Exhibit 99.2
The audited consolidated balance sheets of the Company as at December 31, 2007 and 2006 and the consolidated statements of operations, comprehensive loss, shareholders’ equity and cash flows for the year ended December 31, 2007, December 31, 2006, and December 31, 2005, and for the period from inception (June 17, 1993) to December 31, 2007, together with the auditors’ report thereon.
Consolidated Financial Statements of
NEUROCHEM INC.
(a development stage company)
(a development stage company)
Years ended December 31, 2007, 2006 and 2005 and period from inception
(June 17, 1993) to December 31, 2007
(June 17, 1993) to December 31, 2007
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Neurochem Inc.
We have audited the accompanying consolidated balance sheets of Neurochem Inc. (“the Company”) and subsidiaries as of December 31, 2007 and 2006 and the related consolidated statements of operations, comprehensive loss, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2007, and for the period from inception (June 17, 1993) to December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. With respect to the consolidated financial statements for the year ended December 31, 2007, we also conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and subsidiaries as of December 31, 2007 and 2006 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007 and for the period from inception (June 17, 1993) to December 31, 2007, in conformity with Canadian generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 13, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Chartered Accountants
Montreal, Canada
February 13, 2008, except as to Note 21, which is as of February 20, 2008
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Neurochem Inc.
We have audited Neurochem Inc.’s (“the Company”) internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting as presented in the section entitled “Internal Control over Financial Reporting” included in the accompanying Management’s Discussion and Analysis. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have conducted our audits on the consolidated financial statements in accordance with Canadian generally accepted auditing standards. With respect to the consolidated financial statements for the year ended December 31, 2007, we also have conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our report dated February 13, 2008, except as to Note 21, which is as of February 20, 2008, expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Chartered Accountants
Montreal, Canada
February 13, 2008
NEUROCHEM INC.
Consolidated Financial Statements
Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
Financial Statements | ||||
Consolidated Balance Sheets | 1 | |||
Consolidated Statements of Operations | 2 | |||
Consolidated Statements of Comprehensive Loss | 3 | |||
Consolidated Statements of Shareholders’ Equity | 4 | |||
Consolidated Statements of Cash Flows | 6 | |||
Notes to Consolidated Financial Statements | 8 |
NEUROCHEM INC.
Consolidated Balance Sheets
Consolidated Balance Sheets
December 31, 2007 and 2006
(in thousands of US dollars, unless otherwise noted)
(in accordance with Canadian GAAP)
(in thousands of US dollars, unless otherwise noted)
(in accordance with Canadian GAAP)
December 31, | December 31, | December 31, | ||||||||||
2007 | 2007 | 2006 | ||||||||||
(CDN$- | (US$) | (US$- | ||||||||||
note 2 (b)) | note 2 (a)) | |||||||||||
Assets | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 10,833 | $ | 10,963 | $ | 12,158 | ||||||
Marketable securities | 47,141 | 47,709 | 36,600 | |||||||||
Restricted cash (note 6) | — | — | 6,000 | |||||||||
Sales taxes and other receivables | 766 | 775 | 1,043 | |||||||||
Research tax credits receivable | 1,785 | 1,807 | 928 | |||||||||
Prepaid expenses | 1,335 | 1,351 | 2,489 | |||||||||
61,860 | 62,605 | 59,218 | ||||||||||
Restricted cash (note 6) | 5,399 | 5,464 | 549 | |||||||||
Deferred financing fees (notes 4 (b) and 10) | — | — | 1,535 | |||||||||
Long-term prepaid expenses | 361 | 365 | 789 | |||||||||
Long-term investment (note 4 (a)) | 1 | 1 | 319 | |||||||||
Property and equipment (note 7) | 3,794 | 3,840 | 3,912 | |||||||||
Patents (note 8) | 6,083 | 6,156 | 5,080 | |||||||||
$ | 77,498 | $ | 78,431 | $ | 71,402 | |||||||
Liabilities and Shareholders’ Equity | ||||||||||||
Current liabilities: | ||||||||||||
Accounts payable | $ | 3,632 | $ | 3,676 | $ | 3,753 | ||||||
Accrued liabilities | 8,988 | 9,096 | 9,834 | |||||||||
Deferred revenue (note 5) | 7,044 | 7,129 | 7,568 | |||||||||
Deferred gain on sale of property (note 7) | 1,323 | 1,339 | 1,222 | |||||||||
20,987 | 21,240 | 22,377 | ||||||||||
Deferred gain on sale of property (note 7) | 15,713 | 15,902 | 15,732 | |||||||||
Long-term accrued liabilities (note 9) | 1,264 | 1,279 | 635 | |||||||||
Convertible notes (note 10) | 35,000 | 35,421 | 33,650 | |||||||||
72,964 | 73,842 | 72,394 | ||||||||||
Non-controlling interest | 672 | 680 | 725 | |||||||||
Shareholders’ equity: | ||||||||||||
Share capital (note 11) | 270,017 | 273,269 | 203,751 | |||||||||
Equity portion of convertible notes (note 10) | 9,724 | 9,841 | 8,620 | |||||||||
Additional paid-in capital | 15,214 | 15,397 | 11,396 | |||||||||
Warrants (note 10) | 16,656 | 16,857 | — | |||||||||
311,611 | 315,364 | 223,767 | ||||||||||
Deficit | (314,467 | ) | (318,254 | ) | (234,240 | ) | ||||||
Accumulated other comprehensive income | 6,718 | 6,799 | 8,756 | |||||||||
(307,749 | ) | (311,455 | ) | (225,484 | ) | |||||||
3,862 | 3,909 | (1,717 | ) | |||||||||
Commitments and contingencies (note 14) | ||||||||||||
Subsequent events (note 21) | ||||||||||||
$ | 77,498 | $ | 78,431 | $ | 71,402 | |||||||
See accompanying notes to consolidated financial statements.
On behalf of the Board of Directors by:
/s/ Graeme K. Rutledge | /s/ Colin Bier | |||||||
Director | Director |
1
NEUROCHEM INC.
Consolidated Statements of Operations
Consolidated Statements of Operations
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
(in accordance with Canadian GAAP)
(in thousands of US dollars, except per share data, unless otherwise noted)
(in accordance with Canadian GAAP)
Cumulative | ||||||||||||||||||||
Year ended | Year ended | Year ended | since | |||||||||||||||||
December 31, | December 31, | December 31, | inception of | |||||||||||||||||
2007 | 2007 | 2006 | 2005 | operations | ||||||||||||||||
(CDN$- | (US$) | (US$- | (US$- | (US$- | ||||||||||||||||
note 2 (b)) | note 2(a)) | note 2 (a)) | note 2 (a)) | |||||||||||||||||
Revenues: | ||||||||||||||||||||
Collaboration agreement (note 5) | $ | 1,106 | $ | 1,119 | $ | 2,106 | $ | 2,793 | $ | 6,120 | ||||||||||
Reimbursable costs | 391 | 396 | 712 | 872 | 2,131 | |||||||||||||||
Research contracts | — | — | — | — | 6,038 | |||||||||||||||
License fees | — | — | — | — | 733 | |||||||||||||||
1,497 | 1,515 | 2,818 | 3,665 | 15,022 | ||||||||||||||||
Expenses: | ||||||||||||||||||||
Research and development | 55,069 | 55,732 | 51,688 | 41,676 | 224,622 | |||||||||||||||
Research tax credits and grants | (2,135 | ) | (2,161 | ) | (1,899 | ) | (3,626 | ) | (21,253 | ) | ||||||||||
Other research and development charges | — | — | 1,127 | — | 1,127 | |||||||||||||||
52,934 | 53,571 | 50,916 | 38,050 | 204,496 | ||||||||||||||||
General and administrative | 10,455 | 10,581 | 11,522 | 18,333 | 74,584 | |||||||||||||||
Arbitral award (note 12) | — | — | 1,835 | — | 1,835 | |||||||||||||||
Reimbursable costs | 391 | 396 | 712 | 872 | 2,131 | |||||||||||||||
Stock-based compensation | 4,224 | 4,275 | 3,569 | 3,958 | 14,904 | |||||||||||||||
Special charges | — | — | — | — | 1,288 | |||||||||||||||
Depreciation of property and equipment | 1,022 | 1,034 | 1,129 | 1,674 | 7,646 | |||||||||||||||
Amortization and patent cost write-off | 656 | 664 | 427 | 958 | 2,738 | |||||||||||||||
69,682 | 70,521 | 70,110 | 63,845 | 309,622 | ||||||||||||||||
Loss before undernoted items | (68,185 | ) | (69,006 | ) | (67,292 | ) | (60,180 | ) | (294,600 | ) | ||||||||||
Interest income | 3,301 | 3,341 | 2,077 | 1,718 | 11,589 | |||||||||||||||
Interest and bank charges | (200 | ) | (202 | ) | (133 | ) | (381 | ) | (1,543 | ) | ||||||||||
Accretion expense (note 10) | (15,564 | ) | (15,751 | ) | (550 | ) | — | (16,301 | ) | |||||||||||
Change in fair value of embedded derivatives | (860 | ) | (870 | ) | — | — | (870 | ) | ||||||||||||
Change in fair value of third party asset-backed commercial paper (note 6) | (1,170 | ) | (1,184 | ) | — | — | (1,184 | ) | ||||||||||||
Gain on technology transfer | — | — | — | — | 2,306 | |||||||||||||||
Foreign exchange gain (loss) | 1,117 | 1,130 | (280 | ) | 154 | 866 | ||||||||||||||
Other income | 1,259 | 1,274 | 1,348 | 772 | 3,719 | |||||||||||||||
Share of loss in a company subject to significant influence (note 4 (a)) | (323 | ) | (327 | ) | (2,440 | ) | (2,578 | ) | (5,346 | ) | ||||||||||
Non-controlling interest (note 4 (a)) | 108 | 109 | 801 | 768 | 1,678 | |||||||||||||||
(12,332 | ) | (12,480 | ) | 823 | 453 | (5,086 | ) | |||||||||||||
Net loss before income taxes | (80,517 | ) | (81,486 | ) | (66,469 | ) | (59,727 | ) | (299,686 | ) | ||||||||||
Income taxes: | ||||||||||||||||||||
Quebec credit for losses | — | — | — | — | 464 | |||||||||||||||
Net loss | $ | (80,517 | ) | $ | (81,486 | ) | $ | (66,469 | ) | $ | (59,727 | ) | $ | (299,222 | ) | |||||
Net loss per share (note 17): | ||||||||||||||||||||
Basic and diluted | $ | (1.83 | ) | $ | (1.85 | ) | $ | (1.72 | ) | $ | (1.70 | ) | ||||||||
See accompanying notes to consolidated financial statements.
2
NEUROCHEM INC.
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Comprehensive Loss
Years ended December 31, 2007, 2006 and 2005
(in thousands of US dollars)
(in accordance with Canadian GAAP)
(in thousands of US dollars)
(in accordance with Canadian GAAP)
Year ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Net loss | $ | (81,486 | ) | $ | (66,469 | ) | $ | (59,727 | ) | |||
Foreign exchange adjustment on change in functional currency (note 2 (a)) | 1,957 | (1,397 | ) | (1,219 | ) | |||||||
Comprehensive loss | $ | (79,529 | ) | $ | (67,866 | ) | $ | (60,946 | ) | |||
See accompanying notes to consolidated financial statements.
3
NEUROCHEM INC.
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Shareholders’ Equity
Years ended December 31, 2007, 2006 and 2005
(in thousands of US dollars, unless otherwise noted)
(in thousands of US dollars, unless otherwise noted)
(in accordance with Canadian GAAP)
Equity | Accumulated | |||||||||||||||||||||||||||||||
portion of | Additional | other | ||||||||||||||||||||||||||||||
Share capital | convertible | paid-in | comprehensive | |||||||||||||||||||||||||||||
Number | Dollars | notes | capital | Warrants | Deficit | income | Total | |||||||||||||||||||||||||
Balance, December 31, 2004 | 30,320,419 | $ | 125,212 | $ | — | $ | 4,434 | $ | — | $ | (101,438 | ) | $ | 6,140 | $ | 34,348 | ||||||||||||||||
Adjustment to reflect change in accounting policy for variable interest entities (note 4 (a)) | — | — | — | — | — | (2,079 | ) | — | (2,079 | ) | ||||||||||||||||||||||
Issued for cash from public offering (note 11 (b)) | 4,000,000 | 61,200 | — | — | — | — | — | 61,200 | ||||||||||||||||||||||||
Share issue costs (note 11 (b)) | — | — | — | — | — | (4,107 | ) | — | (4,107 | ) | ||||||||||||||||||||||
Exercise of warrants (note 11 (b)) | 2,800,000 | 7,189 | — | — | — | — | — | 7,189 | ||||||||||||||||||||||||
Exercise of stock options: | ||||||||||||||||||||||||||||||||
For cash | 300,660 | 1,111 | — | — | — | — | — | 1,111 | ||||||||||||||||||||||||
Ascribed value from additional paid-in capital | — | 428 | — | (428 | ) | — | — | — | — | |||||||||||||||||||||||
Stock-based compensation (notes 11(d) and 13) | — | — | — | 3,958 | — | — | — | 3,958 | ||||||||||||||||||||||||
Change in foreign currency translation adjustment (note 2 (a)) | — | — | — | — | — | — | 1,219 | 1,219 | ||||||||||||||||||||||||
Net loss | — | — | — | — | — | (59,727 | ) | — | (59,727 | ) | ||||||||||||||||||||||
Balance, December 31, 2005 | 37,421,079 | 195,140 | — | 7,964 | — | (167,351 | ) | 7,359 | 43,112 | |||||||||||||||||||||||
Exercise of warrants (note 11 (b)) | 1,200,000 | 8,095 | — | — | — | — | — | 8,095 | ||||||||||||||||||||||||
Equity portion of November 2006 convertible notes (note 10 (a)) | — | — | 8,620 | — | — | — | — | 8,620 | ||||||||||||||||||||||||
Share issue costs (note 10 (a)) | — | — | — | — | — | (420 | ) | — | (420 | ) | ||||||||||||||||||||||
Exercise of stock options: | ||||||||||||||||||||||||||||||||
For cash | 100,943 | 379 | — | — | — | — | — | 379 | ||||||||||||||||||||||||
Ascribed value from additional paid-in capital | — | 137 | — | (137 | ) | — | — | — | — | |||||||||||||||||||||||
Stock-based compensation (note 13) | — | — | — | 3,569 | — | — | — | 3,569 | ||||||||||||||||||||||||
Change in foreign currency translation adjustment (note 2 (a)) | — | — | — | — | — | — | 1,397 | 1,397 | ||||||||||||||||||||||||
Net loss | — | — | — | — | — | (66,469 | ) | — | (66,469 | ) | ||||||||||||||||||||||
Balance, December 31, 2006 | 38,722,022 | 203,751 | 8,620 | 11,396 | — | (234,240 | ) | 8,756 | (1,717 | ) | ||||||||||||||||||||||
4
NEUROCHEM INC.
Consolidated Statements of Shareholders’ Equity, Continued
Consolidated Statements of Shareholders’ Equity, Continued
Years ended December 31, 2007, 2006 and 2005
(in thousands of US dollars, unless otherwise noted)
(in accordance with Canadian GAAP)
(in thousands of US dollars, unless otherwise noted)
(in accordance with Canadian GAAP)
Equity | Accumulated | |||||||||||||||||||||||||||||||
portion of | Additional | other | ||||||||||||||||||||||||||||||
Share capital | convertible | paid-in | comprehensive | |||||||||||||||||||||||||||||
Number | Dollars | notes | capital | Warrants | Deficit | income | Total | |||||||||||||||||||||||||
Balance carried forward, December 31, 2006 | 38,722,022 | $ | 203,751 | $ | 8,620 | $ | 11,396 | $ | — | $ | (234,240 | ) | $ | 8,756 | $ | (1,717 | ) | |||||||||||||||
Adjustment to reflect change in accounting policy for financial instruments (note 4 (b)) | — | — | — | — | — | (155 | ) | — | (155 | ) | ||||||||||||||||||||||
Equity portion of May 2007 convertible notes (note 10 (b)) | — | — | 11,152 | — | — | — | — | 11,152 | ||||||||||||||||||||||||
Warrants issued in connection with the May 2007 convertible notes issuance (note 10 (b)) | — | — | — | — | 16,857 | — | — | 16,857 | ||||||||||||||||||||||||
Share issue costs (note 10 (b)) | — | — | — | — | — | (2,373 | ) | — | (2,373 | ) | ||||||||||||||||||||||
Exercise of stock options: | ||||||||||||||||||||||||||||||||
For cash | 60,803 | 371 | — | — | — | — | — | 371 | ||||||||||||||||||||||||
Ascribed value from additional paid-in capital | — | 224 | — | (224 | ) | — | — | — | — | |||||||||||||||||||||||
Issued on conversion of 6% senior convertible notes due in 2027 (note 10 (b)) | 5,619,321 | 30,513 | (9,688 | ) | — | — | — | — | 20,825 | |||||||||||||||||||||||
Issued on conversion of 5% junior convertible notes due in 2012 (note 10 (b)) | 4,444,449 | 38,410 | (243 | ) | — | — | — | — | 38,167 | |||||||||||||||||||||||
Stock-based compensation (note 13) | — | — | — | 4,225 | — | — | — | 4,225 | ||||||||||||||||||||||||
Change in foreign currency translation adjustment (note 2 (a)) | — | — | — | — | — | — | (1,957 | ) | (1,957 | ) | ||||||||||||||||||||||
Net loss | — | — | — | — | — | (81,486 | ) | — | (81,486 | ) | ||||||||||||||||||||||
Balance, December 31, 2007 | 48,846,595 | $ | 273,269 | $ | 9,841 | $ | 15,397 | $ | 16,857 | $ | (318,254 | ) | $ | 6,799 | $ | 3,909 | ||||||||||||||||
See accompanying notes to consolidated financial statements.
5
NEUROCHEM INC.
Consolidated Statements of Cash Flows
Consolidated Statements of Cash Flows
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, unless otherwise noted)
(in accordance with Canadian GAAP)
(in thousands of US dollars, unless otherwise noted)
(in accordance with Canadian GAAP)
Cumulative | ||||||||||||||||||||
Year ended | Year ended | Year ended | since | |||||||||||||||||
December 31, | December 31, | December 31, | inception of | |||||||||||||||||
2007 | 2007 | 2006 | 2005 | operations | ||||||||||||||||
(CDN$- | (US$) | (US$- | (US$- | (US$- | ||||||||||||||||
note 2 (b)) | note 2 (a)) | note 2 (a)) | note 2 (a)) | |||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net loss | $ | (80,517 | ) | $ | (81,486 | ) | $ | (66,469 | ) | $ | (59,727 | ) | $ | (299,222 | ) | |||||
Adjustments for: | ||||||||||||||||||||
Depreciation, amortization and patent cost write-off | 1,678 | 1,698 | 1,556 | 2,632 | 10,384 | |||||||||||||||
Unrealized foreign exchange (gain) loss | (3,113 | ) | (3,151 | ) | 1,384 | 1,450 | 1,299 | |||||||||||||
Stock-based compensation | 4,224 | 4,275 | 3,569 | 3,958 | 14,904 | |||||||||||||||
Share of loss in a company subject to significant influence | 323 | 327 | 2,440 | 2,578 | 5,346 | |||||||||||||||
Non-controlling interest | (108 | ) | (109 | ) | (801 | ) | (768 | ) | (1,678 | ) | ||||||||||
Accretion expense | 15,564 | 15,751 | 550 | — | 16,301 | |||||||||||||||
Change in fair value of embedded derivatives | 860 | 870 | — | — | 870 | |||||||||||||||
Change in fair value of third party asset-backed commercial paper | 1,170 | 1,184 | — | — | 1,184 | |||||||||||||||
Amortization of gain on sale-leaseback | (1,282 | ) | (1,297 | ) | (1,256 | ) | (144 | ) | (2,698 | ) | ||||||||||
Amortization of deferred financing fees | — | — | 47 | — | 47 | |||||||||||||||
Write-off of leasehold improvements and other property and equipment | — | — | — | — | 914 | |||||||||||||||
Provision for lease exit obligations | — | — | — | — | 374 | |||||||||||||||
Gain on technology transfer | — | — | — | — | (2,306 | ) | ||||||||||||||
Shares issued for services | — | — | — | — | 30 | |||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||||||
Restricted cash | — | — | — | (6,519 | ) | (6,519 | ) | |||||||||||||
Amount receivable under collaboration agreement | — | — | — | 11,098 | — | |||||||||||||||
Sales taxes and other receivables | 343 | 347 | (430 | ) | 45 | (526 | ) | |||||||||||||
Research tax credits receivable | (552 | ) | (558 | ) | 1,166 | (871 | ) | (1,253 | ) | |||||||||||
Prepaid expenses | 1,358 | 1,374 | 238 | 470 | (912 | ) | ||||||||||||||
Long-term prepaid expenses | 480 | 486 | 384 | 5 | 3 | |||||||||||||||
Deferred revenue | (1,106 | ) | (1,119 | ) | (2,106 | ) | (2,793 | ) | 5,193 | |||||||||||
Accounts payable and accrued liabilities | (5,372 | ) | (5,437 | ) | 3,291 | 2,157 | 7,009 | |||||||||||||
(66,050 | ) | (66,845 | ) | (56,437 | ) | (46,429 | ) | (251,256 | ) | |||||||||||
6
NEUROCHEM INC.
Consolidated Statements of Cash Flows, Continued
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, unless otherwise noted)
(in accordance with Canadian GAAP)
(in thousands of US dollars, unless otherwise noted)
(in accordance with Canadian GAAP)
Cumulative | ||||||||||||||||||||
Year ended | Year ended | Year ended | since | |||||||||||||||||
December 31, | December 31, | December 31, | inception of | |||||||||||||||||
2007 | 2007 | 2006 | 2005 | operations | ||||||||||||||||
(CDN$- | (US$) | (US$- | (US$- | (US$- | ||||||||||||||||
note 2 (b)) | note 2 (a)) | note 2 (a)) | note 2 (a)) | |||||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Proceeds from issue of share capital | 367 | 371 | 8,641 | 69,829 | 203,616 | |||||||||||||||
Share issue costs | — | — | (418 | ) | (4,090 | ) | (12,758 | ) | ||||||||||||
Proceeds from convertible notes | 79,048 | 80,000 | 41,930 | — | 121,930 | |||||||||||||||
Financing fees | (5,653 | ) | (5,721 | ) | (1,624 | ) | — | (7,345 | ) | |||||||||||
Proceeds from sale-leaseback | — | — | — | 26,411 | 27,807 | |||||||||||||||
Repayment of obligations under capital lease | — | — | — | (343 | ) | (2,214 | ) | |||||||||||||
Proceeds from long-term debt | — | — | — | — | 8,052 | |||||||||||||||
Repayment of long-term debt | — | — | — | (7,773 | ) | (8,052 | ) | |||||||||||||
73,762 | 74,650 | 48,529 | 84,034 | 331,036 | ||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Additions to property and equipment | (568 | ) | (575 | ) | (801 | ) | (1,126 | ) | (18,703 | ) | ||||||||||
Additions to patents | (1,166 | ) | (1,180 | ) | (1,716 | ) | (939 | ) | (7,931 | ) | ||||||||||
Additions to long-term investment | — | — | (1,464 | ) | — | (1,855 | ) | |||||||||||||
Proceeds from (purchase of) marketable securities | (10,005 | ) | (10,126 | ) | 18,565 | (34,453 | ) | (41,141 | ) | |||||||||||
Proceeds from disposal of property and equipment | — | — | — | 56 | 76 | |||||||||||||||
(11,739 | ) | (11,881 | ) | 14,584 | (36,462 | ) | (69,554 | ) | ||||||||||||
Net (decrease) increase in cash and cash equivalents | (4,027 | ) | (4,076 | ) | 6,676 | 1,143 | 10,226 | |||||||||||||
Cash and cash equivalents, beginning of period | 12,013 | 12,158 | 6,332 | 5,988 | — | |||||||||||||||
Effect of foreign exchange on cash and cash equivalents | 2,847 | 2,881 | (850 | ) | (799 | ) | 737 | |||||||||||||
Cash and cash equivalents, end of period | $ | 10,833 | $ | 10,963 | $ | 12,158 | $ | 6,332 | $ | 10,963 | ||||||||||
Supplemental disclosures to cash flow statements (note 18).
See accompanying notes to consolidated financial statements.
7
NEUROCHEM INC.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
(in thousands of US dollars, except per share data, unless otherwise noted)
1. | Organization and business activities: | |
Neurochem Inc. (the Company or Neurochem) is a global health company focused on the research, development and commercialization of products to provide innovative health solutions to address critical unmet medical needs. | ||
Since inception, the business activities of the Company have been devoted principally to the development of the Company’s core technology platform, amyloid inhibitors, which focus on chemical compounds that could have the potential to inhibit the formation, deposition and toxicity of amyloid fibrils which are implicated or believed to be the underlying causes of certain diseases. The diseases currently targeted by the Company include Amyloid A (AA) amyloidosis, Alzheimer’s disease and Type II Diabetes as well as certain features of metabolic syndrome. | ||
The status of the Company’s principal product candidates is as follows: |
Disease indication | Product candidate | Stage of development | |||
AA amyloidosis | eprodisate (KIACTATM) | Clinical development | |||
Type II Diabetes as well as features of metabolic syndrome | NC-503 | Phase II clinical trial | |||
Alzheimer’s Disease | prodrug | Preclinical development |
Neurochem is considered to be in the development stage, with clinical trials for two of its programs. Since inception, substantially all of the Company’s research and development expenditures, capital expenditures, including costs incurred to secure patents, and all revenues from milestone payments, collaboration agreements and research contracts, relate to the Company’s core technology platform. | ||
In the fiscal period ended June 30, 2003, the Company licensed out intellectual property rights on preclinical-stage technology in its Type II Diabetes program to Innodia Inc. (Innodia). Innodia is a private development stage company engaged in developing novel drugs for the treatment of Type II Diabetes and underlying diseases. | ||
The Company is subject to a number of risks, including the successful development and marketing of its technologies and product candidates. In order to achieve its business plan, the Company anticipates the need to raise additional capital and/or achieve sales and other revenue generating activities. As of December 31, 2007, management believes that funds from operations, as well as existing financial resources will be sufficient to meet the Company’s requirements for the next year. |
8
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
(in thousands of US dollars, except per share data, unless otherwise noted)
2. | Functional and reporting currency: |
(a) | Change in functional and reporting currency: | ||
Effective July 1, 2007, the Company adopted the US dollar as its functional and reporting currency, as a significant portion of its revenue, expenses, assets, liabilities and financing are denominated in US dollars. Prior to that date, the Company’s operations were measured in Canadian dollars and the consolidated financial statements were expressed in Canadian dollars. | |||
The Company followed the recommendations of the Emerging Issues Committee (EIC) of the Canadian Institute of Chartered Accountants (CICA), set out in EIC-130, “Translation method when the reporting currency differs from the measurement currency or there is a change in the reporting currency”. In accordance with EIC-130, assets and liabilities as at June 30, 2007 were translated into US dollars using the exchange rate in effect on that date; revenues, expenses and cash flows were translated at the average rate in effect during the six-month period ended June 30, 2007 and equity transactions were translated at historical rates. For comparative purposes, historical financial statements have been restated in US dollars using the current rate method. Under this method, assets and liabilities are translated at the closing rate in effect at the end of these periods, revenues, expenses and cash flows are translated at the average rates in effect for these periods and equity transactions are translated at historical rates. Any exchange differences resulting from the translation are included in accumulated other comprehensive income presented in shareholders’ equity. | |||
(b) | Translation of convenience: | ||
The Company’s functional currency is the US dollar. The Company also presents the consolidated financial statements as at and for the period ended December 31, 2007, in Canadian dollars, using the convenience translation method whereby all US dollar amounts are converted into Canadian dollars at the noon exchange rate quoted by the Federal Reserve Bank of New York as at December 31, 2007, which was 0.9881 Canadian dollar per US dollar. The supplementary information in Canadian dollars is presented only for the convenience of some readers and thus has limited usefulness. This translation should not be viewed as a representation that such US dollar amounts actually represent such Canadian dollar amounts or could be or would have been converted into Canadian dollars at the rate indicated. |
3. | Significant accounting policies: | |
The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). |
(a) | Principles of consolidation: | ||
The consolidated financial statements include the accounts of Neurochem Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated on consolidation. |
9
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
(in thousands of US dollars, except per share data, unless otherwise noted)
3. | Significant accounting policies (continued): |
(b) | Cash and cash equivalents: | ||
The Company considers all investments with maturities of three months or less at inception, that are highly liquid and readily convertible into cash, to be cash equivalents. | |||
(c) | Marketable securities: | ||
Marketable securities are investments with maturities greater than three months and less than a year, and consist principally of commercial paper. Interest is recognized on an effective yield basis. Marketable securities are classified as “Financial Assets Available for Sale” and are marked-to-market with all unrealized gains and losses recognized in comprehensive loss. Realized gains and losses on sale and losses on impairment of these securities are recognized in net loss. | |||
(d) | Property and equipment: | ||
Property and equipment are stated at cost. Depreciation is provided at the following annual rates: |
Asset | Basis | Rate/period | |||||||
Building (to November 2005) | Straight-line | 20 years | |||||||
Research equipment | Declining balance | 20 | % | ||||||
Office equipment | Declining balance | 20 | % | ||||||
Computer hardware | Declining balance | 30 | % | ||||||
Computer software | Straight-line | 1-2 years |
(e) | Patents: | ||
The capitalized amount with respect to patents relates to direct costs incurred in connection with securing patents. Patents are stated at cost and are amortized using the straight-line method over the remaining life of the patent. | |||
(f) | Impairment and disposal of long-lived assets: | ||
Long-lived assets, including property and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the difference between the carrying amount and the fair value. Quoted market values are used whenever available to estimate fair value. When quoted market values are unavailable, the fair value of the long-lived asset is generally based on estimates of discounted expected net cash flows. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or the fair value less selling costs, and would no longer be depreciated. The assets and liabilities of a disposed group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the balance sheet. |
10
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
(in thousands of US dollars, except per share data, unless otherwise noted)
3. Significant accounting policies (continued):
(g) | Revenue recognition: | ||
Revenue from collaboration agreements that includes multiple elements is considered to be a revenue arrangement with multiple deliverables. Under this type of arrangement, the identification of separate units of accounting is required and revenue is allocated among the separate units based on their relative fair values. Payments received under the collaboration agreement may include upfront payments, regulatory and sales-based milestone payments for specific achievements, as well as distribution fees. Upfront and regulatory milestone payments, which require the Company’s ongoing involvement, are deferred and amortized into income on a straight-line basis over the estimated period of service. Sales-based milestone payments, for which the Company has no future involvement or obligations to perform related to that specified element of the arrangement, are recognized into income upon the achievement of the specified milestones. Distribution fees are recognized when the service has been performed, amount is determinable and collection is reasonably assured. | |||
License fees are recorded when conditions and events under the license agreement have been met or occurred, and collectibility is reasonably assured. | |||
Reimbursable costs incurred in connection with the Company’s collaboration agreement with Centocor, Inc. are included in total revenues and expenses. | |||
Interest income is recognized as earned. | |||
(h) | Research and development: | ||
Research expenditures are expensed as incurred and include a reasonable allocation of overhead expenses. Development expenditures are deferred when they meet the criteria for capitalization in accordance with Canadian GAAP, and the future benefits could be regarded as being reasonably certain. At December 31, 2007 and 2006, no development costs were deferred. | |||
(i) | Government assistance: | ||
Government assistance, consisting of grants and research tax credits, is recorded as a reduction of the related expense or the cost of the asset acquired. Grants are recorded when there is reasonable assurance that the Company has complied with the terms and conditions of the approved grant program. Research tax credits are recorded when there is reasonable assurance of their recovery. | |||
(j) | Foreign exchange: | ||
Monetary assets and liabilities denominated in foreign currencies are translated at year-end exchange rates. Non-monetary assets and liabilities denominated in foreign currencies are translated at exchange rates in effect at the transaction date. Income and expenses denominated in foreign currencies are translated at exchange rates in effect at the transaction date. Translation gains and losses are included in income. |
11
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
(in thousands of US dollars, except per share data, unless otherwise noted)
3. Significant accounting policies (continued):
(k) | Income taxes: | ||
Income taxes are provided for using the liability method. Under this method, differences between the financial reporting bases and the income tax bases of the Company’s assets and liabilities are recorded using the substantively enacted tax rates anticipated to be in effect when the tax differences are expected to reverse. A valuation allowance is recorded against any future tax asset if it is more likely than not that the asset will not be realized. | |||
(l) | Costs associated with lease exit activities: | ||
Costs associated with lease obligations for leased premises that are no longer being used by the Company are recognized and measured at fair value as of the cease-use date. The fair value of the liability at the cease-use date is determined based on the remaining lease rentals, reduced by estimated sublease rentals that could reasonably be obtained for the property, measured using the credit-adjusted risk-free rate. | |||
(m) | Earnings per share: | ||
Basic earnings per share are determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed in a manner consistent with basic earnings per share, except that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of options and warrants, if dilutive. The number of additional shares is calculated by assuming that outstanding options and warrants were exercised, and that the proceeds from such exercises were used to acquire common shares at the average market price during the reporting period. The dilutive effect of the convertible notes is reflected in diluted earnings per share by application of the “if-converted” method, if dilutive. Under the if-converted method, convertible notes are assumed to have been converted at the beginning of the period (or at time of issuance, if later) and the resulting common shares are included in the denomination for purposes of calculating diluted earnings per share. | |||
(n) | Stock-based compensation: | ||
The Company follows the fair value based method to account for options granted to employees and non-employees, whereby compensation cost is measured at fair value at the date of grant and is expensed over the award’s vesting period. |
12
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
(in thousands of US dollars, except per share data, unless otherwise noted)
3. Significant accounting policies (continued):
(o) | Use of estimates: | ||
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant areas requiring the use of management estimates include estimating the useful lives of long-lived assets, including property and equipment and patent costs, estimating accruals for clinical trial expenses, estimating the timing of regulatory approvals for revenue recognition purposes, estimating the fair value of restricted cash, allocating the proceeds received from issuance of convertible notes between debt and equity components as well as assessing the recoverability of research tax credits and future tax assets. The reported amounts and note disclosures reflect the most probable set of economic conditions and planned course of actions. Actual results could differ from these estimates. |
4. Changes in accounting policies:
(a) | Variable interest entities: | ||
On January 1, 2005, the Company adopted the recommendations of Accounting Guideline 15,Consolidation of Variable Interest Entities(AcG-15), which provides guidance for determining when an enterprise consolidates the assets, liabilities and results of operations of entities that are subject to control on a basis other than ownership of voting interests (a variable interest entity (VIE)). This guideline requires the Company to identify VIEs in which it has an interest, determine whether it is the primary beneficiary of such entities and, if so, to consolidate the VIE. A primary beneficiary is an enterprise that will absorb a majority of the VIE’s expected losses, receive a majority of its expected residual returns, or both. It was determined that the Company’s investment in a holding company that owns Innodia Inc.’s shares (Innodia Holding) meets the criteria for being a VIE and that the Company is the primary beneficiary of Innodia Holding. Innodia Holding’s only activity is the investment in Innodia Inc., which is accounted for using the equity method. The implementation of AcG-15 resulted in the consolidation of the Company’s interest in Innodia Holding starting January 1, 2005. The effect of the implementation of this accounting guideline was to adjust the net carrying value of the long-term investment and the deficit by $2,079 at January 1, 2005. | |||
In March 2006, the Company invested an additional amount of $1,464 in Innodia Holding in connection with a financing by Innodia Inc. As at December 31, 2007, the Company’s indirect equity investment in Innodia Inc. is approximately 23% of the issued and outstanding shares. For the year ended December 31, 2007, the Company recorded its share of loss in Innodia Holding bringing the investment to $1. The Company has since ceased to recognize its share of Innodia Inc.’s losses since it is not committed to provide further financial support to this company or otherwise guarantee obligations of this company. The Company continues to track the losses of Innodia Holding should it return to profitability. |
13
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
(in thousands of US dollars, except per share data, unless otherwise noted)
4. | Changes in accounting policies (continued): |
(b) | On January 1, 2007, the Company adopted the following new accounting standards issued by the CICA: |
(i) | Comprehensive income: | ||
Section 1530,Comprehensive Income, introduces a new financial statement which shows the change in equity of an enterprise during a period from transactions and other events arising from non-owner sources. A new financial statement has been presented in relation to Section 1530. | |||
(ii) | Financial instruments — recognition and measurement: | ||
Section 3855,Financial Instruments — Recognition and Measurementand Section 3861,Financial Instruments — Disclosure and Presentation, establish standards for recognition and presentation of financial instruments on the balance sheet and the measurement of financial instruments according to prescribed classifications. The Company is required to designate its financial instruments into one of five categories, which determine the manner of evaluation of each instrument and the presentation of related gains and losses. Depending on the financial instruments’ classifications, changes in subsequent measurements are recognized in net income or comprehensive income. | |||
The Company has designated its financial instruments as follows: |
– | Cash equivalents, marketable securities and restricted cash are classified as “Financial Assets Available for Sale”. These financial assets are marked-to-market at each reporting date with all unrealized gains and losses recognized in comprehensive income. See note 6 for restricted cash. | ||
– | Other receivables are classified as “Loans and Receivables”. Accounts payable, accrued liabilities and convertible notes are classified as “Other Financial Liabilities”. After their initial fair value measurement, these financial instruments are measured at amortized cost using the effective interest rate method. |
The new standards require derivative instruments to be recorded as either assets or liabilities measured at their fair value each period through earnings unless exempted from derivative treatment as a normal purchase and sale. Certain derivatives embedded in other contracts must also be measured at fair value. Embedded derivatives are required to be separated from the host contract and accounted for as a derivative financial instrument if the embedded derivative and host contract are not closely related, and the combined contract is not held for trading or designated at fair value. The Company chose to review all contracts in place, that were entered into after January 1, 2003, for any embedded derivatives within these contracts to determine if any such embedded derivatives needed to be accounted for separately at fair value from the base contract. The change in accounting policy related to embedded derivatives resulted in an increase of $155 to the opening deficit at the date of adoption. As of December 31, 2007, the fair value of the embedded derivative liability was $109 and was included in “accrued liabilities” on the consolidated balance sheet. During the year ended December 31, 2007, the increase in fair value of the embedded derivative liability of $63 was recorded as an expense in the consolidated statement of operations. |
14
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007 | ||||
(in thousands of US dollars, except per share data, unless otherwise noted) |
4. | Changes in accounting policies (continued): |
(b) | (continued): |
(ii) | Financial instruments — recognition and measurement (continued): | ||
As a result of adopting Section 3855, deferred financing costs of $1,535 as at January 1, 2007, relating to convertible notes have been reclassified from deferred financing fees to convertible notes on the consolidated balance sheet. These costs are being amortized using the effective interest method over the life of the related debt. | |||
(iii) | Equity: | ||
Section 3251,Equity, describes standards for the presentation of equity and changes in equity for the reporting period as a result of the application of Section 1530,Comprehensive Income. This standard did not have an impact on the Company’s consolidated financial statements for the year ended December 31, 2007. | |||
(iv) | Hedges: | ||
Section 3865,Hedges, specifies the criteria under which hedge accounting may be applied, how hedge accounting should be performed under permitted hedging strategies and the required disclosures. This standard did not have an impact on the Company’s consolidated financial statements for the year ended December 31, 2007. |
(c) | Future accounting changes: | ||
The following accounting standards were recently issued by the CICA. The Company is currently evaluating the impact of the adoption of these new standards on its consolidated financial statements. | |||
Section 1535,Capital Disclosures, establishes guidelines for disclosure of both qualitative and quantitative information that enables users of financial statements to evaluate the entity’s objectives, policies and processes for managing capital. This new standard relates to disclosure only and will not impact the financial results of the Company. This standard is effective January 1, 2008. | |||
Section 3862,Financial Instruments — Disclosure, describes the required disclosure for the assessment of the significance of financial instruments for an entity’s financial position and performance and of the nature and extent of risks arising from financial instruments to which the entity is exposed and how the entity manages those risks. Section 3863,Financial Instruments — Presentation, establishes standards for presentation of the financial instruments and non-financial derivatives. It carries forward the presentation related requirements of Section 3861,Financial Instruments — Disclosure and Presentation. These new standards relate to disclosure only and will not impact the financial results of the Company. These standards are effective January 1, 2008. |
15
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
4. | Changes in accounting policies (continued): |
(c) | Future accounting changes (continued): | ||
International Financial Reporting Standards (IFRS) | |||
In 2005, the Accounting Standards Board of Canada (AcSB) announced that accounting standards in Canada are to converge with IFRS. In May 2007, the CICA published an updated version of its “Implementation Plan for Incorporating IFRS into Canadian GAAP”. This plan includes an outline of the key decisions that the CICA needs to make as it implements the Strategic Plan for publicly accountable enterprises that will converge Canadian generally accepted accounting standards with IFRS. While IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences in accounting policy which must be addressed. The Company is currently assessing the future impact of these new standards on its consolidated financial statements. These standards are effective for fiscal years beginning January 1, 2011. |
5. | Collaboration agreement: | |
In December 2004, the Company concluded a collaboration and distribution agreement with Centocor, Inc. (Centocor) for eprodisate (KIACTAÔ), the Company’s most advanced product candidate designed to treat AA Amyloidosis. Under this agreement, Neurochem granted to Centocor, a wholly-owned subsidiary of Johnson & Johnson, Inc., worldwide exclusive distribution rights for eprodisate (KIACTAÔ), with the exception of Canada, Switzerland, China, Japan, Taiwan and South Korea for which the distribution rights remain with Neurochem. The agreement includes up-front, regulatory and sales-based milestone payments valued up to $54,000, as well as tiered distribution fees which will be based upon annual sales of eprodisate (KIACTAÔ) in the applicable territories over the life of the agreement. Neurochem will be responsible for the product approval activities in the United States and in Europe, as well as for global manufacturing activities. Centocor will manage the marketing and sales of eprodisate (KIACTAÔ) in the applicable territories. KIACTAÔ is a trademark of Johnson & Johnson Corporation. | ||
In 2004, the Company recorded a receivable for the upfront payment due from Centocor upon signing of the agreement in the amount of $12,000, which was received in 2005. One half of the upfront payment received by the Company is potentially refundable in specified circumstance. All of the deferred revenue at December 31, 2007 and 2006 relates to amounts received under this agreement. | ||
The Company recognized $1,119 of revenue under the agreement in 2007 (2006 — $2,106; 2005 - $2,793), representing the amortization of the non-refundable upfront payment for the period from signing the agreement, December 21, 2004, over the remaining estimated period through to the anticipated regulatory approval date of the related investigational product candidate. The estimated period over which revenue is being recognized is subject to change based on additional information that the Company may receive periodically in respect of its expected date of regulatory approvals. |
16
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
6. | Restricted cash: | |
Restricted cash is composed of short-term investments pledged to a bank as collateral for two letters of credit; the first in the amount of $6,000 was issued in connection with the potentially refundable upfront payment received under the collaboration agreement with Centocor and the second in the amount of CDN$640 was granted in favour of a landlord in relation to the lease of a building. As at December 31, 2007, restricted cash is composed of third-party Asset-Backed Commercial Paper (ABCP). These investments were due to mature during the third quarter of 2007 but, as a result of a disruption in the credit markets, particularly in the ABCP market, they did not settle on maturity and currently remain outstanding. At the time these investments were acquired, the ABCP were rated R1-high by Dominion Bond Rating Service, which is the highest credit rating for this type of investment. The ABCP are currently subject to a restructuring proposal under a standstill agreement which is expected to result in the conversion of the ABCP into longer-term financial instruments with maturities corresponding to the underlying assets. A Pan-Canadian Investors Committee (the Committee) was established to oversea the orderly restructuring of these instruments during the standstill agreement period. A restructuring plan was announced by the Committee on December 23, 2007, and is anticipated to be completed by the end of March 2008. | ||
During the quarter ended December 31, 2007, the Company recorded a provision for losses in the amount of $1,184 in respect of ABCP, reflecting the Company’s estimated reduction in the fair value of these investments as at December 31, 2007. The Company estimated the fair value of the ABCP using a probability weighted discounted cash flow approach, based on its best estimates of the time period over which the assets in the underlying trust are going to generate cash flows ranging from 7 to 30 years based on the proposed restructuring, the coupon interest rate, the discount rate to apply to the net cash flows anticipated to be received commensurate with highly rated notes and other qualitative factors. This estimate of the fair value of the ABCP is not supported by observable market prices or rates, therefore is subject to uncertainty, including, but not limited to, the outcome of the restructuring plan being considered, the estimated amounts to be recovered, the yield of the substitute financial instruments and the timing of future cash flows. The resolution of these uncertainties could be such that the ultimate fair value of these investments may vary from the Company’s current best estimate. Changes to the near term could require changes in the recognized amount of these assets. The Company does not expect there will be a material adverse impact on its business as a result of the Third Party ABCP liquidity issue. | ||
During the third and fourth quarters of 2007, both letters of credit were renewed upon their respective annual expiry, with the ABCP issued as collateral. |
17
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
(in thousands of US dollars, except per share data, unless otherwise noted)
7. | Property and equipment: |
Accumulated | 2007 Net book | |||||||||||
Cost | depreciation | value | ||||||||||
Research equipment | $ | 7,568 | $ | 4,648 | $ | 2,920 | ||||||
Computer hardware and software | 3,148 | 2,645 | 503 | |||||||||
Office equipment | 973 | 556 | 417 | |||||||||
$ | 11,689 | $ | 7,849 | $ | 3,840 | |||||||
2006 | ||||||||||||
Accumulated | Net book | |||||||||||
Cost | depreciation | value | ||||||||||
Research equipment | $ | 6,450 | $ | 3,617 | $ | 2,833 | ||||||
Computer hardware and software | 2,818 | 2,160 | 658 | |||||||||
Office equipment | 842 | 421 | 421 | |||||||||
$ | 10,110 | $ | 6,198 | $ | 3,912 | |||||||
On November 17, 2005, the Company entered into a sale and leaseback transaction for its facilities for a sale price of $26,411. The transaction generated a net gain of $20,085. The net gain is deferred and is being amortized over the original term of the lease of 15 years as a reduction of rent expense. The Company accounts for this lease as an operating lease. Rent expense is calculated on a straight-line basis over the original term of the lease. The Company has an option to purchase the property at fair market value beginning on December 1, 2017. The Company repaid in its totality the remaining balance of the revolving decreasing term credit, which originally financed the acquisition of the facilities. Interest on long-term debt amounted to $282 for the year ended December 31, 2005. |
8. | Patents: |
2007 | 2006 | |||||||
Cost | $ | 7,686 | $ | 6,121 | ||||
Accumulated amortization | 1,530 | 1,041 | ||||||
$ | 6,156 | $ | 5,080 | |||||
18
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
8. | Patents (continued): | |
The remaining weighted average amortization period of patents at December 31, 2007 is 13.6 years (2006 — 14.3 years; 2005 — 15.6 years). The estimated amortization expense for each of the next five years is approximately $450 per annum or $2,250 in the aggregate. | ||
Effective January 1, 1994, the Company entered into an epilepsy license agreement (Epilepsy Agreement), with Parteq Research and Development Innovations (Parteq), the commercialization arm of Queen’s University. Pursuant to the Epilepsy Agreement, the Company was granted the worldwide exclusive license, under certain intellectual property, including patents and patent applications (Epilepsy Patents) belonging to Queen’s University to develop, make, have made, use, sell and have sold certain products. In 2005, the Company provided Parteq with a termination notice for the Epilepsy Agreement, pursuant to which responsibility for, and all rights in, the Epilepsy Patents reverted to Parteq. Accordingly, the Company wrote off the net book value of the Epilepsy Patents in the amount of $704 during the year ended December 31, 2005. | ||
9. | Long-term liabilities: | |
Long-term accrued liabilities consist of: |
2007 | 2006 | |||||||
Lease exit obligation | $ | 59 | $ | 71 | ||||
Deferred rent liability | 1,161 | 564 | ||||||
Deferred share unit plan (note 11 (f)) | 59 | — | ||||||
$ | 1,279 | $ | 635 | |||||
10. | Convertible notes: | |
Convertible notes consist of the following: |
2007 | 2006 | |||||||
6% Senior convertible notes due in 2026 (a) | $ | 33,618 | $ | 33,650 | ||||
6% Senior convertible notes due in 2027 (b) | 2,825 | — | ||||||
Derivative-related asset (b) | (1,022 | ) | — | |||||
$ | 35,421 | $ | 33,650 | |||||
19
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
10. | Convertible notes (continued): |
(a) | On November 9, 2006, the Company entered into a private placement of $42,085 aggregate principal amount of convertible senior notes (the 2006 Notes) due in 2026. The 2006 Notes bear interest at a rate of 6% per annum and are payable semi-annually on May 15 and November 15 of each year, beginning on May 15, 2007. The 2006 Notes are convertible into common shares based on an initial conversion rate of 50.7181 shares per $1 principal amount of 2006 Notes ($19.72 per share) which represents a conversion premium of 20% over the Company’s share price at date of issuance. | ||
The 2006 Notes are convertible, at the option of the holder under the following conditions: |
(i) | after December 31, 2006, if the closing sale price of the Company’s common shares for each of 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter exceed 120% of the conversion price in effect on the last trading day of the immediately preceding calendar quarter; | ||
(ii) | during the five consecutive business days immediately after any five consecutive trading day period in which the average trading price per $1 principal amount of 2006 Notes was equal to or less than 97% of the average conversion value of the 2006 Notes; | ||
(iii) | if the Company makes certain distributions on its common shares or engages in certain transactions; | ||
(iv) | at any time from, and including, October 15, 2009 to November 15, 2009, from October 15, 2011 to November 15, 2011 and at any time on or after November 15, 2021. |
On October 15, 2009, the conversion rate of the 2006 Notes will be adjusted to an amount equal to a fraction whose numerator is $1 and whose denominator is the average of the closing sale prices of the common shares during the 20 trading days immediately preceding, and including, the third business day immediately preceding October 15, 2009. However, no such adjustment will be made if the adjustment will reduce the conversion rate. On and after November 15, 2009, the conversion rate will be readjusted back to the conversion rate that was in effect prior to October 15, 2009. | |||
On or after November 15, 2011, the Company may redeem the 2006 Notes, in whole or in part, at a redemption price in cash equal to 100% of the principal amount of the 2006 Notes, plus any accrued and unpaid interest. On November 15, 2011, November 15, 2016 and November 15, 2021, the 2006 Note holders may require the Company to purchase all or a portion of their 2006 Notes at a purchase price in cash equal to 100% of the principal amount of the 2006 Notes to be purchased, plus any accrued and unpaid interest. | |||
The Company, at its discretion, may elect to settle the principal amount owing upon redemption or conversion in cash, shares or a combination thereof. |
20
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
10. | Convertible notes (continued): |
(a) | (continued): | ||
In accordance with Canadian GAAP, the 2006 Notes are accounted for as a compound financial instrument and are presented in their component parts of debt and equity. The debt component is measured at the issue date as the present value of the cash payments of interest and principal due under the terms at a rate which approximates the estimated interest rate of a similar non-convertible financial instrument with comparable terms and risk. The difference between the value as determined in this manner and the face value of the 2006 Notes has been allocated to equity. The debt component is accreted to its face value through a charge to earnings over its term. The effective interest rate of the 2006 Notes is 12.60%. | |||
Issue costs incurred in connection with the issuance of the 2006 Notes were $1,955 and have been presented as follows: $1,535 as financing fees and $420 as share issue costs. | |||
Changes in the 2006 Notes for the years ended December 31, 2007 and 2006 were as follows: |
Balance, December 31, 2005 | $ | — | ||
Note issuance as at November 9, 2006 | 33,465 | |||
Accretion expense | 550 | |||
Interest paid/payable | (365 | ) | ||
Balance, December 31, 2006 | 33,650 | |||
Adjustment to reflect change in accounting policy for financial instruments (note 4 (b)) | (1,535 | ) | ||
Accretion expense | 4,108 | |||
Interest paid/payable | (2,525 | ) | ||
Foreign exchange gain | (80 | ) | ||
Balance, December 31, 2007 | $ | 33,618 | ||
21
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
10. | Convertible notes (continued): |
(b) | On May 2, 2007, the Company issued $80,000 aggregate principal amount of convertible notes, consisting of $40,000, 6% senior convertible notes due in 2027 (the Senior Notes) and $40,000, 5% senior subordinated convertible notes due in 2012 (the Junior Notes). The Senior Notes have an initial conversion price equal to the lesser of $12.68 or the 5-day weighted average trading price of the common shares preceding any conversion, subject to adjustments in certain circumstances. The Senior Notes are convertible at the option of the holder at anytime after three days notice. The conversion price is the average trading price of the Company’s trading price for the period preceding the conversion, subject to a ceiling of $12.68 and a floor of $6.00. The conversion price may be fixed, subject to shareholder’s approval, for the period from October 15, 2009 to November 15, 2009. After November 1, 2011, the Senior Notes may be redeemed by the holders if the Company fails to maintain a specified net cash position. The Company will pay interest on the Senior Notes until maturity on May 2, 2027, subject to earlier repurchase, redemption or conversion. The Junior Notes were subject to mandatory conversion into common shares under certain circumstances. In connection with this transaction, the Company issued warrants to purchase an aggregate of 2,250,645 common shares of Neurochem until May 2, 2012, at an initial purchase price of $12.68 per share, subject to adjustments in certain circumstances. | ||
In accordance with Canadian GAAP, the Senior Notes and the Junior Notes are accounted for as a compound financial instrument and are presented in their component parts of debt and equity. The Company initially allocated the proceeds from the Senior Notes and the Junior Notes between its liability and equity components using the residual value method. The Senior Notes proceeds, net of issue costs of $2,069, were allocated as follows: $23,492 to debt, $10,909 to equity portion of the convertible notes, $5,907 to warrants and $2,377 to derivative-related asset. The Junior Notes proceeds, net of issue costs of $2,697, were allocated as follows: $27,753 to debt, $243 to equity portion of the convertible notes, $9,533 to warrants and $226 to derivative-related asset. Issue costs of $2,373 in relation to equity instruments, including $1,417 of warrants, were charged to the deficit. The fair value of the embedded derivatives was determined using the Binomial model and the fair value of the warrants was determined using the Black-Scholes pricing model. The models used in the valuation of the components of the convertible notes contain certain subjective assumptions, changes of which may cause significant variation in the estimated fair value of the debt and equity components of the convertible notes. | |||
The Company accretes the carrying value of the Senior Notes and Junior Notes to their face values through a charge to earnings over their expected lives, which is 54 months for the Senior Notes and was one month for the Junior Notes. The effective interest rate of the Senior Notes is 19.97%. | |||
During the year ended December 31, 2007, $35,500 of the Senior Notes were converted into 5,619,321 common shares and the totality of the Junior Notes was converted into 4,444,449 common shares. |
22
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
10. | Convertible notes (continued): |
(b) | (continued): | ||
Changes in the Senior Notes, Junior Notes and derivative-related asset for the year ended December 31, 2007, were as follows: |
Senior | Junior | Derivative- | ||||||||||
Notes | Notes | related asset | ||||||||||
Balance as at December 31, 2006 | $ | — | $ | — | $ | — | ||||||
Notes issuance as at May 2, 2007 | 23,492 | 27,753 | (2,603 | ) | ||||||||
Accretion expense | 1,213 | 10,430 | — | |||||||||
Interest paid/payable | (628 | ) | (174 | ) | — | |||||||
Foreign exchange loss | 32 | 383 | 90 | |||||||||
Conversion by note holders | (21,284 | ) | (38,392 | ) | 684 | |||||||
Change in fair value | — | — | 807 | |||||||||
Balance as at December 31, 2007 | $ | 2,825 | $ | — | $ | (1,022 | ) | |||||
11. | Share capital: |
(a) | The authorized share capital of the Company consists of: |
• | an unlimited number of voting common shares | ||
• | an unlimited number of non-voting preferred shares, issuable in one or more series |
23
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
11. | Share capital (continued): |
(b) | Common shares issued and outstanding: | ||
December 31, 2005: |
(i) | On March 9, 2005, the Company completed a public offering for the issuance and sale of 4 million common shares at a price of $15.30 for total proceeds of $61,200. Total share issue costs of $4,107 were charged to the deficit. | ||
(ii) | On July 25, 2005, a subsidiary of Picchio Pharma Inc. (Picchio Pharma) exercised a warrant to purchase 2.8 million common shares for total proceeds of $7,189. |
December 31, 2006: |
(iii) | On February 16, 2006, Picchio Pharma exercised its remaining warrant outstanding to purchase 1.2 million common shares for total proceeds of $8,095. |
December 31, 2007: |
(iv) | In 2007, the Company issued 10,063,770 common shares in connection with the conversion of Senior and Junior convertible notes. See note 10 (b). |
(c) | Stock option plan: | ||
Under its stock option plan, the Company may grant options to purchase common shares to employees, directors and consultants of the Company (the Stock Option Plan). The terms, number of common shares covered by each option, as well as the vesting period are determined by the Board of Directors. In general, options vest over periods of up to five years. During the year ended December 31, 2005, the shareholders approved an amendment to the Company’s Stock Option Plan to change the maximum number of shares reserved for issuance from 4,438,767 common shares to 12.5% of the issued and outstanding common shares. The maximum number of common shares which may be optioned in favor of any single individual shall not exceed 5% of the issued and outstanding common shares of the Company. The option price per share is equal to the weighted average trading price of common shares for the five days preceding the effective date of grant during which the common shares were traded on the Toronto Stock Exchange. In no event may the term of any option exceed ten years from the date of the grant of the option. |
24
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
11. | Share capital (continued): |
(c) | Stock option plan (continued): | ||
Changes in outstanding options issued under the Stock Option Plan for the years ended December 31, 2005, 2006 and 2007 were as follows: |
Weighted | ||||||||
average | ||||||||
Number | exercise price | |||||||
(CDN$) | ||||||||
Options outstanding, December 31, 2004 | 2,363,784 | $ | 14.51 | |||||
Granted | 318,500 | 21.31 | ||||||
Exercised | (300,660 | ) | 4.48 | |||||
Cancelled or expired | (71,666 | ) | 13.68 | |||||
Options outstanding, December 31, 2005 | 2,309,958 | 16.78 | ||||||
Granted | 402,000 | 16.53 | ||||||
Exercised | (100,943 | ) | 4.25 | |||||
Cancelled or expired | (33,519 | ) | 20.84 | |||||
Options outstanding, December 31, 2006 | 2,577,496 | 17.17 | ||||||
Granted | 336,333 | 11.20 | ||||||
Exercised | (60,803 | ) | 7.12 | |||||
Cancelled or expired | (36,293 | ) | 11.72 | |||||
Options outstanding, December 31, 2007 | 2,816,733 | $ | 16.75 | |||||
The following table summarizes information about options outstanding and exercisable at December 31, 2007: |
Options outstanding | Options exercisable | |||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||
average | average | average | ||||||||||||||||||
exercise | years to | exercise | ||||||||||||||||||
Exercise price/share | Number | price | expiration | Number | price | |||||||||||||||
(CDN$) | (CDN$) | (CDN$) | ||||||||||||||||||
$0.36 - $0.65 | 11,500 | $ | 0.65 | 0.5 | 11,500 | $ | 0.65 | |||||||||||||
$2.99 - $6.93 | 513,127 | 4.42 | 5.5 | 341,552 | 4.11 | |||||||||||||||
$8.11 - $15.35 | 670,766 | 10.62 | 6.3 | 468,467 | 9.05 | |||||||||||||||
$17.40 - $23.35 | 801,507 | 19.76 | 7.3 | 376,533 | 21.10 | |||||||||||||||
$25.30 - $33.00 | 819,833 | 26.75 | 6.5 | 560,708 | 27.18 | |||||||||||||||
2,816,733 | $ | 16.75 | 6.5 | 1,758,760 | $ | 16.39 | ||||||||||||||
25
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
11. | Share capital (continued): |
(d) | Agreement to issue shares: | ||
The agreement with the Chief Executive Officer effective December 1, 2004, to issue to him up to 220,000 common shares upon the execution of the agreement and upon achievement of specified performance targets was approved by regulatory authorities and shareholders in 2005. During the year ended December 31, 2007, the Company recorded nil (2006 — nil; 2005 — $1,189) in stock-based compensation in relation to nil common shares (2006 — nil; 2005 - 140,000) to be issued to the Chief Executive Officer in connection with his execution and achievement of certain specified targets. As at December 31, 2007, stock-based compensation in relation to 140,000 of the total 220,000 common shares has been recognized. The shares will be issued by the Company upon formal notification by the Chief Executive Officer. | |||
(e) | Equity line of credit: | ||
On August 9, 2006, the Company entered into a securities purchase agreement in respect of an equity line of credit facility. The facility will terminate February 9, 2009, and it provides the Company with access to financing of up to $60,000 in return for the issuance of common shares at a discount of 3.0% to market price at the time of drawdown less a placement fee equal to 2.4% of gross proceeds payable to the placement agent. Under the agreement, the Company is committed to draw down at least $25,000 over the term of the facility. Drawdown requests are subject to the terms and conditions as specified in the agreement. Either party may terminate the agreement if the volume-weighted average price of the Company’s common shares is below $5 per share for more than 30 consecutive days. Given that the current price per share has been below the minimum price as per the agreement, the agreement may be terminated at any time. As of December 31, 2007, the Company had not drawn any funds under the equity line of credit. | |||
See subsequent event note 21 (c), for terms of the amendment. |
26
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
11. | Share capital (continued): |
(f) | Deferred share unit plan: | ||
On February 15, 2007, the Company adopted a deferred share unit (DSU) plan for certain designated employees (the Designated Employees Plan), as well as a DSU plan for members of the Board of Directors (the Board Plan). The Designated Employees Plan permits employees to elect to take all or any portion of their annual bonus in the form of DSUs rather than in cash, while the Board Plan permits members of the Board of Directors to elect to take all of their annual retainer and/or all of their meeting attendance fees as DSUs rather than in cash. The number and price of DSUs are determined by the five-day volume weighted average trading price of the Company’s common shares at the time the DSUs are issued, as provided for under the respective plans. The DSUs are redeemable only upon the participant’s resignation, termination, retirement or death, in cash, at a value equal to the number of DSUs credited multiplied by the market value of common shares on the date a notice of redemption is filed. | |||
During the year ended December 31, 2007, the Company granted 26,567 DSUs having a weighted average fair value per unit of CDN$11.26. For DSUs, compensation cost is measured based on the market price of the Company’s shares from the effective date of grant through to the settlement date. The offsetting liability is marked-to-market. Any changes in the market value of the Company’s shares through to the settlement date results in a change to the measure of compensation cost for those awards and is recorded in the consolidated statement of operations. At December 31, 2007, the Company had a liability of $59 with respect to issued DSUs. |
12. | Arbitral award: | |
In June 2006, the International Chamber of Commerce Court of Arbitration (ICC) issued its Final Award (the Final Award) in the arbitration dispute involving Neurochem and Immtech Pharmaceuticals, Inc., formerly known as Immtech International, Inc. (Immtech). The dispute concerned an agreement entered into between Immtech and Neurochem in April 2002 (the Agreement) under which Neurochem had the right to apply its proprietary anti-amyloid technology to test certain compounds to be provided by Immtech. The ICC denied the majority of Immtech’s claims after an evidentiary hearing before the tribunal convened in accordance with the rules of the ICC (the Tribunal) held in September 2005. In the Final Award, the Tribunal held that Neurochem did not misappropriate any of Immtech’s compounds, information or trade secrets and that Immtech was not entitled to any interest in, or ownership or assignment of, Neurochem’s patent applications. | ||
The Tribunal found that Neurochem had breached certain sections of the Agreement, and Immtech was awarded $35 in damages, plus interest thereon for a disputed progress payment under the Agreement. Immtech was awarded only a portion of the ICC’s administrative charges and arbitral fees and costs incurred by the Tribunal which had been previously advanced by Immtech, as well as a portion of Immtech’s arbitration-related legal fees. In the second quarter of 2006, the Company recorded a charge of $1,835 to account for this decision. |
27
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
12. | Arbitral award (continued): | |
On January 25, 2007, Immtech, the University of North Carolina at Chapel Hill (UNC), and Georgia State University Research Foundation, Inc. (together with UNC, the Universities) filed with the Federal District Court for the Southern District of New York, USA (the Court) a Notice of Voluntary Dismissal bringing to an end the litigation action described herein. The litigation had been stayed since 2004 when the Court ordered Immtech to submit its claims to arbitration as provided for in the underlying agreement between Immtech and Neurochem, leaving the claims of the Universities to be decided after the conclusion of the arbitration. The plaintiffs voluntarily dismissed their litigation complaint against the Company without any payment, license, business agreement, concession or compromise by the Company. | ||
13. | Stock-based compensation: | |
For the year ended December 31, 2007, the Company recorded total stock-based compensation (excluding compensation under the deferred share unit plan) of $4,225 (2006 — $3,569; 2005 - $2,769), related to stock options granted under the Stock Option Plan after July 1, 2002. | ||
The fair value of each option granted is estimated on the date of grant using the Black-Scholes pricing model. The weighted average assumptions for the years ended December 31, 2007, 2006 and 2005 were as follows: |
2007 | 2006 | 2005 | ||||||||||
Risk-free interest rate | 4.02 | % | 4.18 | % | 3.86 | % | ||||||
Expected volatility | 61 | % | 60 | % | 58 | % | ||||||
Expected life in years | 7 | 7 | 7 | |||||||||
Expected dividend yield | nil | nil | nil | |||||||||
The following table summarizes the weighted average grant-date fair value per share for options granted during the years ended December 31, 2007, 2006 and 2005: |
Weighted average | ||||||||
Number of | grant-date | |||||||
options | fair value | |||||||
(CDN$) | ||||||||
Years ended: | ||||||||
December 31, 2007 | 336,333 | $ | 6.94 | |||||
December 31, 2006 | 402,000 | 10.46 | ||||||
December 31, 2005 | 318,500 | 12.77 | ||||||
28
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
13. | Stock-based compensation (continued): | |
Dividend yield was excluded from the calculation, since it is the present policy of the Company to retain all earnings to finance operations and future growth. | ||
14. | Commitments and contingencies: |
(a) | Operating leases: | ||
Minimum annual lease payments for the next five years and thereafter under operating leases are as follows: |
2008 | $ | 2,916 | ||
2009 | 2,952 | |||
2010 | 3,014 | |||
2011 | 3,103 | |||
2012 | 3,195 | |||
Thereafter | 27,544 | |||
$ | 42,724 | |||
In addition, the Company is also responsible for operating costs and taxes under the operating leases. |
29
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
14. | Commitments and contingencies (continued): |
(b) | License agreements and research collaborations: | ||
On February 1, 2006, the Company entered into an assignment agreement with Parteq (Assignment Agreement) which terminated an amyloid license agreement. This amyloid license agreement granted the Company an exclusive worldwide license under certain intellectual property (Amyloid Intellectual Property). Pursuant to the Assignment Agreement, Parteq agreed and assigned the Amyloid Intellectual Property to the Company for consideration, comprising an upfront payment of CDN$200 and various deferred payment amounts, which are approximately equal to the payments provided for in the amyloid license agreement. The Assignment Agreement also provides for annual technology payments, deferred milestone payments and deferred graduated payments based on gross revenues to be generated from commercialized products, which approximate the payments included in the amyloid license agreement. | |||
Under the terms of an agreement with the federal Ministry of Industry (Technology Partnerships Canada Program), as amended in 2005, the Company is committed to pay the federal government royalties equal to 7.24% of certain milestone revenue and 0.724% of end-product sales realized from the commercialization of effective orally-administered therapeutics for the treatment of Alzheimer’s disease until December 31, 2010. After December 31, 2010, the Company may have to continue to pay royalties until such time as the aggregate amount of royalties paid pursuant to the agreement reaches CDN$20,540. Under the agreement, the Company is committed to spend a specified amount on research and development from the date of regulatory approval to December 31, 2014. | |||
The Company is party to research and license agreements under which it has obtained rights to use certain technologies to develop certain product candidates. These agreements impose various milestones, commercialization, sublicensing, royalty and other payment, insurance, indemnification and other obligations and are subject to certain reservations of rights. | |||
The Company is a party to a collaboration agreement with Centocor for eprodisate (KIACTATM), under which Neurochem is responsible for the regulatory activities in the United States and in Europe up to approval, as well as for global manufacturing activities. | |||
The Company outsources clinical trials in the normal course of business. As at December 31, 2007, the Company’s future obligations with respect to these clinical trial agreements amount to $3,732 (2006 — $16,615). | |||
(c) | Management services agreement: | ||
The payments under a management services agreement with Picchio International Inc. (Picchio International), a company related to a shareholder, director and officer (see note 15 (a)) are $2,317 in 2008. |
30
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
14. | Commitments and contingencies (continued): |
(d) | Guarantees: | ||
The Company is contingently liable for letters of credit, see note 6. The Company has not recorded a liability with respect to the guarantees, as the Company does not expect to make any payments for these items. The Company has determined that the fair value of the non-contingent obligations requiring performance under the guarantees in the event that specified events or conditions occur approximate the cost of obtaining the letters of credit. |
15. Related party transactions:
(a) | Under the terms of a management services agreement entered into in March 2003, as amended, with Picchio International, the Company recorded a management fee of $2,343 for the year ended December 31, 2007 (2006 — $2,164; 2005 — $1,981). During the year ended December 31, 2007, the Company paid $848 of performance based fees which was accrued as at December 31, 2006. | ||
In 2004, the Company entered into an agreement to issue shares to the Chief Executive Officer. See note 11 (d). | |||
(b) | The Company paid Parteq, a company related to a director, the following amounts in the normal course of operations: |
Years ended: | ||||
December 31, 2007 | $ | 23 | ||
December 31, 2006 | 27 | |||
December 31, 2005 | 31 | |||
As indicated in note 8, the Company wrote off certain patents related to non-core technologies that reverted back to Parteq. As indicated in note 14 (b), the Company entered into an agreement with Parteq which terminated an amyloid license agreement and assigned the Amyloid Intellectual Property to the Company. | |||
(c) | In 2005, the Company entered into a lease agreement for a three-year period ending April 2008 with a company in which Picchio Pharma has an equity interest. For the year ended December 31, 2007, sub-lease revenue under the agreement amounted to $858 (2006 - $846; 2005 — $579). During 2007, the lease agreement was extended to April 2011, with gross rent of approximately $968 per year. The Company provided an indemnification to that company should it be required to vacate its subleased premises by the landlord prior to the expiration of the lease. At December 31, 2007, Neurochem had an amount receivable of $19 (2006 — $19) with this company. In addition, Neurochem had amounts receivable of $2 (2006 — $22) from other companies in which Picchio Pharma has an equity interest. |
31
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
15. | Related party transactions (continued): |
(d) | In March 2006, as disclosed in note 4 (a), the Company invested an additional amount of $1,464 in Innodia Holding, a company in which Picchio Pharma has an equity interest. In addition, during 2006, the Company entered into an amendment agreement with Innodia amending the May 2003 license agreement, which granted Innodia an exclusive worldwide license under certain intellectual property relating to diabetes. |
These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. |
16. | Income taxes: |
(a) | Details of the components of income taxes are as follows: |
Year ended | Year ended | Year ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2007 | 2006 | 2005 | ||||||||||
Loss before income taxes: | ||||||||||||
Canadian operations | $ | (22,150 | ) | $ | (12,290 | ) | $ | (12,702 | ) | |||
Foreign operations | (59,336 | ) | (54,179 | ) | (47,025 | ) | ||||||
(81,486 | ) | (66,469 | ) | (59,727 | ) | |||||||
Basic income tax rate | 32.02 | % | 32.02 | % | 31.02 | % | ||||||
Computed income tax recovery | (26,092 | ) | (21,283 | ) | (18,527 | ) | ||||||
Adjustments in income taxes resulting from: | ||||||||||||
Non-recognition of losses and other deductions | 6,915 | 2,603 | 12,185 | |||||||||
Difference in tax rate of a foreign subsidiary | 16,529 | 15,428 | 8,773 | |||||||||
Non-deductible stock option expense | 1,331 | 1,108 | 1,193 | |||||||||
Non-taxable portion of gain on sale of property | — | — | (2,658 | ) | ||||||||
Permanent differences and other | 1,317 | (6 | ) | (966 | ) | |||||||
Impact of future changes in enacted rates: | ||||||||||||
(Increase) decrease in future tax asset | 2,856 | (58 | ) | 7,658 | ||||||||
Increase (decrease) in valuation allowance | (2,856 | ) | 2,208 | (7,658 | ) | |||||||
$ | — | $ | — | $ | — | |||||||
32
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
16. | Income taxes (continued): |
(b) | Net future tax assets: | ||
The future tax assets and liabilities at December 31, 2007 and 2006 are as follows: |
2007 | 2006 | |||||||
Future tax assets: | ||||||||
Patent costs | $ | 9,677 | $ | 7,829 | ||||
Unclaimed scientific research and experimental development expenditures for tax purposes | 21,456 | 13,523 | ||||||
Deferred gain on sale of property | 4,638 | 5,239 | ||||||
Share issue costs | 1,352 | 1,443 | ||||||
Net operating losses of a foreign subsidiary | 7,910 | 5,051 | ||||||
Long-term investment | 1,259 | 1,215 | ||||||
Convertible notes | — | 225 | ||||||
Other | 837 | 241 | ||||||
47,129 | 34,766 | |||||||
Less: valuation allowance | (45,382 | ) | (33,794 | ) | ||||
1,747 | 972 | |||||||
Future tax liabilities: | ||||||||
Property and equipment | (841 | ) | (889 | ) | ||||
Deferred financing fees | (59 | ) | (83 | ) | ||||
Convertible notes | (847 | ) | — | |||||
Net future tax assets | $ | — | $ | — | ||||
In assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion or all of the future income tax assets will be realized. The ultimate realization of future tax assets is dependent upon the generation of future taxable income and/or tax planning strategies. Since the Company is a development stage enterprise, the generation of future taxable income is dependent on the successful commercialization of its products and technologies. | ||
(c) | The Company has the following unclaimed deductions available to reduce future taxable income in Canada: |
Federal | Quebec | |||||||
Research expenditure pool (no expiry) | $ | 93,252 | $ | 38,341 | ||||
33
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
16. | Income taxes (continued): |
(c) (continued) | |||
The Company also has approximately $15,207 in federal research investment tax credits that can be used to reduce future federal taxes payable and which expire as follows: |
2014 | $ | 2,074 | ||
2015 | 4,145 | |||
2026 | 5,006 | |||
2027 | 3,982 | |||
$ | 15,207 | |||
(d) | The Company has non-capital losses carried forward in a foreign subsidiary which are available to reduce future years’ taxable income of that subsidiary. These expire as follows: |
2011 | $ | 46,752 | ||
2012 | 51,605 | |||
2013 | 63,775 | |||
2014 | 74,875 | |||
$ | 237,007 | |||
17. | Loss per share: | |
The reconciliation between basic and diluted loss per share is as follows: |
Year ended | Year ended | Year ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2007 | 2006 | 2005 | ||||||||||
Basic weighted average number of common shares outstanding | 44,030,474 | 38,654,063 | 35,104,342 | |||||||||
Basic net loss per share | $ | (1.85 | ) | $ | (1.72 | ) | $ | (1.70 | ) | |||
Diluted loss per share was not presented as the effect of options, warrants and Notes would have been anti-dilutive. All outstanding options, warrants and Notes could potentially be dilutive in the future. |
34
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
18. | Statements of cash flows — supplementary disclosure: |
(a) | Cash and cash equivalents: | ||
Cash and cash equivalents consist of cash balances with banks and short-term investments: |
2007 | 2006 | |||||||
Cash balances with banks | $ | 1,925 | $ | 2,034 | ||||
Short-term investments (yielding interest between 4.18% to 4.75% (December 31, 2006: 4.32% to 5.31%)) | 9,038 | 10,124 | ||||||
$ | 10,963 | $ | 12,158 | |||||
(b) | Interest and income taxes: |
Year ended | Year ended | Year ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2007 | 2006 | 2005 | ||||||||||
Cash paid in the year for: | ||||||||||||
Interest | $ | 3,367 | $ | — | $ | 212 | ||||||
Income tax | — | — | — | |||||||||
(c) | Non-cash transactions: |
Year ended | Year ended | Year ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2007 | 2006 | 2005 | ||||||||||
Additions to property and equipment and patents included in accounts payable and accrued liabilities at year-end | $ | 404 | $ | 332 | $ | 1,136 | ||||||
35
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
19. | Segment disclosures: |
(a) | Business segment: | ||
The Company operates in one business segment, the research, development and commercialization of innovative therapeutics. The Company’s operations are conducted principally in Canada and Europe. | |||
(b) | Property and equipment and intangible assets (patents) by geographic area are as follows: |
2007 | 2006 | |||||||
Canada | $ | 3,801 | $ | 3,841 | ||||
Europe | 6,195 | 5,151 | ||||||
$ | 9,996 | $ | 8,992 | |||||
(c) | Major customers: | ||
All revenues recognized in 2007, 2006 and 2005 were derived from one customer under the collaboration agreement referred to in note 5. |
20. | Financial instruments: |
(a) | Fair value disclosure: | ||
Fair value estimates are made as of a specific point in time, using available information about the financial instrument. These estimates are subjective in nature and often cannot be determined with precision. | |||
The Company has determined that the carrying value of its short-term financial assets and liabilities, including cash and cash equivalents, sales taxes and other receivables, as well as accounts payable and accrued liabilities, approximates their fair value because of the relatively short periods to maturity of these instruments. Refer to note 6 for restricted cash. The fair value of convertible notes is estimated based on discounting expected future cash flows at the discount rates which represent borrowing rates presently available to the Company for instruments with similar terms and maturity. At December 31, 2007, the fair values of long-term financial liabilities were as follows: |
2007 | 2006 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
amount | value | amount | value | |||||||||||||
Financial liabilities included in long-term liabilities | $ | 118 | $ | 118 | $ | 71 | $ | 71 | ||||||||
Convertible notes | 35,421 | 21,182 | 33,650 | 33,650 | ||||||||||||
36
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
20. | Financial instruments (continued): |
(a) | Fair value disclosure (continued): | ||
Marketable securities are comprised of fixed income instruments with a high credit rating (not less than R1-mid rating) as rated by Dominion Board Rating Service (DBRS). As at December 31, 2007, the weighted average effective interest rate of the marketable securities is approximately 4.61% (2006 — 5.02%). The fair market value of the marketable securities amounts to $47,709 as at December 31, 2007 (2006 — $36,600). | |||
(b) | Credit risk: | ||
Credit risk results from the possibility that a loss may occur from the failure of another party to perform according to the terms of the contract. The Company regularly monitors the credit risk exposure and takes steps to mitigate the likelihood of these exposures from resulting in actual loss. | |||
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, marketable securities and restricted cash. The Company invests cash with major North American and European financial institutions. The Company has investment policies that are designed to provide for the safety and preservation of principal, the Company’s liquidity needs and yields that are appropriate. Authorized investments include bankers’ acceptances, bearer deposit notes, corporate and government bonds, certificates of deposit, commercial paper and treasury bills, and shall not exceed 10% per issuer, subject to certain exceptions. | |||
Refer to note 6 for credit risk related to restricted cash. | |||
(c) | Foreign currency risk management: | ||
A portion of the Company’s expenses, are denominated in Canadian dollars. This results in financial risk due to fluctuations in the value of the US dollar relative to the Canadian dollar. The Company does not use derivative financial instruments to reduce its foreign exchange exposure. Fluctuations in foreign exchange rates could cause unanticipated fluctuations in the Company’s operating results. | |||
(d) | Interest rate risk: | ||
The Company’s exposure to interest rate risk is as follows: |
Cash and cash equivalents | Short-term fixed interest rate | |
Marketable securities | Short-term fixed interest rate | |
Convertible notes | Fixed interest rate |
37
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
21. | Subsequent events: | |
On February 20, 2008, the Company’s Board of Directors approved the following transactions: | ||
(a) The issuance of 2,445,000 options to purchase common shares to be issued under the Stock Option Plan of the Company. The option price per share will be determined based on the weighted average trading price of common shares for the five days preceding the date of grant during which the common shares were traded on the Toronto Stock Exchange. | ||
(b) The Company renewed the management services agreement entered into with Picchio International Inc., referred to in note 15 (a), to November 30, 2008. | ||
(c) The Company entered into an amendment with respect to the equity line of credit (ELOC) facility. The term of the ELOC facility has been extended to February 2010. The minimum draw-down obligation by the Company has been reduced to $15,000 over the term. The maximum amount of each monthly draw-down is limited to the lower of $6,000 or 12.5% of the volume-weighted price calculation of the common shares at the time of draw-down. The common shares will be issued at a discount of 4.0% to market price if the volume-weighted average price (VWAP) per share is $6 or higher, and 7% if the VWAP per share is lower than $6 at the time of draw-down. | ||
(d) The name-change from Neurochem to BELLUS HealthTM, pending shareholder approval at the next annual meeting. |
38