945,298 | | | | (3,852,809 | ) |
| Common shares issued as default shares from 2010 private placement (Note 11 a) | | | 25,002 | | | | 14,467 | | | | — | | | | — | |
| Share issue costs of the default shares above (Note 11 a) | | | — | | | | (24,243 | ) | | | — | | | | — | |
| Common shares issued for acquisition of Tribute (Notes 2 and 11 a) | | | 13,000,000 | | | | 7,423,415 | | | | — | | | | — | |
| Options issued to employees and directors (Note 11 b) | | | — | | | | — | | | | 332,532 | | | | — | |
| Net (loss) for the year | | | — | | | | — | | | | — | | | | (521,781 | ) |
| BALANCE, | | | | | | | | | | | | | | | | |
| December 31, 2011 | | | 37,610,042 | | | | 16,469,621 | | | | 1,277,830 | | | | (4,374,590 | ) |
| Common shares issued for milestone related to acquisition of Tribute (Notes 2 and 11 a) | | | 2,000,000 | | | | 1,120,336 | | | | — | | | | — | |
| Options issued to employees and directors (Note 11 b) | | | — | | | | — | | | | 589,893 | | | | — | |
| Net (loss) for the year | | | — | | | | — | | | | — | | | | (3,348,966 | ) |
| December 31, 2012 | | | 39,610,042 | | | | 17,589,957 | | | | 1,867,723 | | | | (7,723,556 | ) |
See accompanying notes to financial statements.
(formerly Stellar Pharmaceuticals Inc.)
STATEMENTS OF OPERATIONS AND
COMPREHENSIVE (LOSS)
(Expressed in Canadian dollars)
For the Years Ended December 31,
| | | 2012 | | | 2011 | |
| Revenues | | | | | | |
| Licensed domestic product net sales | | $ | 8,322,945 | | | $ | 572,272 | |
| Other domestic product sales | | | 2,494,359 | | | | 1,977,167 | |
| International product sales | | | 1,525,479 | | | | 1,306,215 | |
| Royalty and licensing revenues | | | - | | | | 14,227 | |
Total revenues (Notes 15 and 18) | | | 12,342,783 | | | | 3,869,881 | |
| | | | | | | | | |
| Cost of sales | | | | | | | | |
| Licensor sales and distribution fees | | | 5,916,845 | | | | 484,480 | |
| Cost of products sold | | | 1,220,716 | | | | 932,755 | |
| Write down of inventories | | | 36,345 | | | | 26,117 | |
| Gross Profit | | | 5,168,877 | | | | 2,426,529 | |
| | | | | | | | | |
| Expenses | | | | | | | | |
| Selling, general and administrative (Notes 14 a, 16 and 19) | | | 8,870,609 | | | | 3,034,740 | |
| Amortization | | | 718,981 | | | | 77,951 | |
| Total expenses | | | 9,589,590 | | | | 3,112,691 | |
| (Loss) from operations | | | (4,420,713 | ) | | | (686,162 | ) |
| | | | | | | | | |
| Non-operating income (expenses) | | | | | | | | |
| Change in warrant liability (Note 11 c) | | | 247,486 | | | | 214,280 | |
| Cost of extending the warrant expiration (Note 11 c) | | | (135,157 | ) | | | - | |
| Change in fair value of contingent consideration (Note 2) | | | 79,724 | | | | (57,996 | ) |
| Research and development | | | (21,402 | ) | | | (49,977 | ) |
| Loss on disposal of equipment | | | - | | | | (259,636 | ) |
| Acquisition and restructuring costs (Notes 2 and 16) | | | - | | | | (671,112 | ) |
| Accretion expense | | | (140,154 | ) | | | (6,888 | ) |
| Interest expense | | | (253,143 | ) | | | - | |
| Interest income | | | 13,940 | | | | 18,910 | |
| Loss and comprehensive loss before tax | | | (4,629,419 | ) | | | (1,498,581 | ) |
| Current income tax recovery | | | 71,153 | | | | - | |
Deferred income tax recovery (Note 17) | | | 1,209,300 | | | | 976,800 | |
| Net loss and comprehensive loss for the year | | $ | (3,348,966 | ) | | $ | (521,781 | ) |
Loss Per Share (Note 12) - Basic | | $ | (0.09 | ) | | $ | (0.02 | ) |
- Diluted | | $ | (0.09 | ) | | $ | (0.02 | ) |
Weighted Average Number of Common Shares Outstanding - Basic | | | 39,167,419 | | | | 25,706,000 | |
- Diluted | | | 39,167,419 | | | | 25,706,000 | |
See accompanying notes to the financial statements.
(formerly Stellar Pharmaceuticals Inc.)
STATEMENTS OF CASH FLOWS
(Expressed in Canadian dollars)
For the Years Ended December 31,
| | | 2012 | | | 2011 | |
| Cash flows from (used in) operating activities | | | | | | |
| Net (loss) | | $ | (3,348,966 | ) | | $ | (521,781 | ) |
| Items not affecting cash: | | | | | | | | |
| Deferred income tax recovery | | | (1,209,300 | ) | | | (976,800 | ) |
| Amortization | | | 772,012 | | | | 143,505 | |
| Loss on disposal of equipment | | | - | | | | 259,636 | |
| Change in warrant liability (Note 11 c) | | | (247,486 | ) | | | (214,280 | ) |
| Cost of extending the warrant expiration | | | 135,157 | | | | - | |
| Change in fair value of contingent consideration | | | (79,724 | ) | | | 57,996 | |
| Stock-based compensation (Note 11 b) | | | 589,893 | | | | 332,532 | |
| Accretion expense | | | 140,154 | | | | 6,888 | |
| Issuance of equity instruments for services rendered | | | - | | | | 14,467 | |
| Change in non-cash operating assets and liabilities (Note 13) | | | 1,690,533 | | | | (113,611 | ) |
| Cash flows (used in) operating activities | | | (1,557,727 | ) | | | (1,011,448 | ) |
| Cash flows (used in) investing activities | | | | | | | | |
| Additions to property, plant and equipment | | | (49,272 | ) | | | (9,990 | ) |
| Payment of contingent liabilities (Note 2 a) | | | (40,000 | ) | | | - | |
| Increase in patents and licensing agreements | | | (792,902 | ) | | | (42,521 | ) |
| Cash cost of acquisitions (Note 2) | | | (425,000 | ) | | | (1,036,110 | ) |
| Cash flows (used in) investing activities | | | (1,307,174 | ) | | | (1,088,621 | ) |
| Cash flows from (used in) financing activities | | | | | | | | |
| Financing costs deferred | | | (341,489 | ) | | | - | |
| Long term debt repayment | | | (217,569 | ) | | | - | |
| Long term debt issued | | | 3,500,000 | | | | - | |
| Share issuance costs | | | - | | | | (24,243 | ) |
| Cash flows from (used in) financing activities | | | 2,940,942 | | | | (24,243 | ) |
| Changes in cash and cash equivalents | | | 76,041 | | | | (2,124,312 | ) |
| Change in cash due to changes in foreign exchanges | | | (20,146 | ) | | | - | |
Cash and cash equivalents, beginning of year (Note 4) | | | 2,227,973 | | | | 4,352,285 | |
| Cash and cash equivalents, end of year (Note 4) | | $ | 2,283,868 | | | $ | 2,227,973 | |
See accompanying notes to the financial statements.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
| 1. | DESCRIPTION OF BUSINESS |
Tribute Pharmaceuticals Canada Inc. ("Tribute Pharmaceuticals" or the "Company") (formerly Stellar Pharmaceuticals Inc.) is an emerging specialty pharmaceutical company with a primary focus on the acquisition, licensing, development and promotion of healthcare products in Canada. The Company targets several therapeutic areas in Canada but has a particular interest in products for the treatment of pain, urology, dermatology and endocrinology/cardiology. Tribute Pharmaceuticals also sells Uracyst® and NeoVisc® internationally through a number of strategic partnerships. On December 1, 2011, the Company acquired 100% of the outstanding shares of Tribute Pharmaceuticals Canada Ltd. and Tribute Pharma Canada Inc. ("Tribute"), creating a North American specialty pharmaceutical company (See Note 2).
On October 1, 2012, Stellar Pharmaceuticals Inc. amalgamated with its two wholly owned subsidiaries, Tribute and became a single entity. Prior to this date, the financial statements of the Company were consolidated with its two wholly owned subsidiaries.
| 2. | ACQUISITIONS AND GOODWILL |
Tribute
On December 1, 2011, the Company acquired 100% of the outstanding shares of privately-held Tribute, a Canadian-based specialty pharmaceutical company. Tribute's shareholders were paid 13,000,000 common shares of the Company, which were valued at $7,423,415 based on the then current stock price of $0.57, and $1,000,000 in cash consideration, with an additional $500,000 in cash consideration payable to Tribute shareholders on December 1, 2012. During the year ended December 31, 2012, $40,000 of this amount was paid, with the remaining balance outstanding and included in accounts payable and accrued liabilities. Upon approval by Health Canada for the marketing and sale of Cambia, Tribute shareholders were also entitled to an additional 2,000,000 common shares of the Company, which were issued during the year ended December 31, 2012 (Note 11 a). The estimated fair value of this contingent non-cash consideration as of the acquisition date was $1,142,064, based on the Company’s stock price of $0.57 on December 1, 2011. The Company estimated the fair value of the contingent consideration by assigning an achievement probability to each potential milestone and discounting the associated cash payment to its present value using a risk adjusted rate of return. The Company evaluates its estimates of fair value of contingent consideration liabilities at the end of each reporting period until the liability is settled. Any changes in the fair value of contingent consideration liabilities are included in change in fair value of contingent consideration on the statements of operations and comprehensive loss. The liability for these amounts payable, are reported together as “amount payable and contingent consideration due” on the balance sheet.
The Company expensed $671,112, in acquisition and restructuring costs during the year ended December 31, 2011 on the statement of operations and comprehensive loss.
In connection with the acquisition, the Company acquired assets with a fair value of $14,460,209. Assets consisted primarily of receivables and other current assets of $791,648, a licensing asset of $255,820, licensing agreements of $10,004,000 and goodwill of $3,408,741. The value of goodwill is not deductible for tax purposes. Liabilities were also assumed of $4,477,387 consisting of bank indebtedness of $36,107, accounts payable and accrued liabilities of $1,940,280 and deferred tax liability of $2,501,000. The license agreement asset relates to Cambia, an acute treatment for migraine attacks with or without aura in adults and an agreement with Actavis Group PTC ehf, which provides the rights and licensing to several products. The estimated fair value of the license agreement asset was determined based on the use of the discounted cash flow model using an income approach for the acquired licenses. Estimated revenues were probability adjusted to take into account the stage of completion and the risks surrounding successful development and commercialization. The license agreement assets are classified as indefinite-lived intangible assets until the successful completion and commercialization or abandonment of the associated marketing and development efforts. The licensing asset and licensing agreements relate to product license agreements having an estimated useful life of 7 to 15 years. During 2012, the Company recognized a $79,724 reduction of expense (2011 – charge of $57,996) related to the change in the estimated fair value of the contingent consideration liability on the statements of operations and comprehensive loss. As of December 31, 2011, the total estimated fair value of the contingent consideration of $1,200,060, based on the Company’s stock price of $0.60 on December 31, 2011, was included in “amount payable and contingent consideration due” on the balance sheet. The Company believes that the fair values assigned to the assets acquired, the liabilities assumed and the contingent consideration liabilities were based on reasonable assumptions.
Subsequent to the acquisition, a shareholder of Tribute and an individual with a controlling interest in Tribute became the Chief Executive Officer and Chief Financial Officer of the Company, respectively.
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
| | Pro Forma Results. The following schedule includes consolidated statements of income data for the unaudited pro forma results for the year ended December 31, 2011 as if the Tribute acquisition had occurred as of the beginning of the year presented after giving effect to certain adjustments. The unaudited pro forma information is provided for illustrative purposes only and is not indicative of the results of operations or financial condition that would have been achieved if the Tribute acquisition would have taken place at the beginning of the year presented and should not be taken as indicative of future results of operations or financial condition. Pro forma adjustments are tax-effected at the effective tax rate. |
| | | | (Unaudited) Twelve months ended December 31, 2011 |
| Total Revenues | | $ | 11,287,380 |
| Loss from operations | | | (1,356,478) | |
| Net loss | | | (1,541,992) | |
| Basic (loss) per share | | | (0.04) | |
| Diluted (loss) per share | | | (0.04) | |
The following table summarizes the amounts of identified assets acquired and liabilities assumed from Tribute at the acquisition date fair value:
| Recognized amounts for identifiable assets acquired and liabilities assumed | |
| Book value of Tribute’s net assets | | $ | (928,919) | |
| Allocation of consideration to fair value of assets acquired: | | | | |
| Intangible assets | | | 10,004,000 | |
| Deferred tax liabilities | | | (2,501,000) | |
| Goodwill | | | 3,408,741 | |
| | | $ | 9,982,822 | |
Theramed
On June 19, 2012, the Company closed an agreement with Theramed Corporation ("Theramed"), a privately-held medical device company, thereby acquiring the exclusive rights to Collatamp G® for Canada. The initial term of the agreement to the exclusive Canadian rights ends March 31, 2018. The purchase of the exclusive rights was accounted for as a business combination. In connection with the purchase of the assets, the Company paid $425,000. The Company acquired assets with a fair value of $500,026, consisting of inventories of $101,690, intangible assets of $208,000 and goodwill of $190,336. The value of goodwill is deductible for tax purposes. Liabilities of $75,026 were assumed in connection with the purchase. The acquisition of Collatamp G® will add significant benefit to the Company’s existing specialty care products, Neovisc® and Uracyst®. The addition of Collatamp G® will boost the synergies of the Company’s current portfolio of products and will also benefit the Company’s presence in the hospital and specialty care markets.
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a basis consistent with that of the prior year.
a) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and all highly liquid investments purchased with an original maturity of three months or less at the date of purchase. Cash and cash equivalents are held with three major financial institutions in Canada.
b) ACCOUNTS RECEIVABLE
The Company routinely assesses the recoverability of all material trade and other receivables to determine their collectability by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer's ability to pay.
c) REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. License fees which are comprised of initial fees and milestone payments are recognized upon achievement of the milestones, provided the milestone is meaningful, and provided that collectability is reasonably assured and other revenue recognition criteria are met. Milestone payments are recognized into income upon the achievement of the specified milestones when the Company has no further involvement or obligation to perform services, as related to that specific element of the arrangement. Up-front fees and other amounts received in excess of revenue recognized are recorded as deferred revenues.
Revenues from the sale of products, net of trade discounts, returns and allowances, are recognized when legal title to the goods has been passed to the customer and collectability is reasonably assured. Revenues associated with multiple-element arrangements are attributed to the various elements, if certain criteria are met, including whether the delivered element has standalone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered elements. Non-refundable up-front fees for the transfer of methods and technical know-how, not requiring the Company to perform additional research or development activities or other significant future performance obligations, are recognized upon delivery of the methods and technical know-how.
Royalty revenue is recognized when the Company has fulfilled the terms in accordance with the contractual agreement and has no material future obligation, other than inconsequential and perfunctory support, as would be expected under such agreements and the amount of the royalty fee is determinable and collection is reasonably assured.
A customer is obligated to pay for products sold to it within a specified number of days from the date that title to the products is transferred to the customer. The Company’s standard terms are typically 0.5% to 2% discount, 15 to 20 days net 30 from the date of invoice.
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
The Company has a product returns policy on some of its products, which allows the customer to return pharmaceutical products that have expired, for full credit, provided the expired products are returned within twelve months from the expiration date.
Transfer of title occurs and risk of ownership passes to a customer at the time of shipment or delivery, depending on the terms of the agreement with a particular customer. The sale price of the Company’s products is substantially fixed or determinable at the date of sale based on purchase orders generated by a customer and accepted by the Company. A customer’s obligation to pay the Company for products sold to it is not contingent upon the resale of those products. The Company recognizes revenues for the sale of products from the date the title to the products is transferred to the customer.
d) INVENTORIES
Inventories are valued at the lower of cost and net realizable value with cost being determined on a first-in, first-out basis. Cost is determined to be purchase cost for raw materials and the production cost (materials, labor and indirect manufacturing cost) for work-in-process and finished goods. Throughout the manufacturing process, the related production costs are recorded within inventory.
e) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The Company periodically evaluates whether current facts or circumstances indicate that the carrying value of such assets to be held and used may not be recoverable. The Company reviews its long-term assets, such as fixed assets to be held and used or disposed of, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized in the amount by which the carrying amount of the asset exceeds its fair value. The basis of amortization and estimated useful lives of these assets are provided for as follows:
| Asset Classification | | Amortization Method | | Useful Life |
| | | | | |
| Building | | Straight-line | | 20 years |
| Computer and office equipment | | Straight-line | | 5 years |
| Leasehold improvements | | Straight-line | | 5 years |
| Manufacturing equipment | | Straight-line & activity based | | 5 to 10 years |
| Warehouse equipment | | Straight-line | | 5 to 10 years |
| Packaging equipment | | Activity based | | 5 to 10 years |
Activity based amortization is based on the number of uses for each asset in that category.
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
f) GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of acquisition cost over the fair value of the net assets of the acquired businesses. Goodwill has an indefinite useful life and is not amortized, but instead tested for impairment annually. Intangible assets include patents, a licensing asset and licensing agreements.
Patents represent capitalized legal costs incurred in connection with applications for patents. In-process patents pending are not amortized. All patents subject to amortization are amortized on a straight line basis over an estimated useful life of up to 17 years. The Company regularly evaluates patents and applications for impairment or abandonment, at which point the Company charges the remaining net book value to expenses. The licensing asset represents amounts paid for exclusive Canadian licensing rights to develop, register, promote, manufacture, use, market, distribute and sell pharmaceutical products. The licensing agreements represent the fair value assigned to licensing agreements acquired. The licensing asset and licensing agreement are amortized over the remaining life of the agreement, upon product approval. See Note 8.
When assessing goodwill impairment, the Company assesses qualitative factors first to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is not performed. In the event that there are qualitative factors which indicate that the carrying amount is greater than the fair value of the reporting unit, then the two step impairment approach is performed.
g) USE OF ESTIMATES
The preparation of these financial statements has required management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent liabilities and the revenue and expenses recorded. On an ongoing basis, the Company evaluates its estimates, including those related to provision for doubtful accounts, inventories, accrued liabilities, accrued returns, discounts and rebates, income taxes, stock based compensation, revenue recognition, goodwill, intangible assets, contingent consideration and the estimated useful lives of property, plant and equipment. The Company bases its estimates on historical experiences and on various other assumptions believed to be reasonable under the circumstances.
Actual results could differ from those estimates. As adjustments become necessary, they are recorded in the statement of operations and comprehensive loss in the period in which they become known. Such adjustments could be material.
h) DEFERRED INCOME TAXES
The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.
Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax results in deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company records net deferred tax assets to the extent management believe these assets will more likely than not be realized. In making such determination, all available positive and negative evidence is utilized, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In the event a determination is made that the Company would be able to realize deferred income tax assets in the future in excess of the net recorded amount, an adjustment to the valuation allowance would be made, which would reduce the provision for income taxes.
Tax benefits from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. This interpretation also provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
i) STOCK-BASED CONSIDERATION
The Company uses the fair value based method of accounting for all its stock-based compensation in accordance with FASB Accounting Standards Codification ("ASC") ASC 718 “Compensation – Stock Compensation”. The estimated fair value of the options that are ultimately expected to vest based on performance related conditions, as well as the options that are expected to vest based on future service, is recorded over the option’s requisite service period and charged to stock-based compensation. In determining the amount of options that are expected to vest, the Company takes into account, voluntary termination behavior as well as trends of actual option forfeitures.
Stock options and warrants which are indexed to a factor which is not a market, performance or service condition, in addition to the Company’s share price, are classified as liabilities and re-measured at each reporting date based on the Black-Scholes option pricing model with a charge to operations, until the date of settlement. Some warrants have been reflected as a liability as they are indexed to a factor which is not a market performance or service condition.
j) FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION
Monetary assets and liabilities are translated into Canadian dollars, which is the functional currency of the Company, at the year-end exchange rate, while foreign currency revenues and expenses are translated at the exchange rate in effect on the date of the transaction. The resultant gains or losses are included in the statement of operations and comprehensive loss. Non-monetary items are translated at historical rates.
k) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. The approved refundable portion of the tax credits are netted against the related expenses. Non-refundable investment tax credits are recorded in the period when reasonable assurance exists that the Company has complied with the terms and conditions required for approval of the tax credit and it is more likely than not that the Company will realize the benefits of these tax credits against the deferred taxes. Refundable investment tax credits are recorded in the period when reasonable assurance exists that the Company has complied with the terms and conditions required for approval of the tax credit and it is more likely than not that the Company will collect it. At December 31, 2012, the Company had no outstanding refundable tax credits (2011 - nil). Tax credits, when applicable, are recorded as an offset to research and development.
l) COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity during a period related to transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
m) EARNINGS (LOSS) PER SHARE
FASB ASC Section 260, “Earnings (Loss) Per Share”, requires presentation of both basic and diluted earnings (loss) per share (EPS) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue shares were exercised or converted into shares that would then share in the earnings.
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
Basic earnings (loss) per share are computed based on the weighted average number of common shares outstanding each year. There were no diluted earnings factors for stock options and warrants for the years ended December 31, 2012 and 2011. The diluted loss per share is not presented when the effect is anti-dilutive.
The accounting for acquisitions requires extensive use of estimates and judgments to measure the fair value of the identifiable tangible and intangible assets acquired, including license agreement assets and liabilities assumed. Additionally, the Company must determine whether an acquired entity is considered to be a business or a set of net assets, because the excess of the purchase price over the fair value of net assets acquired can only be recognized as goodwill in a business combination.
o) �� CONTINGENT CONSIDERATION
Contingent consideration liabilities represent future amounts the Company may be required to pay in conjunction with various business combinations. The ultimate amount of future payments is based on specified future criteria, such as sales performance and the achievement of certain future development, regulatory and sales milestones. The Company estimates the fair value of the contingent consideration liabilities related to sales performance using the income approach, which involves forecasting estimated future net cash flows and discounting the net cash flows to their present value using a risk-adjusted rate of return. The Company estimates the fair value of the contingent consideration liabilities related to the achievement of future development and regulatory milestones by assigning an achievement probability to each potential milestone and discounting the associated cash payment to its present value using a risk-adjusted rate of return. The Company evaluates its estimates of the fair value of contingent consideration liabilities on a periodic basis. Any changes in the fair value of contingent consideration liabilities are included in the Company’s statements of operations. The total estimated fair value of contingent consideration liabilities was $nil and $1,624,289 at December 31, 2012 and 2011, respectively, and was included in "amount payable and contingent consideration due" on the balance sheets.
p) FAIR VALUE MEASUREMENTS
The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
| | Level 1 - | Quoted prices in active markets for identical assets or liabilities. |
| | Level 2 - | Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| | Level 3 - | Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability. |
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
The Company’s valuation techniques used to measure the fair value of money market funds and certain marketable equity securities were derived from quoted prices in active markets for identical assets or liabilities. The valuation techniques used to measure the fair value of all other financial instruments, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data.
In accordance with the fair value accounting requirements, companies may choose to measure eligible financial instruments and certain other items at fair value. The Company has not elected the fair value option for any eligible financial instruments.
The carrying amounts of the Company’s financial assets and liabilities including cash and cash equivalents, accounts receivable, loan receivable, accounts payable and accrued liabilities and long term debt are approximate of their fair values due to the short maturity of these instruments.
The Company’s equity-linked financial instruments reflected as warrant liability on the balance sheet represent financial liabilities classified as Level 2 as per ASU 2009-05. As required by the guidance, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The fair value of the warrant liability which is not traded in an active market has been determined using the Black-Scholes option pricing model based on assumptions that are supported by observable market conditions. The estimated fair value of the contingent non-cash consideration was based on the Company’s stock price.
q) RECENTLY ADOPTED ACCOUNTING STANDARDS
In September 2011, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that allows an entity to use a qualitative approach to test goodwill for impairment. Under this guidance, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. In addition, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. This guidance is effective for the Company’s goodwill impairment tests performed at December 31, 2012 and does not have a material impact on the Company’s financial statements.
In July 2012, the FASB issued an accounting standards update with new guidance on annual impairment testing of indefinite-lived intangible assets. The standards update allows an entity to first assess qualitative factors to determine if it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If based on its qualitative assessment an entity concludes it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing is not required. The standards update is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
| 4. | Cash and cash equivalents |
| | | December 31, 2012 | | | December 31, 2011 | |
| Cash | | $ | 2,283,868 | | | $ | 1,227,834 | |
| Cash equivalents | | | - | | | | 1,000,139 | |
| | | $ | 2,283,868 | | | $ | 2,227,973 | |
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
| | | December 31, 2012 | | | December 31, 2011 | |
| Raw materials | | $ | 215,332 | | | $ | 233,758 | |
| Finished goods | | | 284,147 | | | | 200,712 | |
| Packaging materials | | | 91,476 | | | | 73,834 | |
| Work in process | | | 409,602 | | | | 362,326 | |
| | | $ | 1,000,557 | | | $ | 870,630 | |
During the year ended December 31, 2012, the Company assessed its inventory and determined that $36,345 of its on-hand inventory would not be used prior to its potential useful life. Therefore, $19,411 (2011 - $nil) of finished goods and $16,934 (2011 - $26,117) of packaging materials were written off during the year.
| 6. | Prepaid Expenses and Other Receivables |
| | | December 31, 2012 | | | December 31, 2011 | |
| Prepaid operating expenses | | $ | 113,735 | | | $ | 95,411 | |
| Manufacturing deposits | | | - | | | | 23,882 | |
| Interest receivable on loan receivables | | | 5,175 | | | | 4,808 | |
| | | $ | 118,910 | | | $ | 124,101 | |
| 7. | Property, Plant and Equipment |
| | | December 31, 2012 | |
| | | Cost | | | Accumulated Amortization | | | Net Carrying Amount | |
| Land | | $ | 90,000 | | | $ | - | | | $ | 90,000 | |
| Building | | | 618,254 | | | | 238,973 | | | | 379,281 | |
| Leasehold improvements | | | 10,359 | | | | 518 | | | | 9,841 | |
| Office equipment | | | 61,315 | | | | 44,137 | | | | 17,178 | |
| Manufacturing equipment | | | 1,103,523 | | | | 541,880 | | | | 561,643 | |
| Warehouse equipment | | | 17,085 | | | | 15,989 | | | | 1,096 | |
| Packaging equipment | | | 111,270 | | | | 42,302 | | | | 68,968 | |
| Computer equipment | | | 103,313 | | | | 71,945 | | | | 31,368 | |
| | | $ | 2,115,119 | | | $ | 955,744 | | | $ | 1,159,375 | |
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
| | | December 31, 2011 | |
| | | Cost | | | Accumulated Amortization | | | Net Carrying Amount | |
| Land | | $ | 90,000 | | | $ | - | | | $ | 90,000 | |
| Building | | | 618,254 | | | | 208,060 | | | | 410,194 | |
| Office equipment | | | 44,308 | | | | 42,186 | | | | 2,122 | |
| Manufacturing equipment | | | 1,094,168 | | | | 498,569 | | | | 595,599 | |
| Warehouse equipment | | | 17,085 | | | | 13,578 | | | | 3,507 | |
| Packaging equipment | | | 111,270 | | | | 32,764 | | | | 78,506 | |
| Computer equipment | | | 90,762 | | | | 63,228 | | | | 27,534 | |
| | | $ | 2,065,847 | | | $ | 858,385 | | | $ | 1,207,462 | |
During the year ended December 31, 2012, the Company disposed of $nil (2011 - $380,795) of manufacturing equipment and $nil (2011 - $65,600) of computer equipment and recorded a reduction to accumulated amortization of $nil (2011 - $186,759) and $nil (2011 - $259,636) to loss on disposal of equipment on the statements of operations and comprehensive loss.
During the year ended December 31, 2012, the Company recorded total amortization of $97,359 (2011 - $112,936), which was recorded as $23,037 (2011 - $33,957) to cost of goods sold, $29,994 (2011 - $32,912) to inventory and the remaining $44,328 (2011 - $46,067) was recorded to amortization expense on the statements of operations and comprehensive loss.
| | | December 31, 2012 | |
| | | Cost | | | Accumulated Amortization | | | Net Carrying Amount | |
| Patents | | $ | 235,441 | | | $ | 28,139 | | | $ | 207,302 | |
| Licensing asset | | | 1,005,820 | | | | 19,343 | | | | 986,477 | |
| Licensing agreements | | | 10,212,000 | | | | 522,600 | | | | 9,689,400 | |
| | | $ | 11,453,261 | | | $ | 570,082 | | | $ | 10,883,179 | |
| | | December 31, 2011 | |
| | | Cost | | | Accumulated Amortization | | | Net Carrying Amount | |
| Patents | | $ | 192,539 | | | $ | 15,086 | | | $ | 177,453 | |
| Licensing asset | | | 255,820 | | | | - | | | | 255,820 | |
| Licensing agreements | | | 10,004,000 | | | | 27,529 | | | | 9,976,471 | |
| | | $ | 10,452,359 | | | $ | 42,615 | | | $ | 10,409,744 | |
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
Amortization expense of intangible assets for the years ended December 31, 2012 and 2011, were $527,467 and $31,885, respectively.
The Company has patents pending of $81,854 at December 31, 2012 (2011 - $121,087) and a licensing agreement of $nil (2011 - $7,664,000) not currently being amortized.
The licensing asset consists of capitalized payments to third party licensors related to the achievement of regulatory approvals to commercialize products in specified markets and up-front payments associated with royalty obligations for products that have not achieved regulatory approval for marketing.
Estimated future amortization expense at December 31, 2012 is as follows:
| | Amount | |
| 2013 | | $ | 1,050,379 | |
| 2014 | | | 1,050,379 | |
| 2015 | | | 1,050,379 | |
| 2016 | | | 1,050,379 | |
| 2017 | | | 1,032,851 | |
| Thereafter | | | 5,566,958 | |
| | | $ | 10,801,325 | |
| | | | | | | |
| | | 2012 | | | 2011 | |
| Balance at the beginning of the year | | $ | 3,408,741 | | | $ | - | |
| Acquisition of businesses (Note 2) | | | 190,336 | | | | 3,408,741 | |
| Balance at the end of the year | | $ | 3,599,077 | | | $ | 3,408,741 | |
The goodwill relates to the Company’s acquisitions of Tribute and Theramed. The Company has evaluated the goodwill and has determined that there is no impairment of the values at December 31, 2012 and 2011.
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
| 10. | Long Term Debt and Debt Issuance Costs |
On May 11, 2012, the Company entered into a loan and security agreement (the "Loan Agreement") with MidCap Funding III, LLC (the "Lender") for a 36 month term loan that is due May 11, 2015. The term loan allows for a total advancement of US$6,000,000 ($5,969,400). An amount of US$3,500,000 ($3,482,150) was drawn on execution of the Loan Agreement and the remainder will be advanced if the Company raises an amount of not less than US$6,000,000 ($5,969,400) from any combination of: an equity issuance; upfront payments associated with a pharmaceutical partnership; or upfront payments in conjunction with the acquisition or in-licensing of pharmaceutical products. Advancement of the remainder of the loan is available until March 31, 2013, and subject to Lender review. The Loan Agreement is secured by all assets of the Company and contains customary covenants that, among other things, generally restrict the Company’s ability to incur additional indebtedness. The Loan Agreement includes a financial covenant to raise not less than US$3,000,000 ($2,984,700) by March 31, 2013 in the form of an equity raise or cash from an upfront payment associated with a pharmaceutical partnership (see Note 21). As of December 31, 2012, the Company was in compliance with all Loan Agreement covenants, which included minimum revenue targets.
Payments are due monthly, with the first six (6) payments being interest-only, with principal and interest payments due thereafter. Interest is calculated at the higher of 4% or the thirty (30) day London Inter Bank Offered Rate ("LIBOR") plus 7%.
In connection with the Loan Agreement, the Company granted warrants to purchase an aggregate of 750,000 common shares in the capital of the Company at an exercise price of US$0.56 ($0.56). The grant date fair value of the warrants was $312,000. Of this amount, $208,000 for 500,000 warrants was recorded as a warrant liability, with an equal amount recorded as a discount to the carrying value of the loan in the accompanying financial statements. The remaining $104,000 was in respect of 250,000 warrants which were granted for compensation of the transaction and has been classified as debt issuance costs and recorded as a warrant liability. The discount to the carrying value of the loan is being amortized as a non-cash interest expense over the term of the loan using the effective interest rate method. The grant date fair value of the warrants was determined using the Black-Scholes model with the following assumptions: expected volatility of 124.6%, a risk-free interest rate of 1.48%, an expected life of five years, and no expected dividend yield.
During the year ended December 31, 2012, the Company accreted $64,383 (2011 - $nil) in non-cash accretion expense in connection with the long term loan, which is included in accretion expense on the statements of operations and comprehensive loss.
The Company also incurred $341,489 in financing fees and legal costs related to closing the Loan Agreement. These fees and costs are classified as debt issuance costs, and are included in long-term assets on the balance sheets. These assets are being amortized as a non-cash interest expense over the term of the outstanding loan using the effective interest rate method. During the year ended December 31, 2012, the Company amortized $147,186 (2011 – $nil) in non-cash interest expense, which is included in amortization expense on the statements of operations and comprehensive loss.
During the year ended December 31, 2012, the Company made principal payments of US$218,750 ($217,569) and interest payments of US$217,164 ($216,795) under the Loan Agreement. The Company is scheduled to make the following principal and interest payments over the next three years ended December 31:
| | 2013 | | 2014 | | 2015 |
| Principal payments | US$1,312,500 ($1,305,840) | | US$1,312,500 ($1,305,840) | | US$656,250 ($652,903) |
| Interest payments | US$298,776 ($297,252) | | US$152,396 ($151,619) | | US$20,587 ($20,482) |
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
During the year ended December 31, 2011, the Company issued 25,002 common shares and recorded $14,467, based on an average stock price of $0.58 on the date of issuance, due to the late registration of the common shares issued pursuant to the private placement offering completed during the year ended December 31, 2010. The common shares were valued using the market price of the common shares at the date of issuance. The Company also recorded $24,243 in fees related to finalizing the registration of the private placement offering common shares as share issuance costs.
On December 1, 2011, the Company issued 13,000,000 common shares in conjunction with the acquisition of Tribute (See Note 2) with a fair value of $7,423,415.
During the year ended December 31, 2012, the Company issued 2,000,000 common shares related to a contingent liability recorded on December 1, 2011 (see Note 2). The difference between the fair value of these shares at December 31, 2011 and the fair value on the date of issuance was a credit of $79,724 which was recorded as a reduction of expense to the “change in fair value of contingent consideration” on the statements of operations and comprehensive loss.
| | b) | Stock Based Compensation |
The Company’s stock-based compensation program ("Plan") includes stock options in which some options vest based on continuous service, while others vest based on performance conditions such as profitability and sales goals. For those equity awards that vest based on continuous service, compensation expense is recorded over the service period from the date of grant. For performance-based awards, compensation expense is recorded over the remaining service period when the Company determines that achievement is probable.
During the year ended December 31, 2012, there were 290,000 options granted to an officer and employees of the Company (2011 – 2,270,952). The weighted average exercise price of these options is USD$0.53 ($0.53), with 195,000 of these options having quarterly vesting terms at 25% on each of March 31, June 30, September 30 and December 31, 2013, upon achieving certain financial objectives. There are 50,000 options exercisable at a rate of 12.5% per quarter beginning in the first full quarter after the date of grant. Another 30,000 options are exercisable at a rate of 25% per quarter beginning one year from the date of the first full quarter after the date of grant. The remaining 15,000 options are exercisable at a rate of 12.5% per quarter beginning in the first full quarter after the date of grant. Since share-based compensation is recognized only for those awards that are ultimately expected to vest, the Company has applied an estimated forfeiture rate (based on historical experience and projected employee turnover) to certain unvested awards for the purpose of calculating compensation expense.
For the year ended December, 2012, the Company recorded $589,893 (2011 – $332,532) as compensation expense for options issued to directors, officers and employees based on continuous service. This expense was recorded as selling, general and administrative expense in the statements of operations and comprehensive loss. During the year ended December 31, 2012, 52,500 (2011 – 172,000) performance based options issued to an officer and employees were forfeited or expired and therefore removed from the number of options outstanding.
The total number of options outstanding as at December 31, 2012 was 3,212,952 (December 31, 2011 – 2,975,452). The weighted average grant date fair value of the options granted during the year ended December 31, 2012, was $0.45 (2011 - $0.47).
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
The Company uses the Black-Scholes option-pricing model to estimate the grant date fair value of grants of stock options with the following weighted average assumptions:
| | | 2012 | | | 2011 | |
| Risk-free interest rate | | | 1.49 | % | | | 1.54 | % |
| Expected life | | 5 years | | | 5 years | |
| Expected volatility | | | 124 | % | | | 123 | % |
| Expected dividend yield | | | 0 | % | | | 0 | % |
The Company’s computation of expected volatility for the years ended December 31, 2012 and 2011 is based on the Company’s market close price over the period equal to the expected life of the options. The Company’s computation of expected life is calculated using the simplified method.
The Company’s expected dividend yield is 0%, since there is no history of paying dividends and there are no plans to pay dividends. The Company’s risk-free interest rate is the Canadian Treasury Bond rate for the period equal to the expected term.
On June 22, 2011, pursuant to resolutions by the Board of Directors and shareholders, the Company amended the Plan to change the maximum number of common shares subject to options that may be issued under the Plan from a fixed number of 4,629,452 to a floating amount equivalent to 10% of the issued and outstanding common shares, or 3,961,004 shares as at December 31, 2012 (2011 – 3,761,004). The total remaining options available for granting under the plan at December 31, 2012, was 748,052 (2011 – 785,552).
The activities in options outstanding are as noted below:
| | | Options | | | Weighted Average Exercise Price | |
| Balance, January 1, 2011 | | | 876,500 | | | $ | 0.95 | |
| Granted | | | 2,270,952 | | | | 0.56 | |
| Expired | | | (30,000 | ) | | | 0.68 | |
| Forfeited | | | (142,000 | ) | | | 0.96 | |
| Balance, December 31, 2011 | | | 2,975,452 | | | $ | 0.66 | |
| Granted | | | 290,000 | | | | 0.53 | |
| Forfeited | | | (52,500 | ) | | | 0.67 | |
| Balance, December 31, 2012 | | | 3,212,952 | | | | 0.65 | |
When employees or non-employees exercise their stock options, the capital stock is credited by the sum of the consideration paid together with the related portion previously credited to additional paid-in capital when stock-based compensation costs were recorded.
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
As at December 31, 2012, the Company had 1,169,619 (2011 - 569,500) vested options. As at December 31, 2012, the number of unvested options expected to vest (including the impact of expected forfeitures) had been estimated at 2,043,333 (2011 - 2,405,952) with a weighted average contractual life of 3.9 years (2011 - 4.7 years) and exercise price of $0.58 (2011 - $0.61). As at December 31, 2012, the total fair value of future expense to be recorded in subsequent periods (assuming no forfeiture occurs) is $540,454 (2011 - $1,014,671). The weighted average time remaining for these options to vest is 1.9 years (2011 - 3 years).
As at December 31, 2012, the aggregate intrinsic value of outstanding options was $Nil (2011 - $90,344) and the aggregate intrinsic value of exercisable options was $Nil (2011 - $17,103) based on the Company’s closing common share price of $0.35 (2011 - $0.60).
The Company recognizes compensation expense for the fair values of stock options using the graded vesting method over the requisite service period for the entire award.
The following table presents information relating to stock options outstanding and exercisable at December 31, 2012.
| | | | Options Outstanding | | | Options Exercisable | |
Range of Exercise Price | | | Number of Shares | | | Weighted Average Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | | | Number of Shares | | | Weighted Average Exercise Price | |
| $0.30 to 0.49 | | | | 275,000 | | | | 3.8 | | | $ | 0.43 | | | | 195,000 | | | $ | 0.41 | |
| $0.50 to 0.69 | | | | 2,203,452 | | | | 3.9 | | | | 0.57 | | | | 325,119 | | | | 0.59 | |
| $0.70 to 0.89 | | | | 77,000 | | | | 1.9 | | | | 0.84 | | | | 77,000 | | | | 0.84 | |
| $0.90 to 1.09 | | | | 657,500 | | | | 2.4 | | | | 0.96 | | | | 572,500 | | | | 0.96 | |
| | | | | 3,212,952 | | | | 3.6 | | | $ | 0.65 | | | | 1,169,619 | | | $ | 0.76 | |
The following table presents information relating to stock options outstanding and exercisable at December 31, 2011.
| | | | Options Outstanding | | | Options Exercisable | |
Range of Exercise Price | | | Number of Shares | | | Weighted Average Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | | | Number of Shares | | | Weighted Average Exercise Price | |
| $0.40 to $0.59 | | | | 2,115,952 | | | | 4.9 | | | $ | 0.56 | | | | 90,000 | | | $ | 0.41 | |
| $0.60 to $0.79 | | | | 125,000 | | | | 4.5 | | | | 0.68 | | | | — | | | | — | |
| $0.80 to $0.89 | | | | 77,000 | | | | 2.9 | | | | 0.84 | | | | 77,000 | | | | 0.84 | |
| $0.90 to $0.99 | | | | 510,000 | | | | 3.5 | | | | 0.95 | | | | 255,000 | | | | 0.95 | |
| $1.00 to $1.09 | | | | 147,500 | | | | 2.9 | | | | 1.00 | | | | 147,500 | | | | 1.00 | |
| | | | | 2,975,452 | | | | 4.5 | | | $ | 0.66 | | | | 569,500 | | | $ | 0.86 | |
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
c) Warrants
As at December 31, 2012, the following compensation warrants were outstanding:
Expiration Date | | Number of Warrants | | | Weighted Average Exercise Price | | | Fair Value at December 31, 2012 | | | Fair Value at December 31, 2011 | |
| April 8, 2013 | | | 500,000 | | | | US$1.47($1.46) | | | $ | - | | | $ | 2,034 | |
| April 8, 2013 | | | 500,000 | | | | US$1.96($1.95) | | | $ | - | | | $ | 509 | |
| April 8, 2013 | | | 500,000 | | | | US$2.46($2.45) | | | $ | - | | | $ | - | |
| May 11, 2017 | | | 750,000 | | | | US$0.56($0.56) | | | $ | 202,213 | | | $ | - | |
| | | | 2,250,000 | | | | US$1.50($1.49) | | | $ | 202,213 | | | $ | 2,543 | |
In connection with a private placement offering in October 2010, the Company granted 1,500,000 warrants to the participants, each exercisable into one common share as follows: 500,000 at US$1.50 ($1.49), 500,000 at US$2.00 ($1.99) and 500,000 at US$2.50 ($2.49) each for a period of 18 months, which ended on April 8, 2012. On April 5, 2012, the Company granted a one year extension on these warrants and recorded $135,157 as the cost of extending the warrant expiration on the statements of operations and comprehensive loss. The exercise price of the 1,500,000 warrants was denominated in US dollars while the Company’s functional and reporting currency is the Canadian dollar. As a result, the fair value of the warrants fluctuates based on the current stock price, volatility, the risk free interest rate, time remaining until expiry and changes in the exchange rate between the US and Canadian dollar. The fair value of this extension of the warrants on date of grant was estimated using the Black-Scholes option pricing model, based on the following assumptions: expected dividend yield of 0%; expected volatility of 107%; risk free interest rate of 1.43%; and expected term of 1 year.
On May 11, 2012 the Company granted 750,000 warrants in connection with the long-term debt obligation (Note 10), at an exercise price of US$0.56 ($0.56). Subsequently, the pro rata exercise price of the 1,500,000 warrants described above was adjusted due to the exercise rate of the 750,000 new warrants being lower than the original exercise price of the October 2010 warrants. The effect of this pro rata change was as follows: 500,000 at US$1.47 ($1.46), 500,000 at US$1.96 ($1.95) and 500,000 at US$2.46 ($2.45). The fair value of these warrants fluctuates based on the current stock price, volatility, the risk free interest rate, time remaining until expiry and changes in the exchange rate between the US and Canadian dollar. The fair value of the warrant liability at the date of grant of the 750,000 warrants was $312,000 and was estimated using the Black-Scholes option pricing model, based on the following assumptions: expected dividend yield of 0%; expected volatility of 124%; risk free interest rate of 1.48%; and expected term of 5 years.
ASC 815 "Derivatives and Hedging" indicates that warrants with exercise prices denominated in a different currency than an entity’s functional currency should not be classified as equity. As a result, these warrants have been treated as derivatives and recorded as liabilities carried at their fair value, with period-to-period changes in the fair value recorded as a gain or loss in the statement of operations and comprehensive loss. The Company treated the warrants as a liability upon their issuance.
At December 31, 2012, the fair value of the warrant liability of $202,213 (2011 - $2,543) was estimated using the Black-Scholes option pricing model based on the following weighted average assumptions: expected dividend yield of 0% (2011- 0%); expected volatility of 108.4% (2011 – 93%); risk-free interest rate of 1.20% (2011 – 0.93%); and expected term of 1.65 years (2011 – 0.25 years).
This model requires management to make estimates of the expected volatility of its common shares, the expected term of the warrants and interest rates. The risk free interest rate is based on the Canadian Treasury Bond rate. The Company has not paid dividends and does not expect to pay dividends in the foreseeable future. The expected term of the warrants is the contractual term of the warrants upon initial recognition.
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
For the year ended December 31, 2012, the Company recorded a gain of $247,486 (2010 – $214,280) as change in warrant liability on the statement of operations and comprehensive loss.
The treasury stock method assumes that proceeds received upon the exercise of all warrants and options outstanding in the year are used to repurchase the Company's shares at the average share price during the year. The diluted (loss) earnings per share is not computed when the effect of such calculation is anti-dilutive. In years when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. Potentially dilutive securities, which were not included in diluted weighted average shares for the years ended December 31, 2012 and 2011 consist of outstanding stock options (3,212,952 and 2,975,452, respectively) and outstanding warrants (2,250,000 at December 31, 2012 and 1,500,000 at December 31, 2011).
The following table sets forth the computation of loss per share:
| | | December 31 | |
| | | 2012 | | | 2011 | |
| Numerator: | | | | | | |
| Net loss available to common shareholders | | $ | (3,348,966 | ) | | $ | (521,781 | ) |
| Denominator: | | | | | | | | |
| Weighted average number of common shares outstanding | | | 39,167,419 | | | | 25,706,000 | |
| Effect of dilutive common shares | | | - | | | | - | |
| Diluted weighted average number of common shares outstanding | | | 39,167,419 | | | | 25,706,000 | |
| Loss per share – basic and diluted | | $ | (0.09 | ) | | $ | (0.02 | ) |
| 13. | Changes in Non-Cash Operating Assets and Liabilities |
Changes in non-cash balances related to operations are as follows:
| | | December 31 | |
| | | 2012 | | | 2011 | |
| Accounts receivable | | $ | (441,277 | ) | | $ | 521,208 | |
| Inventories | | | (28,237 | ) | | | (258,954 | ) |
| Prepaid expenses and other receivables | | | 5,191 | | | | (24,668 | ) |
| Taxes recoverable | | | (81,240 | ) | | | (180,160 | ) |
| Accounts payable and accrued liabilities | | | 2,236,096 | | | | (171,037 | ) |
| | | $ | 1,690,533 | | | $ | (113,611 | ) |
Included in accounts payable and accrued liabilities at the year ended December 31, 2012, is an amount related to patents and licenses of $5,489 (2011 - $4,809) and an amount payable to Tribute shareholders of $460,000 (2011 - $nil) – see Note 2.
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
During the year ended December 31, 2012, there was $216,795 (2011 - $nil) in interest paid and $nil in taxes paid (2011 – $nil).
During the year ended December 31, 2012, there was $104,000 (2011 - $nil) of non-cash debt issuance costs (see note 10).
In connection with the acquisition on December 1, 2011, of Tribute (Note 2), the Company issued 13,000,000 common shares valued at $7,423,415.
| 14. | Contingencies and Commitments |
a) License Agreements
On December 1, 2011, the Company acquired 100% of the outstanding shares of Tribute (see Note 2). Included in this transaction were the following license agreements:
On June 30, 2008, Tribute signed a Sales, Marketing and Distribution Agreement with Actavis Group PTC ehf ("Actavis") to perform certain sales, marketing, distribution, finance and other general management services in Canada in connection with the importation, marketing, sales and distribution of Bezalip® SR and Soriatane® (the "Products"). On January 1, 2010, a first amendment was signed with Actavis to grant Tribute the right and obligation to more actively market and promote the Products in Canada. On March 31, 2011, a second amendment was signed with Actavis that extended the term of the agreement, modified the terms of the agreement and increased Tribute’s responsibilities to include the day-to-day management of regulatory affairs, pharmacovigilance and medical information relating to the Products. Tribute pays Actavis a sales and distribution fee up to an annual base-line net sales forecast plus an incremental fee for incremental net sales above the base-line. Tribute has agreed to a marketing budget for the first three years of not less than $3,750,000. On May 4, 2011, Tribute signed a Product Development and Profit Share Agreement with Actavis to develop, obtain regulatory approval of and market Bezalip SR in the USA. The Company shall pay US$5,000,000 to Actavis within 30 days of receipt of the regulatory approval to market Bezalip SR in the USA.
On November 9, 2010, Tribute signed a license agreement (the "License Agreement") with Nautilus Neurosciences, Inc. (“Nautilus”) for the exclusive rights to develop, register, promote, manufacture, use, market, distribute and sell Cambia® in Canada. On August 11, 2011, Tribute and Nautilus executed the first amendment to the License Agreement and on September 30, 2012 executed the second amendment to the License Agreement. The payments under this agreement include: a) US$250,000 ($255,820) upfront payment to Nautilus upon the execution of this agreement - paid; and b) the following milestone payments; i) US$750,000 ($746,175) to be paid upon the earlier of the first commercial sale of the product or six months after all regulatory approvals. As per the second amendment of the License Agreement, a payment of US$250,000 ($245,200) was paid in October 2012, while the remaining US$500,000 ($497,450) was made on March 1, 2013 and is included in accounts payable and accrued liabilities at December 31, 2012 . Additional payments are due as follows: ii) US$250,000 ($248,725) the first year in which annual net sales exceed US$2,500,000 ($2,487,250), iii) US$500,000 ($497,450) the first year in which the annual net sales exceed US$5,000,000 ($4,974,500), iv) US$750,000 ($746,175) the first year in which the annual net sales exceed US$7,500,000 ($7,461,750), v) US$1,000,000 ($994,900) the first year in which the annual net sales exceed US$10,000,000 ($9,949,000), vi) US$1,500,000 ($1,492,350) the first year the annual net sales exceed US$15,000,000 ($14,923,500), and vii) US$2,000,000 ($1,989,800) the first year in which the annual net sales exceed US$20,000,000 ($19,898,000). Royalty rates are tiered and payable at rates ranging from 22.5-25.0% of net sales. The initial term of the agreement expires on September 30, 2025 but is subject to automatic renewals under certain circumstances.
On December 30, 2011, the Company signed a license agreement to commercialize MycoVa in Canada with NexMed U.S.A. As of December 31, 2012, this product has not been filed with Health Canada and as at December 31, 2012, no upfront payments have been paid. Within 10 days of execution of a manufacturing agreement, the Company is obligated to pay an up-front license fee of $200,000. Upon Health Canada approval, the Company is obligated to pay an additional milestone of $400,000. Sales milestones payments of $250,000 each are based on the achievement of aggregate net sales in increments of $5,000,000. Royalties are payable at rates ranging from 20% to 25% of net sales.
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
b) Executive Termination Agreements
The Company currently has employment agreements with the provision of termination and change of control benefits with officers and executives of the Company. The agreements for the officers and executives provide that in the event that any of their employment is terminated during the initial term (i) by the Company for any reason other than just cause or death; (ii) by the Company because of disability; (iii) by the officer or executive for good reason; or (iv) by a change of control, the officer or executive shall be entitled to the balance of the remuneration owing for the remainder of the initial term of up to an aggregate amount of $1,314,167 as of December 31, 2012 (2011 - $1,954,167) or if a change of control occurs subsequent to the initial term, while the officers or executives are employed on an indefinite basis, a lump sum payment of up to an aggregate amount of $1,520,000 (based on current base salaries).
c) Consultant Royalty Agreements
The Company has consultant royalty agreements in place for several of its international license agreements. These agreements involve royalty payments to be issued to the consultants who assisted in locating the licensee who signed the license agreements with the Company.
The royalty payments issued to consultants include 10% of the upfront fees received from the licensee and 10% of any future milestone payments received. No royalties on license fees were paid for the year ended December 31, 2012 (2011 - $nil). In addition, royalty payments on product sales are also based on 4% to 5% of the total sales of Uracyst at a declining rate of 1% per year over a three to five year period, declining to a 1% rate effective in the final year. The expenses recorded in regards to royalty fees on product sales for the year ended December 31, 2012 were $15,329 (2011 - $18,541). These amounts have been recorded as royalty expense in selling, general and administrative on the statements of operations and comprehensive loss.
d) Manufacturing Agreements
During 2012 and 2011, the Company’s NeoVisc® product was manufactured at Therapure Biopharma Inc. in Mississauga, Ontario, Canada and Uracyst® was manufactured by Jubilant Hollisterstier, Inc. (formerly Draxis Pharma, Inc.) in Kirkland, Quebec, Canada. Bezalip® SR and Soriatane® are provided by Tribute’s licensor, Actavis. Under the terms of these agreements the Company is obligated to make payments for batches to be manufactured within the one year termination notification period.
The Company presently leases office and warehouse equipment under operating leases. For the year ended December 31, 2012, expenses related to these leases were $3,616 (2011 - $3,802).
On September 1, 2012, the Company entered into a five year operating lease for its head office. For the year ended December 31, 2012, expenses related to this lease was $32,000 (2011- $nil).
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
As at December 31, 2012, minimum operating lease payments under these leases are as follows:
| | | Total | | | 2013 | | | 2014 | | | 2015 | | 2016 | | | 2017 | |
| Operating lease obligations | | $ | 475,478 | | | $ | 97,491 | | | $ | 100,157 | | | $ | 104,497 | | | $ | 104,000 | | | $ | 69,333 | |
During the year ended December 31, 2012, the Company had two significant wholesale customers (2011 – one) that represented 54.7% (2011 – 31.4%) of product sales.
The Company believes that its relationships with these customers are satisfactory.
| 16. | Related Party Transactions |
Fees were paid to LMT Financial Inc. ("LMT"), a company beneficially owned by a director and former interim officer of the Company, and his spouse) for consulting services. For the year ended December 31, 2012, the Company recorded and paid to LMT an aggregate of $150,000 (2011 - $191,150) reflected as selling, general and administrative expense in the statements of operations and comprehensive loss.
During the year ended December 31, 2012, the Company paid $nil for various legal services (2011 – $87,586) to a law firm in which one of the directors of the Company is a partner, of which $nil (2011 - $8,022) have been recorded as selling, general and administrative expense and $nil (2011 - $79,564) was recorded as acquisition and restructuring costs in the statements of operations and comprehensive loss.
See Note 2.
Rate reconciliation: A reconciliation of income tax (benefit) expense computed at the statutory income tax rate included in the statements of operations and comprehensive loss follows:
Income tax expense (benefit) is comprised of:
| | | 2012 | | | 2011 | |
Income tax expense (benefit) at statutory rate at 26.25% (2011 - 28.25%) | | $ | (1,215,200 | ) | | $ | (423,300 | ) |
| Adjusted for: | | | | | | | | |
| Impact on legislated changes in tax rates | | | 55,800 | | | | 50,900 | |
| Change in valuation allowance | | | - | | | | (676,700 | ) |
| Share issue costs | | | (93,200 | ) | | | (6,800 | ) |
| Non-deductible expenses | | | 158,000 | | | | 60,300 | |
| Other | | | (114,700 | ) | | | 18,800 | |
| Deferred income tax (recovery) | | $ | (1,209,300 | ) | | $ | (976,800 | ) |
Deferred tax assets and liabilities reflect losses carry-forward, the cumulative carry-forward pool of scientific research and experimental development ("SR&ED") expenditures and the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their corresponding tax basis. Significant components of net deferred tax assets are listed below:
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
Components of deferred income tax assets and liabilities:
| | | 2012 | | | 2011 | |
| Benefit of net operating losses carry-forward | | $ | 1,641,400 | | | $ | 682,500 | |
| Book values of property, plant and equipment and intangible assets in excess of tax bases | | | 13,600 | | | | (56,000 | ) |
| Benefit of SR&ED expenditures | | | 449,600 | | | | 449,600 | |
| Share issue costs | | | 63,800 | | | | 11,200 | |
| Non-refundable tax credits | | | 341,300 | | | | 341,300 | |
| License agreements and goodwill | | | (2,375,000 | ) | | | (2,503,200 | ) |
| Valuation allowance | | | (449,600 | ) | | | (449,600 | ) |
| | | $ | (314,900 | ) | | $ | (1,524,200 | ) |
A valuation allowance was provided against certain deferred tax assets at December 31, 2012 and 2011, because the realization of the asset remains not determinable. The valuation allowance decreased by $nil in 2012 (2011- $676,700).
The Company has non-capital losses carry-forward for income tax purposes in the amount of $6,516,600 which may be applied against future years’ taxable income. The losses expire as follows:
| 2013 | | $ | 311,200 | |
| 2014 | | | 1,013,100 | |
| 2026 | | | 231,900 | |
| 2027 | | | 85,400 | |
| 2028 | | | 53,700 | |
| 2030 | | | 755,300 | |
| 2031 | | | 4,066,000 | |
| | | $ | 6,516,600 | |
Tax years 2006 through 2012 remain open to examination by the taxing jurisdictions to which the Company is subject. The Company has not been notified by any taxing jurisdictions of any proposed or planned examination.
The Company has non-refundable tax credits as at December 31, 2012 of $341,300 (2011 - $341,300).
The cumulative carry-forward pool of scientific research and experimental development (SR&ED) expenditures as at December 31, 2012 applicable to future years, with no expiry date, is $1,798,300 (2011 - $1,798,300). The tax credits have a full valuation allowance on them as they do not meet the more-likely-than-not test.
The Company has Ontario Harmonization Credits of $151,500 resulting from an adjustment from the adoption of the Harmonization of the provincial tax attributes with the federal tax attributes. To the extent that this adjustment resulted in a net decrease in the Ontario attributes (because the aggregate Ontario attributes exceed the aggregate federal attributes), the Company is eligible to claim a tax credit as compensation ("transitional credit"). This tax credit is eligible for use up to the end of 2014. The Company has taken a full valuation allowance against this credit as they do not meet the more-likely–than-not test.
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
The Company is a specialty pharmaceutical company with a primary focus on the acquisition, licensing, development and promotion of healthcare products in Canada. The Company targets several therapeutic areas in Canada, but has a particular interest in products for the treatment of pain, dermatology and endocrinology/cardiology. Stellar also sells Uracyst® and NeoVisc® internationally through a number of strategic partnerships. Currently, all of the Company’s manufacturing assets are located in Canada. All direct sales take place in Canada. Licensing arrangements have been obtained to distribute and sell the Company’s products in various countries around the world.
Revenue for the years ended December 31, 2012 and 2011 includes products sold in Canada and international sales of products. Revenue earned is as follows:
| | December 31 | |
| | | 2012 | | | 2011 | |
| Product sales: | | | | | | |
| Canadian sales | | $ | 10,768,716 | | | $ | 2,530,844 | |
| International sales | | | 1,525,479 | | | | 1,306,215 | |
| Other revenue | | | 48,588 | | | | 18,595 | |
| Total | | $ | 12,342,783 | | | $ | 3,855,654 | |
| | | | | | | | | |
| | December 31 | |
| | | | 2012 | | | | 2011 | |
| Royalties and licensing revenue: | | | | | | | | |
| Royalty revenues | | $ | - | | | $ | 14,227 | |
| Licensing revenue | | | - | | | | - | |
| Total | | $ | - | | | $ | 14,227 | |
The Company currently sells its own products and is in-licensing other products in Canada. In addition, revenues include products which the Company out-licenses in Europe, the Caribbean, Austria, Germany, Italy, Lebanon, Kuwait, Malaysia, Portugal, Romania, Spain, South Korea, Turkey and the United Arab Emirates. The continuing operations reflected in the statements of operations and comprehensive loss includes the Company’s activity in these markets.
| 19. | Foreign Currency Gain (Loss) |
| | The Company enters into foreign currency transactions in the normal course of business. Expenses incurred in currencies other than Canadian dollars are therefore subject to gains or losses due to fluctuations in these currencies. As at December 31, 2012, the Company held cash of $211,992 (US$190,858 and €18,973) in denominations other than in Canadian dollars (2011 - $217,828 (US$47,384 and €128,582)); had accounts receivables of $392,918 (US$38,825 and €270,075) denominated in foreign currencies (2011 - $295,544 (US$45,424 and €189,000)); and had accounts payable and accrued liabilities of $59,642 (US$47,349 and €$12,293) denominated in foreign currencies (2011 – $148,703 (US$4,825 and €$109,059). For the year ended December 31, 2012, the Company had a foreign currency gain of $110,186 (2011 – loss of $22,951). These amounts have been included in selling, general and administrative expenses in the statements of operations and comprehensive loss. |
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
The Company generates sufficient cash from operating and financing activities to fund its operations and fulfill its obligations as they become due (see Note 21). The Company has sufficient funds available through its cash, cash equivalents, and financing arrangements, should its cash requirements exceed cash generated from operations to cover financial liability obligations. The Company’s investment policy is to invest excess cash resources into highly liquid short-term investments purchased with an original maturity of three months or less with tier one financial institutions. As at December 31, 2012, there were no restrictions on the flow of these funds nor have any of these funds been committed in any way, except as outlined in the detailed notes.
b) Concentration of credit risk and major customers
The Company considers its maximum credit risk to be $1,220,901 (2011: $779,624). This amount is the total of the following financial assets: trade receivables and loan receivable. The Company’s cash and cash equivalents are held through various high grade financial institutions. Deposits held with these banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and therefore bear minimum risk.
The Company is exposed to credit risk from its customers and continually monitors its customers’ credit. It establishes the provision for doubtful accounts based upon the credit risk applicable to each customer. In line with other pharmaceutical companies, the Company sells its products through a small number of wholesalers and retail pharmacy chains in addition to hospitals, pharmacies, physicians and other groups. Note 15 discloses the significant customer details and the Company believes that the concentrations on the Company’s customers are considered normal for the Company and its industry.
| | As at December 31, 2012, the Company had three customers which made up 53.1% of the outstanding accounts receivable in comparison to four customers which made up 65.1% at December 31, 2011. For 2012, all outstanding accounts receivables were related to product sales, of which $465,981 or 38.9% were related to two wholesale accounts and $177,161 or 14.5% was related to one international customer. For 2011, all outstanding accounts receivables were related to product sales, of which $383,853 or 50.3% were related to three wholesale accounts and $113,192 or 14.8% were related to one international customer. |
The Company principally operates within Canada; however, a portion of the Company’s revenues, expenses, and current assets and liabilities, are denominated in United States dollars and certain European currencies. The Company’s long term debt is repayable in U.S. dollars, which may expose the Company to foreign exchange risk due to changes in the value of the Canadian dollar. As at December 31, 2012, a 5% change in the foreign exchange rate would have increased/decreased the long term debt balance by $164,000 and would have increased/decreased both interest expense and net loss by approximately $12,500 for the year ended December 31, 2012. The Company believes a near-term change in foreign exchange rates would not have a material adverse effect on the financial position or results of operations. Accordingly, the Company does not enter into financial hedging or other derivative contracts.
| | The Company does not actively use derivative instruments to reduce its exposure to foreign currency risk. However, depending on the nature, amount and timing of foreign currency receipts and payments, the Company may enter into forward exchange contracts to mitigate the associated risks. There were no forward exchange contracts outstanding at December 31, 2012 and 2011. For the years ended December 31, 2012 and 2011, the Company held foreign cash balances in the following currencies: |
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
| | | 2012 | | | 2011 | |
| | | Foreign $ | | | Cdn $ | | | Foreign | | | Cdn $ | |
| US dollars | | | 186,321 | | | | 187,103 | | | | 47,384 | | | | 48,189 | |
| EUROS | | | 18,973 | | | | 24,889 | | | | 128,582 | | | | 169,638 | |
The Company is exposed to interest rate fluctuations on its cash and cash equivalents as well as its long term debt. The Company does not believe that the results of operations or cash flows would be materially affected to any significant degree by a sudden change in market interest rates relative to interest rates on the cash equivalents. At December 31, 2012, the Company had an outstanding long term debt balance of US$3,281,250 ($3,264,516), which bears interest monthly at the higher of 4% or the thirty day LIBOR rate plus 7%, which may expose the Company to market risk due to changes in interest rates. For the year ended December 31, 2012, a 1% increase in interest rates would increase interest expense and net loss by approximately $22,500. However, based on current LIBOR interest rates, which are currently under the minimum floor set at 4% and based on historical movements in LIBOR rates, the Company believes a near-term change in interest rates would not have a material adverse effect on the financial position or results of operations.
a) Employee Stock Options
On February 6, 2013, the Company granted 282,500 options to an officer and employees of the Company. The weighted average exercise price of these options is $0.40 (US$0.40). These options having a quarterly vesting term of 25% on each of March 31, June 30, September 30 and December 31, 2014, upon achieving certain financial objectives.
b) Private Placement
On February 27, 2013, the Company closed a private placement for US$3,374,900 ($3,459,273) at a price per Unit of US$0.40 ($0.41). Each Unit consists of one common share of the Company’s stock, one-half of one Series A common share purchase warrant (a "Series A Warrant") and one-half of one Series B common share purchase warrant (a “Series B Warrant”).
Each whole Series A Warrant entitles the holder thereof to acquire one common share of the Company, at any time during the period ending 24 months after the date of issuance, at a price of US$0.50 ($0.51) per common share. Each whole Series B Warrant entitles the holder thereof to acquire one common share of the Company, at any time during the period ending 60 months after the date of issuance, at a price of US$0.60 ($0.61) per common share.
TRIBUTE PHARMACEUTICALS CANADA INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
DECEMBER 31, 2012 AND 2011
The terms of the Series B Warrants provide the Company with a right to call the Series B Warrants at a price of US$0.001($0.001) per warrant if certain conditions are met. Such conditions include the Company’s common shares trading at a volume weighted average price for 20 out of 30 consecutive trading days at a price which exceeds US$1.20 ($1.23), with an average daily volume of at least US$30,000 ($30,750) during that period.
Participation in the private placement included an aggregate of US$2,375,000 ($2,442,688) in gross proceeds received from directors and management of the Company, who were issued a total of 5,937,500 in common shares and 2,968,750 in each of Series A and Series B common share purchase warrants.
The Company paid a commission fee of US$185,600 ($190,240) and issued broker warrants equal to 2.5% of the total Units issued. One half of these warrants have terms substantially similar to the Series A Warrants and the remainder have terms substantially similar to the Series B Warrants.
On March 5, 2013, the Company closed a private placement of US$895,000 ($920,955), at a price per Unit of US$0.40 ($0.41). Each Unit consists of one common share of the Company’s stock, one-half of one Series A common share purchase warrant and one-half of one Series B common share purchase warrant under the same terms as provided the participants of the February 27, 2013 private placement issuance. The Company paid a commission fee of US$62,650 ($64,467) and issued broker warrants equal to 6.0% of the total Units issued. One half of these warrants have terms substantially similar to the Series A Warrants and the remainder have terms substantially similar to the Series B Warrants.
On March 11, 2013, the Company closed a private placement of US$275,000 ($282,370), at a price per Unit of US$0.40 ($0.41). Each Unit consists of one common share of the Company’s stock, one-half of one Series A common share purchase warrant and one-half of one Series B common share purchase warrant under the same terms as provided the participants of the February 27, 2013 private placement issuance. There are no commission fees to be paid in regards to this private placement.
F-31
