Exhibit 99.1
Management discussion and analysis of Liminal BioSciences Inc. (formerly Prometic Life Sciences Inc.)
December 31, 2019
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Management Discussion & Analysis
For the quarter and year ended December 31, 2019
This Management’s Discussion and Analysis, or MD&A, is intended to help the reader to better understand Liminal BioSciences Inc.’s or Liminal or the Company operations, financial performance and results of operations, as well as the present and future business environment. This MD&A has been prepared as of March 20, 2020 and should be read in conjunction with Liminal’s consolidated financial statements for the year ended December 31, 2019. Additional information related to the Company, including the Company’s Annual form on Form 20-F (“AIF”), is available on SEDAR at www.sedar.com and EDGAR at www.sec.gov/edgar. All amounts are in thousands of Canadian dollars, except where otherwise noted.
FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are based on our management’s beliefs and assumptions and on information currently available to our management. These statements are “forward-looking” because they represent our expectations, intentions, plans and beliefs about our business and the markets we operate in and on various estimates and assumptions based on information available to our management at the time these statements are made. For example, statements around financial performance and revenues are based on financial modelling undertaken by our management. This financial modelling takes into account revenues that are uncertain. It also includes forward-looking revenues from transactions based on probability. In assessing probability, management considers the status of negotiations for any revenue generating transactions, and the likelihood, based on the probability of income, that associated costs will be incurred. Management then ranks the probabilities in such a way that only those revenues deemed highly or reasonably likely to be secured are included in the projections.
All statements other than statements of historical facts may be forward-looking statements. Without limiting the generality of the foregoing, words such as “may”, “will”, “expect”, “believe”, “anticipate”, “intend”, “could”, “might”, “would”, “should”, “estimate”, “continue”, “plan” or “pursue”, “seek”, “project”, “predict”, “potential” or “targeting” or the negative of these terms, other variations thereof, comparable terminology or similar expressions, are intended to identify forward-looking statements although not all forward-looking statements contains these terms and phrases.
Forward-looking statements are provided for the purposes of assisting you in understanding us and our business, operations, prospects and risks at a point in time in the context of historical and possible future developments and therefore you are cautioned that such information may not be appropriate for other purposes. Actual events or results may differ materially from those anticipated in these forward-looking statements if known or unknown risks affect our business, or if estimates or assumptions turn out to be inaccurate. In particular, forward-looking statements included in this MD&A include, without limitation, statements in respect to:
| • | our ability to develop, manufacture and successfully commercialize value-added pharmaceutical products; |
| • | our ability to obtain required regulatory approvals; |
| • | the availability of funds and resources to pursue research and development projects; |
| • | the successful and timely completion of our clinical trials; |
| • | our ability to take advantage of business opportunities in the pharmaceutical industry; |
| • | our reliance on key personnel, collaborative partners and other third parties; |
| • | the validity and enforceability of our patents and proprietary technology; |
| • | expectations regarding our ability to raise capital; |
| • | the use of certain hazardous materials; |
| • | the availability and sources of raw materials; |
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| • | our manufacturing capabilities; |
| • | the value of our intangible assets; |
| • | negative operating cash flow; |
| • | the outcome of any current or pending litigation against us; |
| • | uncertainties related to the regulatory process and approvals; |
| • | increasing data security costs; |
| • | costs related to environmental safety regulations; |
| • | competing drugs, as well as from current and future competitors; |
| • | developing products for the indications we are targeting; |
| • | market acceptance of our product candidates by patients and healthcare professionals; |
| • | availability of third-party coverage and adequate reimbursement; |
| • | general changes in economic or market conditions; |
| • | volatility of our share price; and |
| • | other risks and uncertainties, including those listed in the AIF titled “Item 3.D—Risk Factors.” |
You should refer to the section of the AIF titled “Item 3.D—Risk Factors” for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this MD&A will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
You should read this MD&A and the documents that we reference in this MD&A completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
This MD&A contains market data and industry forecasts that were obtained from industry publications. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified any third-party information. While we believe the market position, market opportunity and market size information included in this MD&A is generally reliable, such information is inherently imprecise.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this MD&A, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
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Operating and Financial Review and Prospects.
Overview
We are a clinical-stage biopharmaceutical company focused on discovering, developing and commercializing novel treatments for patients suffering from diseases related to fibrosis, including respiratory, liver and kidney diseases that have high unmet medical need. We have a deep understanding of certain biological targets and pathways that have been implicated in the fibrotic process, including fatty acid receptors such as G-protein-coupled receptor 40, or GPR40, and G-protein-coupled receptor 84, or GPR84, and peroxisome proliferator-activated receptors, or PPARs. In preclinical studies, we observed that targeting these receptors promoted normal tissue regeneration and scar resolution, including preventing the progression of, and reversing established fibrosis. We also have encouraging clinical data that we believe supports the translatability of our preclinical data observations to the clinic. We have leveraged this understanding, as well as our experience with generating small molecules, to build a pipeline of differentiated product candidates.
Our lead small molecule product candidate, fezagepras (also known as PBI-4050), is currently being developed for the treatment of idiopathic pulmonary fibrosis, or IPF, other interstitial lung diseases, or ILDs and an ultra-rare, multi-organ fibrotic disease known as Alström syndrome. Fezagepras is an anti-inflammatory and anti-fibrotic small molecule designed to modulate the activity of multiple receptors, including GPR40, GPR84, PPAR alpha and PPAR gamma.
Our lead plasma-derived product candidate, Ryplazim®, is a highly purified glu-plasminogen derived from human plasma that acts as a plasminogen replacement therapy for patients deficient in plasminogen protein. We plan to resubmit a Biologics License Application, or BLA, with the U.S. Food and Drug Administration, or FDA, in the first half of 2020 based on the results from our open-label Phase 2/3 clinical trial completed in October 2018.
Financial Performance
Amounts in tables are expressed in thousands of Canadian dollars, except per share amounts.
On July 5, 2019, we performed a 1000 to 1 share consolidation of our issued equity instruments including common shares, warrants, options and restricted stock units, or RSU. Any quantity relating to these instruments for 2018 and up to July 5, 2019 or any per unit price such as exercise prices, presented throughout this MD&A have been restated for the share consolidation. The weighted average number of shares outstanding used in the basic and diluted earnings per share, or EPS, have been retroactively adjusted to give effect to the share consolidation and the bonus element included in the rights offering, as required by IAS 33, Earnings per share, and consequently the basic and diluted earnings per share presented in this MD&A have also been adjusted.
On November 25, 2019, we completed a disposition of all our shares in Prometic Bioseparations Ltd. or PBL to Gamma Biosciences GP LLC, a subsidiary of KKR & Co. As a result of this transaction, we no longer retain any interest in PBL and its subsidiary Prometic Manufacturing Inc. or PMI and have ceased to consolidate these entities in our consolidated financial statements as of the date of the disposal. Our interest in PBL and PMI has been presented separately as “Discontinued Operations” in the current and comparative results, in accordance with the guidance under IFRS 5, Non-Current Asset Held for Sale and Discontinued Operations. Unless otherwise indicated, all financial information represents results from continuing and discontinuing operations.
Financial operations overview
Revenue
Revenues include revenues from plasma sales, milestone and licensing revenues, revenues from the rendering of research and development services and rental revenues.
Cost of sales and other production expenses
Cost of sales and other production expenses includes the cost of the inventory sold, as well as non-capitalizable overhead related to commercial inventory and inventory write-downs.
Research and development expenses
Research and development or R&D expenses comprise the costs to manufacture the plasma-derived product candidates, including Ryplazim®, used in pre-clinical studies, clinical trials, and supplied to clinical trial patients and certain other patients in connection with expanded access programs, including on a named patient basis and via a compassionate use programs until Ryplazim® is commercially approved and available, if ever, and for the development of our production processes for Ryplazim® in preparation of the resubmission of the BLA. It also includes the cost of product candidates used in our small molecule clinical trials such as fezagepras, the cost of external consultants supporting the clinical trials and pre-clinical studies, employee compensation and other operating expenses involved in research and development activities.
Administration, selling and marketing expenses
Administration, selling and marketing expenses mainly consist of salaries and benefits related to our executive, finance, human resources, business development, legal, intellectual property, and information technology support functions. Professional fees reported under administrative expenses mainly include legal fees, accounting fees, audit fees, financial printer fees and fees for taxation advisory. It also includes operating expenses such as insurance costs, office expenses, and travel costs pertaining to the administration, selling and marketing activities.
Selling and marketing expenses include costs associated with managing our commercial activities as we prepare for our first commercial launch.
Bad debt expense
For trade receivables, we apply the simplified approach permitted by IFRS 9, Financial instrument or IFRS 9, which requires lifetime expected losses to be recognized from initial recognition of the receivables. Such expected losses are recognized in the statement of operations as bad debt expense.
Loss (gain) on foreign exchange
Gain or loss on foreign exchange includes the effects of foreign exchange variations on monetary assets and liabilities denominated in foreign currencies between the rates at which they were initially recorded at in the functional currency at the date of the transaction and when they are retranslated at the functional currency spot rate of exchange at the reporting date. All differences are included in the consolidated statement of operations.
Finance costs
Finance costs mainly includes interest expense from the long-term debt and from the lease liabilities following the adoption of IFRS 16, Leases or IFRS 16 and banking charges. Finance costs are presented net of interest income which primarily results from the interest earned on the cash and cash equivalents we hold.
Loss (gain) on extinguishments of liabilities
When the terms of our long-term debt are modified significantly, the then existing debt is considered extinguished and the carrying amount of the debt before modification is derecognized, and the fair value of the modified debt is recognized. The difference is recorded as a loss (gain) on extinguishment of liabilities. Deferred financing fees carried on the statement of financial position that pertain to the pre-modified debt are expensed immediately and are also included in the loss or gain.
Change in fair value of financial instruments measured at fair value through profit or loss
Fair value increases and decreases on financial instruments measured at fair value through profit or loss are presented here. Over the past three years, this caption includes the changes in fair values of the convertible debt, investments in equity and the warrant liability.
Impairment losses
Impairment losses includes impairments recorded on capital and intangible assets.
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Share of losses of an associate
Our pro rata share of the losses incurred by an associate are recognized in the profit and loss. An associate is an entity over which we exercise significant influence.
Income tax expense
Income tax expense includes the current tax expense that will be payable to or collectable from the taxation authorities in the various jurisdiction in which we operate. This includes the U.K. small and medium enterprise R&D tax credits we were eligible for until 2018 inclusively. Income tax expense also includes deferred income tax expense and recoveries. Deferred income tax assets are recognized to the extent that it is probable that future tax profits will allow the deferred tax assets to be recovered.
Discontinued operations
Following the sale of two of our subsidiaries previously included in our bioseparations segment, we have restated the prior periods to remove the impact of those operations from the all lines in the financial statements (revenues, cost of sales and production cost, R&D and administration, selling and marketing being the lines most impacted) and have reclassified those results to the discontinued operations line in the financial statement. The amounts showing in the discontinued operations line do not equal the results reported in prior periods for the bioseparation segment since the ownership of one subsidiary that was part of this segment was not sold and since certain of the corporate expenses that were previously allocated to the segment were not reclassified in the results of discontinued operations if those cost remained going forward.
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Operating Results
Comparison of years ended December 31, 2019, 2018 and 2017
The consolidated statements of operations for the year ended December 31, 2019 compared to the corresponding periods in 2018 and 2017 are presented in the following tables:
| | Year ended December 31 | | Change | |
| | 2019 | | | 2018 | | | 2017 | | | 2019 vs 2018 | | | 2018 vs 2017 | |
Revenues | | $ | 4,904 | | | $ | 24,633 | | | $ | 22,313 | | | $ | (19,729 | ) | | $ | 2,320 | |
| | | | | | | | | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | | | | | | | | | |
Cost of sales and other production expenses | | | 2,763 | | | | 25,707 | | | | 3,689 | | | | (22,944 | ) | | | 22,018 | |
Research and development expenses | | | 75,114 | | | | 84,858 | | | | 93,523 | | | | (9,744 | ) | | | (8,665 | ) |
Administration, selling and marketing expenses | | | 45,283 | | | | 29,448 | | | | 29,563 | | | | 15,835 | | | | (115 | ) |
Bad debt expense | | | - | | | | - | | | | 20,491 | | | | - | | | | (20,491 | ) |
Loss (gain) on foreign exchange | | | (1,451 | ) | | | 4,696 | | | | (781 | ) | | | (6,147 | ) | | | 5,477 | |
Finance costs | | | 14,056 | | | | 22,041 | | | | 7,889 | | | | (7,985 | ) | | | 14,152 | |
Loss (gain) on extinguishments of liabilities | | | 92,374 | | | | (33,626 | ) | | | 4,191 | | | | 126,000 | | | | (37,817 | ) |
Change in fair value of financial instruments measured at fair value through profit or loss | | | (1,140 | ) | | | 1,000 | | | | - | | | | (2,140 | ) | | | 1,000 | |
Impairment losses | | | 12,366 | | | | 149,952 | | | | - | | | | (137,586 | ) | | | 149,952 | |
Share of losses of an associate | | | - | | | | 22 | | | | - | | | | (22 | ) | | | 22 | |
Net loss from continuing operations before taxes | | $ | (234,461 | ) | | $ | (259,465 | ) | | $ | (136,252 | ) | | $ | 25,004 | | | $ | (123,213 | ) |
Income tax expense (recovery) from continuing operations: | | | | | | | | | | | | | | | | | | | | |
Current | | | (348 | ) | | | (5,822 | ) | | | (2,691 | ) | | | 5,474 | | | | (3,131 | ) |
Deferred | | | 111 | | | | (13,815 | ) | | | (11,611 | ) | | | 13,926 | | | | (2,204 | ) |
| | | (237 | ) | | | (19,637 | ) | | | (14,302 | ) | | | 19,400 | | | | (5,335 | ) |
Net loss from continuing operations | | $ | (234,224 | ) | | $ | (239,828 | ) | | $ | (121,950 | ) | | $ | 5,604 | | | $ | (117,878 | ) |
| | | | | | | | | | | | | | | | | | | | |
Discontinued operations, net of taxes | | | | | | | | | | | | | | | | | | | | |
Gain on sale of subsidiaries | | | 26,346 | | | | - | | | | - | | | | 26,346 | | | | - | |
Net income from discontinued operations | | | 1,125 | | | | 1,932 | | | | 1,914 | | | | (807 | ) | | | 18 | |
Net loss | | $ | (206,753 | ) | | $ | (237,896 | ) | | $ | (120,036 | ) | | $ | 31,143 | | | $ | (117,860 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) attributable to: | | | | | | | | | | | | | | | | | | | | |
Non-controlling interests - continuing operations | | | (1,044 | ) | | | (42,530 | ) | | | (10,305 | ) | | | 41,486 | | | | (32,225 | ) |
Owners of the parent | | | | | | | | | | | | | | | | | | | | |
- Continuing operations | | | (233,180 | ) | | | (197,298 | ) | | | (111,645 | ) | | | (35,882 | ) | | | (85,653 | ) |
- Discontinued operations | | | 27,471 | | | | 1,932 | | | | 1,914 | | | | 25,539 | | | | 18 | |
| | | (205,709 | ) | | | (195,366 | ) | | | (109,731 | ) | | | (10,343 | ) | | | (85,635 | ) |
Net loss | | $ | (206,753 | ) | | $ | (237,896 | ) | | $ | (120,036 | ) | | $ | 31,143 | | | $ | (117,860 | ) |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) per share | | | | | | | | | | | | | | | | | | | | |
Attributable to the owners of the parent basic and diluted: | | | | | | | | | | | | | | | | | | | | |
From continuing operations | | $ | (14.52 | ) | | $ | (238.28 | ) | | $ | (140.26 | ) | | $ | 223.77 | | | $ | (98.03 | ) |
From discontinued operations | | | 1.71 | | | | 2.33 | | | | 2.40 | | | | (0.62 | ) | | | (0.07 | ) |
Total loss per share | | $ | (12.81 | ) | | $ | (235.95 | ) | | $ | (137.85 | ) | | $ | 223.14 | | | $ | (98.10 | ) |
Weighted average number of outstanding shares (in thousands) | | | 16,062 | | | | 828 | | | | 796 | | | | 15,234 | | | | 32 | |
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Revenues from continuing operations
The following tables provides the breakdown of total revenues from continuing operations by source of revenue for the year ended December 31, 2019 compared to the corresponding periods in 2018 and 2017:
| | Year ended December 31 | | Change | |
| | 2019 | | | 2018 | | | 2017 | | | 2019 vs 2018 | | | 2018 vs 2017 | |
Revenues from the sale of goods | | $ | 4,734 | | | $ | 23,874 | | | $ | 1,469 | | | $ | (19,140 | ) | | $ | 22,405 | |
Milestone and licensing revenues | | | - | | | | - | | | | 19,724 | | | | - | | | | (19,724 | ) |
Revenues from the rendering of services | | | 34 | | | | 260 | | | | 120 | | | | (226 | ) | | | 140 | |
Rental revenue | | | 136 | | | | 499 | | | | 1,000 | | | | (363 | ) | | | (501 | ) |
| | $ | 4,904 | | | $ | 24,633 | | | $ | 22,313 | | | $ | (19,729 | ) | | $ | 2,320 | |
Revenues in 2019 and 2018 were mainly driven by sales of plasma while revenues in 2017 were mainly driven by milestone and licensing revenues.
The decrease of $19.1 million in revenues from the sale of goods during the year ended December 31, 2019 compared to the corresponding period in 2018, and the increase of $22.4 million during the year ended December 31, 2018 compared to the corresponding period in 2017, are mainly due to the sales of excess normal source plasma inventory in 2018.
We had this excess normal source plasma inventory in 2018, as a result of the change in production forecasts due to the complete response letter, or CRL, from the FDA, following the submission of our BLA for Ryplazim®. Since then, we reduced our plasma purchasing commitments and the sales of excess normal source plasma has been much lower in 2019 at $0.4 million for the year ended December 31, 2019 compared to $22.9 million in 2018. We did not sell normal source plasma in 2017.
The decrease from the sales of normal source plasma in the year ended December 31, 2019 was partially offset by an increase in sales of specialty plasma collected at our plasma collection center by $3.7 million compared to the year ended December 31, 2018. The sales of specialty plasma were at similar levels in the year ended December 31, 2018 compared to the corresponding period in 2017.
In the year ended December 31, 2017, we recognized revenues of $19.7 million, generated by the small molecule therapeutics segment and pertaining to a licensing agreement signed with Jiangsu Renshou Pharmaceutical Co, Ltd. or JRP an affiliate of Shenzhen Royal Asset Management Co., LTD or SRAM, regarding the licensing of the Chinese rights to our small molecules fezagepras, PBI-4547 and PBI-4425. Having not received the licensing and milestone revenues within the specified payment terms, we opted to terminate the licensing agreement in March 2018, thereby resulting in the return of all the rights previously conferred under the licensing agreement back to us.
Cost of sales and other production expenses
Cost of sales and other production expenses includes the cost of the inventory sold, as well as non-capitalizable overhead related to commercial inventory and inventory write-downs.
Cost of sales and other production expenses during the year ended December 31, 2019 decreased by $22.9 million compared to the corresponding period in 2018. Cost of sales and other production expenses during the year ended December 31, 2018 increased by $22.0 million compared to the corresponding period in 2017. These changes mainly reflect the varying volumes of normal source plasma sold. Margins were higher during the year ended December 31, 2019 due to the increase in the sales of the specialty plasma compared to 2018 and 2017. In 2018 the volume of sales was mostly driven by the normal source plasma which generated low margins.
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Research and development expenses
The R&D expenses for the year ended December 31, 2019 compared to the same periods in 2018 and 2017, broken down into its two main components, are presented in the following tables:
| | Year ended December 31 | | Change | |
| | 2019 | | | 2018 | | | 2017 | | | 2019 vs 2018 | | | 2018 vs 2017 | |
Manufacturing and purchase cost of product candidates used for R&D activities | | $ | 37,044 | | | $ | 38,667 | | | $ | 34,703 | | | $ | (1,623 | ) | | $ | 3,964 | |
Other research and development expenses | | | 38,070 | | | | 46,191 | | | | 58,820 | | | | (8,121 | ) | | | (12,629 | ) |
Total research and development expenses | | $ | 75,114 | | | $ | 84,858 | | | $ | 93,523 | | | $ | (9,744 | ) | | $ | (8,665 | ) |
R&D expenses include the cost to manufacture plasma-derived product candidates and small molecule product candidates for use in clinical trials, to supply to clinical trial patients and certain other patients in connection with expanded access programs, including on a named patient basis and via a compassionate use programs until Ryplazim® is commercially approved and available, if ever, and for the development of our production processes for Ryplazim® in preparation for the resubmission of the BLA. In 2018 and 2019, there was no commercial production of plasma-derived product candidates we focused on addressing comments received from the FDA in the CRL received in March 2018 and therefore, the cost of manufacturing was classified as R&D expenses. In 2017, some of the plasminogen work in progress inventory was capitalized as part of the inventories carried at December 31, 2017 on the expectation that it would be used for commercial purposes but then it was used in 2018 for processing test runs and to supply participants in the plasminogen congenital deficiency clinical trial and was expensed in R&D during the year.
The plasma-derived product candidates are produced at the Laval plant and the Winnipeg contract manufacturing organization or CMO while the small molecule product candidates are manufactured by third party CMOs. The manufacturing and purchase cost of these product candidates for the year ended December 31, 2019 decreased by $1.6 million compared to the corresponding period in 2018, mainly due to 1) lower expensing of inventories for the production of Ryplazim®, that are expected to be supplied to clinical trial patients and certain other patients in connection with expanded access programs, including on a named patient basis and via a compassionate use programs until Ryplazim® is commercially approved and available, if ever, or for engineering runs at our manufacturing locations, 2) a reduction in the cost for small molecule product candidates, as we did not need to purchase additional materials and 3) the lower rental costs included in R&D due to the impact of the adoption of IFRS 16 in 2019. This decrease was partially offset by an increase in employee salaries due to an increase in manufacturing headcount and an increase in share-based payments expense.
The manufacturing and purchase cost of these product candidates for the year ended December 31, 2018 increased by $4.0 million compared to the corresponding period in 2017, mainly due to the expensing of plasminogen inventory that was on hand as of the previous year end in 2018 as the timeline for the resubmission of the BLA became clearer and it became evident that a portion of the inventory capitalized in 2017 would be used for additional process testing runs while the balance would be used to supply the patients who were part of the clinical trials while awaiting FDA approval of Ryplazim®, if ever.
The decrease of $8.1 million in other R&D expenses during the year ended December 31, 2019 compared to the corresponding period in 2018 was mainly due to a reduction in spending with third parties on clinical trials and pre-clinical studies and the validation of analytical assays and in-process controls in the manufacturing of Ryplazim® amounting to $7.7 million. Clinical trial expenses in the small molecule therapeutics segment declined by $2.0 million as trials undertaken in previous years were completed or nearing their completion and as we were still in the planning stage of future potential clinical trials. Employee compensation expense increased by $2.4 million due to the increase in share-based compensation of $4.3 million, explained below, and was partially offset by a decrease in salaries expense due to a reduction of headcount of $3.0 million.
The decrease of $12.6 million in other R&D expenses during the year ended December 31, 2018 compared to the corresponding period in 2017 was mainly due to the reduction in the clinical trial and pre-clinical research expenses in both the small molecules and plasma-derived therapeutics segments and was partially offset by
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additional spending in the implementation and validation of additional analytical assays and “in-process” controls in the manufacturing of Ryplazim®.
Administration, selling and marketing expenses
The increase of $15.8 million in administration, selling and marketing expenses during the year ended December 31, 2019 compared to the corresponding period in 2018 was mainly attributable to the increase in employee compensation expense of $11.4 million, which includes an increase in share-based payments expense of $10.7 million, and is also explained by the increase in legal and audit fees of $2.7 million. This was partially offset by a decrease in consultant fees relating to marketing of products. Legal and audit fees increased in 2019 as a result of the number of complex transactions incurred and in connection with the preparation for the listing of our common shares on the Nasdaq Stock Market LLC, or the Nasdaq.
The administration, selling and marketing expense during the year ended December 31, 2018 remained relatively flat compared to the corresponding period in 2017.
Bad debt expense
There was no bad debt expense during the year ended December 31, 2019 and 2018 compared to $20.5 million for the corresponding period in 2017. The 2017 expense is due to the write-off, affecting the fourth quarter of 2017, of the amounts due from Jiangsu Renshou Pharmaceutical Co, Ltd or JRP in regards to a license agreement. Since we did not receive the licensing and milestone revenues within the specified payment terms, we terminated the agreement in March 2018 and all the rights previously conferred under the license agreement were returned to us.
Share-based payments expense
Share-based payments expense represents the expense recorded as a result of share options and RSU issued to employees and board members. This expense has been recorded as follows in the consolidated statements of operations:
| | Year ended December 31 | | Change | |
| | 2019 | | | 2018 | | | 2017 | | | 2019 vs 2018 | | | 2018 vs 2017 | |
Cost of sales and other production expenses | | $ | 107 | | | $ | 299 | | | $ | 370 | | | $ | (192 | ) | | $ | (71 | ) |
Research and development expenses | | | 7,137 | | | | 2,295 | | | | 4,150 | | | | 4,842 | | | | (1,855 | ) |
Administration, selling and marketing expenses | | | 14,786 | | | | 4,128 | | | | 4,142 | | | | 10,658 | | | | (14 | ) |
| | $ | 22,030 | | | $ | 6,722 | | | $ | 8,662 | | | $ | 15,308 | | | $ | (1,940 | ) |
The above table includes the share-based payment expense included in both continuing and discontinued operations.
Share-based payments expense increased by $15.3 million during the year ended December 31, 2019, compared to the corresponding period in 2018.
During 2019, we made significant changes to our long-term equity incentive plan to ensure alignment with performance and building shareholder value, and attraction and retention of key employees to drive our future growth. The following important changes were made:
| • | the cancellation in June 2019 and August 2019 of the outstanding share options for active employees in return for the issuance of new vested options having an exercise price reflecting the share price at the time of the grant subject to stockholder approval; |
| • | the modification of the outstanding performance-based RSU into time-vesting RSU; and |
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| • | the issuance of the 2019 annual stock option grant to employees and executives. The vesting terms have been changed from those set in the recent years, especially at the executive level; a portion of the executive grants vested immediately while the overall vesting period was extended up to a period of 6 years. |
Some of these changes triggered an immediate or accelerated recognition of share-based compensation expense resulting in a significant impact on the results during the quarter ended June 30, 2019. Further details of these changes and their accounting impact are provided in Note 19 to the consolidated financial statements for the year ended December 31, 2019.
Share-based payments expense decreased by $1.9 million during the year ended December 31, 2018, compared to the corresponding period in 2017. This decrease is mainly explained by the fact that there were less RSU that vested during the year ended December 31, 2018 compared to the corresponding period in 2017.The RSU expense for performance based RSU can vary significantly from period to period as certain milestones are met, changes in the likelihood of product candidate approvals occur as projects advance, and the timelines to achieve the milestones before expiry become nearer.
Finance costs
Finance costs decreased during the year ended December 31, 2019 by $8.0 million compared to the corresponding period in 2018. This decrease reflects the lower level of debt during 2019 following the April 23, 2019 debt restructuring discussed further below, compared to the same period in 2018.
The adoption of the new lease standard, IFRS 16, at the beginning of 2019, under which lease liabilities are recognized in the consolidated statement of financial position for the discounted value of the future lease payments at initial adoption and with interest expense recognized over the term of each lease, contributes to the increase of finance costs in 2019. The new standard was adopted using the modified retrospective approach and as such, the 2018 figures are not restated. Previously, the embedded interest component in each lease payment was recognized as part of the lease expense included in the various functions presented in the statement of operations such as cost of sales and other production expenses, R&D, and administration, selling and marketing. The interest expense on the lease liabilities from continuing operations for the year ended December 31, 2019 was $6.4 million and is partially offset by the decline in interest expense from long-term debt.
Finance costs increased during the year ended December 31, 2018 by $14.2 million compared to the corresponding period in 2017. This increase reflects the higher level of debt during the year ended December 31, 2018 compared to the same period in 2017 reflecting the amounts drawn on pursuant to a credit facility agreement and the increase in the Original Issue Discount or OID balances, as well as the higher implicit financing rate, when considering the stated interest and the warrants issued, demanded by our lender over the years.
Loss (gain) on extinguishments of liabilities
Loss on extinguishments of liabilities was $92.4 million for the year ended December 31, 2019, mainly due to the debt restructuring agreement on April 23, 2019 with our major creditor, SALP. The debt was reduced to $10.0 million plus interest due, in exchange for the issuance of 15,050,312 common shares. The difference between the adjustment to the carrying value of the loan of $141.5 million and the amount recorded for the shares issued of $228.9 million was recorded as a loss on extinguishment of a loan of $87.4 million, this amount essentially representing the immediate recognition of the accreted interest that would have otherwise been recognized as finance costs over the years until the maturity of the long-term debt. Legal fees related to the debt restructuring of $0.6 million were also recognized as part of the loss on extinguishments of liabilities.
The shares issued in relation to the debt restructuring contained trading restrictions and accordingly, we determined that their quoted price did not fairly represent the value of the shares issued. As such, the issued shares were recorded at fair value using a market approach under a level 2 fair value measurement of $15.21
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per share, resulting in a value of the shares issued of $228.9 million. The fair value was based on a share issuance for cash on the same date with a non-related party.
The portion of the loan that was not settled was modified into an interest-bearing loan at 10% stated interest, payable quarterly. The modification of the terms was treated as an extinguishment of the previous loan and the reissuance of a new loan for accounting purposes. The difference between the carrying amount of the extinguished loan of $4.7 million and the fair value of the new loan of $8.5 million was recorded as a loss on debt extinguishment of $3.9 million. The new loan has a higher fair value mainly because the spread between the effective interest rate of 15.05% and the stated interest rate of the amended loan of 10% is smaller compared to the previous spread between the implicit rate used to calculate the face value and the effective interest rate of the loan before modification of 20.06%. The recorded loss represents an immediate recognition of a portion of the unrecognized interest expense on the old loan.
As part of the cost to complete the debt restructuring, the 168,735 warrants held by SALP (Warrants #1, 2, 8 and 9) were cancelled and replaced with an equivalent number of Warrants #10 that will be exercisable at an exercise price of $15.21 per common share and expire on April 23, 2027. The increase of $0.4 million in the fair value of the replacement warrants compared to those cancelled was recorded as part of the loss on extinguishment of liabilities.
The debt restructuring resulted in a recording of a loss on extinguishment of liabilities of $92.3 million; the impacts of the different aspects of this transaction and other elements included in the loss on extinguishments of liabilities in the consolidated statements of operations are detailed in the following table:
Loss on extinguishment of liabilities due to April 23, 2019 loan modification | | | | |
Comprising the following elements: | | | | |
Debt to equity conversion | | $ | 87,379 | |
Expensing of financing fees on loan extinguishment | | | 653 | |
Extinguishment of previous loan | | | (4,667 | ) |
Recognition of modified loan | | | 8,521 | |
Expensing of increase in the fair value of the warrants | | | 408 | |
Loss on extinguishment of liabilities due to April 23, 2019 loan modification | | $ | 92,294 | |
Loss on extinguishment of liabilities to suppliers | | | 80 | |
Loss on extinguishments of liabilities | | $ | 92,374 | |
Gain on extinguishments of liabilities was $33.6 million for the year ended December 31, 2018. On November 14, 2018, we and the holder of our debt modified the terms of the four loan agreements subject to compliance with covenants and debt servicing obligations, to extend the maturity date of our then-existing credit facility from November 30, 2019 to September 30, 2024 and all three OID loans from July 31, 2022 to September 30, 2024. Interest on amounts outstanding on this credit facility would continue to be payable quarterly at an annual rate of 8.5% during the period of the extension. As of July 31, 2022, the OID loans would be restructured into cash paying loans bearing interest at an annual rate of 10%, payable quarterly. The outstanding face values of the OID loans at that date would become the principal amounts of the restructured loans. As additional consideration for the extension of the maturity dates, we agreed to cancel 100,117 existing warrants (Warrants #3 to 7) and issue replacement warrants to the holder of the long-term debt, bearing a term of 8 years and exercisable at a per share price equal to $1,000.00. The exact number of warrants to be granted was to be set at a number that would result in the holder of the long-term debt having a 19.99% fully-diluted ownership level of our company upon the issuance of the warrants2019. On November 30, 2018, Warrants #3 to 7 were cancelled and 128,057 warrants to purchase common shares (“Warrants #8”), representing a portion of the replacement warrants, were issued. At the end of the agreed upon measurement period for calculating the number of new warrants to be issued, we were to issue the remaining replacement warrants under a new series of warrants (“Warrants #9”), which gave the holder the right to acquire preferred shares. The holder of the long-term debt also obtained our best efforts to support the election of a second representative of the lender to on our board of directors, and the extension of the security to the royalty agreement.
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We assessed the changes made to the previous agreements and determined that the modification should be accounted for as an extinguishment of the previous loans and the recording of new loans at their fair value determined as of the date of the modification. The carrying amount of the previous loans of $155.1 million were derecognized followed by the recognition of the fair value of the modified loans of $107.7 million which were determined using a discounted cash flow model with a market interest rate of 20.1%. Any fees incurred with this transaction were expensed, including legal fees and the difference in fair value between the warrants that were cancelled, and the new warrants issued.
In addition, the fees incurred in regards of this credit facility that were previously recorded in the consolidated statement of financial position as other long-term assets and were being amortized and recognized in the consolidated statement of operations over the original term of this credit facility were expensed upon the modification.
The modification resulted in the recording of a gain on extinguishment of liabilities of $34.9 million; the impacts of the different aspects of this transaction and other elements included in the loss on extinguishments of liabilities in the consolidated statements of operations are detailed in the following table.
Gain on extinguishment of liabilities due to November 14, 2018 debt modification | | | | |
Comprising the following elements: | | | | |
Extinguishment of previous loans | | $ | (155,055 | ) |
Expensing of deferred financing fees on Credit Facility | | | 3,245 | |
Recognition of modified loans | | | 107,704 | |
Expensing of increase in the fair value of the warrants | | | 8,778 | |
Warrants proceeds | | | (10 | ) |
Expensing of legal fees incurred with the debt modification | | | 434 | |
Gain on extinguishment of liabilities due to November 14, 2018 debt modification | | $ | (34,904 | ) |
Loss on extinguishment of liabilities due to set-off of principal | | | 1,278 | |
Gain on extinguishments of liabilities | | $ | (33,626 | ) |
Netted against the above gain in 2018 were some losses on extinguishment of liabilities due to the set-off of principal. A similar loss was recorded in 2017. SALP, the holder of the long-term debt, used the set-off of principal right in the loan agreements, to settle various amounts due to us under a royalty purchase agreement in 2018 and its participation in a private placement in 2017.
In August and September 2018, the face value of the second OID loan was reduced by $3.9 million from $21.2 million to $17.3 million, in settlement of $3.9 million due by SALP under the royalty agreement. The carrying amount of the loan was reduced by $2.6 million and a loss on extinguishment of liabilities of $1.3 million.
On July 6, 2017, the face value of the third OID loan was reduced by $8.6 million, from $39.2 million to $30.6 million. The reduction of $8.6 million is equivalent to the value of 5,045 common shares issued at the agreed price of $1,700.00. The difference of $4.2 million between the adjustment to the carrying value of the loan of $4.1 million and the amount recorded for the shares issued of $8.3 million was recognized as a loss on extinguishment of liabilities.
Change in fair value of financial instruments measured at fair value through profit or loss
In November 2018, we issued Warrant #9 to SALP as part of a completed financing transaction with SALP. These warrants did not meet the definition of an equity instrument and were treated as a derivative instrument which was measured at recurring fair value. The change in fair value of the warrant liability, recognized in the consolidated statements of operations, during the year ended December 31, 2019 and 2018 was a gain of $1.1million and $0.2 million respectively.
In 2015, we entered into research and development agreements as well as a license agreement with ProThera Biologics Inc., or ProThera to develop, manufacture and market Inter-alpha Inhibitor Proteins or IaIP, for the treatment of two indications, one of which is Necrotizing Enterocolitis. In 2016 and 2018, we invested in a
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convertible debt instrument of ProThera. During the year ended December 31, 2018, the decision was made to halt the development of IaIP and to focus on Ryplazim®. Accordingly, a $1.2 million loss was recorded on the reduction in the fair value of our investment in the convertible debt of ProThera. In 2019, the license agreement, development agreements, the convertible debt instrument was terminated.
Impairment losses
2019
During the year 2019, we, headed by our new Chief Executive Officer, have been evaluating our intellectual property and the related market opportunities in the context of our financial situation and have made further decisions about the areas we will or will not pursue.
One of these decisions affecting our plasma-derived therapeutics segment, was to no longer pursue other indications relating to the human-plasma protein plasminogen. As such, we believe we have ensured sufficient resources to complete and re-submit a BLA for Ryplazim® for the treatment of congenital plasminogen deficiency to the FDA, and to secure ongoing manufacturing supply. We have ceased all R&D activities in the plasma-derived therapeutics segment not relating to our Ryplazim®. Because of this, our long-term production forecasts for plasminogen were reduced and one of our planned manufacturing facilities and a technical transfer facility are no longer required. We also intend to close our R&D facility in Rockville, MD by the end of 2020. Consequently, the capital and intangible assets in the plasma-derived therapeutics segment that were no longer to be used as originally planned were reviewed for impairment and written-down to their net recoverable value determined as the fair value less cost of disposal using a market approach. We assessed the resale value of the property, plant and equipment, the licenses and patents in their present condition, less cost of disposal and consequently, recorded an impairment of $7.1 million and $4.5 million on capital assets and intangible assets, respectively, for the year ended December 31, 2019.
In reviewing our portfolio of compounds in the small molecule therapeutics segment, we identified compounds that where not within the areas of fibrosis in which we intend to focus and evaluated the net recoverable value of those related patents as nil, determined as the fair value less cost of disposal using a market approach. An impairment on intangible assets of $0.6 million was recognized for the year ended December 31, 2019.
As a result of the sale of two of our subsidiaries previously included in our bioseparations segment, some intellectual property including patents that we retained are no longer expected to be developed. We evaluated the net recoverable value of those patents as nil, using a fair value less cost of disposal using a market approach. An impairment on intangible assets of $0.1 million was recognized for the year ended December 31, 2019.
2018
As a result of various events during 2018, including: 1) the delay of the expected commercial launch of Ryplazim® following the identification by the FDA of a number of changes required in the Chemistry, Manufacturing and Controls, or CMC section of our BLA submission for Ryplazim® for the treatment of congenital plasminogen deficiency, 2) our limited financial resources since the fourth quarter of 2018, which significantly delayed manufacturing expansion plans as we focused our resources on the resubmission of the Ryplazim® BLA with the FDA; 3) the recognition of the larger than anticipated commercial opportunities for Ryplazim®, if approved, and 4) the change in executive leadership in the fourth quarter of 2018, which realigned our strategic plans in the fourth quarter of 2018 to focus all available plasma-derived therapeutic segment resources on the manufacturing and development of Ryplazim® for the treatment of congenital plasminogen deficiency and other indications.
These changes and their various impacts prompted us to perform an impairment test of the intravenous Immunoglobulin, or IVIG, cash generating unit, or CGU, which includes assets such as the licenses held by NantPro Biosciences, LLC and Prometic Biotherapeutics Inc., manufacturing equipment located at our Canadian manufacturing facilities and the CMO facility at December 31, 2018, and to review whether other assets pertaining to follow-on proteins might be impaired. The license held by NantPro allows it to market and offer
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for sale in the U.S., IVIG manufactured using the PPPS process for the treatment of primary immunodeficiency, if approved. NantPro is our subsidiary.
In regards to the IVIG CGU, the substantial work, time and investment required and limited resources available to complete a robust CMC package for IVIG prior to filing a BLA, and the reduction of the forecasted IVIG production capacity at all plants would significantly delay the commercialisation of IVIG compared to previous timelines. As a result, cash inflows beginning beyond 2023 were not considered in the calculation of the value in use impairment test due to the inherent uncertainty in forecasting cash flows beyond a five-year period. The value in use for the IVIG CGU was therefore $nil. Management also evaluated the fair value less cost to sell and determined that this value also approximated $nil.
Consequently, impairment losses for the totality of the carrying amounts of the NantPro Biosciences, LLC license and a second license acquired in January 2018, giving the rights to use Masterplasma IVIG clinical data and the design plans for a plant with a production capacity in excess of current needs, of $141.0 million and $1.6 million, respectively, were recorded. An impairment was also recorded on the option to purchase equipment in the amount of $0.7 million since we determined the likelihood of exercising this option was low in view of the manufacturing and production plans. Finally, an impairment of $5.7 million was recorded on IVIG production equipment to reduce their value to the fair value less cost to sell.
We also reviewed the carrying amount of other assets pertaining to ProThera and the development of IaIP we acquired, since the resources for further advancement of these assets were limited due to the focus on Ryplazim®. As a result, we recorded an impairment on our investment in an associate of $1.2 million. We also considered the uncertainty of future cash flows for product candidates that have not yet commenced Phase 1 clinical trials in making this estimate.
Income taxes
Current income tax recovery during the year ended December 31, 2019, decreased by $5.5 million compared to the corresponding period in 2018. The decrease during the year ended December 31, 2019 was primarily because we were no longer eligible for certain R&D tax credits in the U.K. following the change in control that resulted after our debt restructuring in April 2019 and therefore no income tax recovery was recorded during the year ended December 31, 2019 on R&D expenditures incurred during the year. This was partially offset by the recognition of R&D tax credits for previous years following the resolution of tax uncertainties regarding the eligibility of certain expenses for 2018 and prior years, upon conclusion of an audit by the taxation authorities. In addition, during the year ended December 31, 2019, we recorded an income tax expense of $1.3 million following the utilization of previously unrecognized non-refundable federal R&D tax credits which were recognized in reduction of R&D expenses.
Current income tax recovery during the year ended December 31, 2018 increased by $3.1 million compared to the corresponding period in 2017. The increase was principally due to the increase in refundable R&D tax credits in the U.K.
Deferred income tax recovery in 2019 was significantly reduced to an expense of $0.1 million as we no longer recognized deferred tax assets in regards to the losses attributed to us as a partner in NantPro Biosciences, LLC since 2019 given there is no longer a balance of deferred tax liabilities against which such deferred tax assets can be recognized. In the year ended December 31, 2018 and 2017, the deferred income tax recovery recognized for NantPro Biosciences, LLC was $14.1 million and $10.7 million, respectively.
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Non-controlling interest
The non-controlling interest for the year ended December 31, 2019 compared to the same periods in 2018 and 2017, broken down into its three main components, are presented in the following table:
| | Year ended December 31 | | Change | |
| | 2019 | | | 2018 | | | 2017 | | | 2019 vs 2018 | | | 2018 vs 2017 | |
Consolidated statements of operations: | | | | | | | | | | | | | | | | | | | | |
Prometic Bioproduction Inc. | | $ | - | | | $ | (927 | ) | | $ | (4,750 | ) | | $ | 927 | | | $ | 3,823 | |
Pathogen Removal and Diagnostic Technologies Inc. | | | (713 | ) | | | (641 | ) | | | (778 | ) | | | (72 | ) | | | 137 | |
NantPro Biosciences, LLC | | | (331 | ) | | | (40,962 | ) | | | (4,777 | ) | | | 40,631 | | | | (36,185 | ) |
Total non-controlling interests | | $ | (1,044 | ) | | $ | (42,530 | ) | | $ | (10,305 | ) | | $ | 41,486 | | | $ | (32,225 | ) |
The decrease in the non-controlling interests share in the losses of $41.5 million during the year ended December 31, 2019 compared to the corresponding period in 2018 was mainly due to the impact of the impairment of the carrying amount of the NantPro license in NantPro Biosciences, LLC in 2018 on the non-controlling interest. We also acquired the full ownership of Prometic Bioproduction Inc. in April 2018 which explains why there is no longer any non-controlling interest sharing in the losses of this subsidiary in the consolidated statements of operations since that date.
Net loss from continuing operations
The net loss from continuing operations decreased by $5.6 million during the year ended December 31, 2019 compared to the corresponding period in 2018. This was mainly driven by the decrease on the impairment losses of $137.6 million in year ended December 31, 2019 compared to the corresponding period in 2018. This was partially offset by an increase of the loss on extinguishment of liabilities of $126.0 million which was principally caused by the debt restructuring that occurred in April 2019. The increase in the share-based payments expense of $15.1 million was partially offset by the decrease in other R&D expenses.
The net loss from continuing operations increased by $117.9 million during the year ended December 31, 2018 compared to the corresponding period of 2017. This was mainly driven by the impairment losses of $150.0 million recorded in year ended December 31, 2018. This was partially offset by the bad debt expense of $20.5 million recorded in 2017.
Net income from discontinued operations
Following the sale of our interests in PBL and PMI in November 2019, the results of the two subsidiaries are presented separately as discontinued operations in our current and comparative results. The net income from discontinued operations was relatively stable over the last three year representing a net income of $1.1 million, $1.9 million and $1.9 million for the years ended December 2019, 2018 and 2017 respectively. The sale of the subsidiaries generated a gain of $26.3 million that is broken down into its main components in the following table:
Fair value of the consideration received and receivable: | | | $ | 51,927 | |
Less: | | | | | |
Carrying amount of net assets sold | | | | | | | | | | (22,015 | ) |
Transaction costs | | | | (5,015 | ) |
Add: Reclassification of foreign currency translation reserve from other comprehensive income into the statement of operations | | | | 1,449 | |
Gain on sale of subsidiaries (income tax $nil) | | | $ | 26,346 | |
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Comparison of quarters ended December 31, 2019, 2018 and 2017
The consolidated statements of operations for the quarter ended December 31, 2019 compared to the same periods in 2018 and 2017 are presented in the following tables:
| | Quarter ended December 31 | | Change | |
| | 2019 | | | 2018 | | | 2017 | | | 2019 vs 2018 | | | 2018 vs 2017 | |
Revenues | | $ | 1,050 | | | $ | 3,379 | | | $ | 458 | | | $ | (2,329 | ) | | $ | 2,921 | |
| | | | | | | | | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | | | | | | | | | |
Cost of sales and other production expenses | | | 528 | | | | 3,359 | | | | 747 | | | | (2,831 | ) | | | 2,612 | |
Research and development expenses | | | 17,253 | | | | 19,191 | | | | 26,440 | | | | (1,938 | ) | | | (7,249 | ) |
Administration, selling and marketing expenses | | | 10,278 | | | | 10,165 | | | | 8,251 | | | | 113 | | | | 1,914 | |
Bad debt expense | | | - | | | | - | | | | 20,491 | | | | - | | | | (20,491 | ) |
Loss (gain) on foreign exchange | | | (205 | ) | | | 3,819 | | | | (1,518 | ) | | | (4,024 | ) | | | 5,337 | |
Finance costs | | | 1,858 | | | | 6,554 | | | | 2,621 | | | | (4,696 | ) | | | 3,933 | |
Loss (gain) on extinguishments of liabilities | | | - | | | | (34,904 | ) | | | - | | | | 34,904 | | | | (34,904 | ) |
Change in fair value of financial instruments measured at fair value through profit or loss | | | - | | | | 1,000 | | | | - | | | | (1,000 | ) | | | 1,000 | |
Impairment losses | | | 12,366 | | | | 149,952 | | | | - | | | | (137,586 | ) | | | 149,952 | |
Net loss from continuing operations before taxes | | $ | (41,028 | ) | | $ | (155,757 | ) | | $ | (56,574 | ) | | $ | 114,729 | | | $ | (99,183 | ) |
Income tax expense (recovery) from continuing operations: | | | | | | | | | | | | | | | | | | | | |
Current | | | (1,587 | ) | | | (1,887 | ) | | | (4,661 | ) | | | 300 | | | | 2,774 | |
Deferred | | | 111 | | | | (11,725 | ) | | | (7,983 | ) | | | 11,836 | | | | (3,742 | ) |
| | | (1,476 | ) | | | (13,612 | ) | | | (12,644 | ) | | | 12,136 | | | | (968 | ) |
Net loss from continuing operations | | $ | (39,552 | ) | | $ | (142,145 | ) | | $ | (43,930 | ) | | $ | 102,593 | | | $ | (98,215 | ) |
| | | | | | | | | | | | | | | | | | | | |
Discontinued operations, net of taxes | | | | | | | | | | | | | | | | | | | | |
Gain on sale of subsidiaries | | | 26,346 | | | | - | | | | - | | | | 26,346 | | | | - | |
Net income(loss) from discontinued operations | | | (1,303 | ) | | | 831 | | | | 2,284 | | | | (2,134 | ) | | | (1,453 | ) |
Net loss | | $ | (14,509 | ) | | $ | (141,314 | ) | | $ | (41,646 | ) | | $ | 126,805 | | | $ | (99,668 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) attributable to: | | | | | | | | | | | | | | | | | | | | |
Non-controlling interests - continuing operations | | | (155 | ) | | | (38,361 | ) | | | (3,367 | ) | | | 38,206 | | | | (34,994 | ) |
Owners of the parent | | | | | | | | | | | | | | | | | | | | |
- Continuing operations | | | (39,397 | ) | | | (103,784 | ) | | | (40,563 | ) | | | 64,387 | | | | (63,221 | ) |
- Discontinued operations | | | 25,043 | | | | 831 | | | | 2,284 | | | | 24,212 | | | | (1,453 | ) |
| | | (14,354 | ) | | | (102,953 | ) | | | (38,279 | ) | | | 88,599 | | | | (64,674 | ) |
Net loss | | $ | (14,509 | ) | | $ | (141,314 | ) | | $ | (41,646 | ) | | $ | 126,805 | | | $ | (99,668 | ) |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) per share | | | | | | | | | | | | | | | | | | | | |
Attributable to the owners of the parent basic and diluted: | | | | | | | | | | | | | | | | | | | | |
From continuing operations | | $ | (1.69 | ) | | $ | (125.04 | ) | | $ | (49.35 | ) | | $ | 123.35 | | | $ | (75.69 | ) |
From discontinued operations | | | 1.07 | | | | 1.00 | | | | 2.78 | | | | 0.07 | | | | (1.78 | ) |
Total loss per share | | $ | (0.62 | ) | | $ | (124.04 | ) | | $ | (46.57 | ) | | $ | 123.42 | | | $ | (77.47 | ) |
Weighted average number of outstanding shares (in thousands) | | | 23,313 | | | | 830 | | | | 822 | | | | 22,483 | | | | 8 | |
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Revenues from continuing operations
The following tables provides the breakdown of total revenues from continuing operations by source for the quarter ended December 31, 2019 compared to the corresponding periods in 2018 and 2017:
| | Quarter ended December 31 | | Change | |
| | 2019 | | | 2018 | | | 2017 | | | 2019 vs 2018 | | | 2018 vs 2017 | |
Revenues from the sale of goods | | $ | 1,016 | | | $ | 3,332 | | | $ | 221 | | | $ | (2,316 | ) | | $ | 3,111 | |
Rental revenue | | | 34 | | | | 47 | | | | 237 | | | | (13 | ) | | | (190 | ) |
| | $ | 1,050 | | | $ | 3,379 | | | $ | 458 | | | $ | (2,329 | ) | | $ | 2,921 | |
The decrease of $2.3 million in the revenues from the sale of goods during the quarter ended December 31, 2019 compared to the corresponding period in 2018 and the increase of $3.1 million during the quarter ended December 31, 2018 compared to the corresponding period in 2017 are mainly due to $3.1 million of sales of excess normal source plasma inventory that occurred in the quarter ended December 31, 2018. In 2019, this decrease was partially offset by the increase in sales of specialty plasma of $0.8 million in the quarter ended December 31, 2019 compared to the corresponding period in 2018.
Cost of sales and other production expenses
Cost of sales and other production expenses during the quarter ended December 31, 2019 decreased by $2.8 million compared to the corresponding period in 2018 while cost of sales and other production expenses during the quarter ended December 31, 2018 increased by $2.6 million compared to the corresponding period in 2017. These variations are mainly due to the sale of excess normal plasma that occurred during the quarter ended December 31, 2018 and were not replicated in the comparative period.
Research and development expenses
The R&D expenses for the quarter ended December 31, 2019 compared to the same periods in 2018 and 2017, broken down into its two main components, are presented in the following table:
| | Quarter ended December 31 | | Change | |
| | 2019 | | | 2018 | | | 2017 | | | 2019 vs 2018 | | | 2018 vs 2017 | |
Manufacturing and purchase cost of product candidates used for R&D activities | | $ | 6,592 | | | $ | 10,463 | | | $ | 10,911 | | | $ | (3,871 | ) | | $ | (448 | ) |
Other research and development expenses | | | 10,661 | | | | 8,728 | | | | 15,529 | | | | 1,933 | | | | (6,801 | ) |
Total research and development expenses | | $ | 17,253 | | | $ | 19,191 | | | $ | 26,440 | | | $ | (1,938 | ) | | $ | (7,249 | ) |
The manufacturing and purchase cost of product candidates for the quarter ended December 31, 2019 decreased by $3.9 million compared to the corresponding period in 2018, mainly due to less expensing of inventories that were expected to be supplied to clinical trial patients until Ryplazim® is commercially approved and available, if ever, and due to the lower rental costs included in R&D due to the impact of the adoption of IFRS 16 in 2019. The manufacturing and purchase cost of product candidates used for R&D activities for the quarters ended December 31, 2018 and 2017 remained stable.
The increase of $1.9 million in other R&D during the quarter ended December 31, 2019 compared to the corresponding period in 2018 was mainly due to an increase in employee compensation expenses of $1.9 million due to severance benefits following reduction of headcount. The increase in other R&D is also due to a reduction of $0.8 million in R&D tax credit being recognized against R&D cost as we reduced the amount of the credit receivable as we re-evaluated the uncertainties about the eligibility of certain expenses. This was partially offset by the reduction in spending with third parties on clinical trials and pre-clinical studies of $1.4 million. Clinical trial expenses declined as trials undertaken in previous years were completed or nearing their completion.
The decrease of $6.8 million in other R&D expenses during the quarter ended December 31, 2018 compared to the corresponding period in 2017 was mainly due to the reduction in the clinical trial and pre-clinical research expenses in both the small molecules and plasma-derived therapeutics segments which were partially offset by
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additional spending in the implementation and validation of additional analytical assays and “in-process” controls in the manufacturing of Ryplazim®.
Administration, selling and marketing expenses
The increase of $0.1 million in administration, selling and marketing expenses during the quarter ended December 31, 2019 compared to the corresponding period in 2018 was mainly attributable to the increase in the director and officer insurance following the listing of our common shares on the Nasdaq, which was partially offset by a reduction in salaries expense of $0.9 million, since , we recorded a significant severance expense with the departure of the former CEO during the quarter ended December 31, 2018. This also explains why the administration costs during this period were higher than those for the quarter ended December 31, 2017.
Share-based payments expense
Share-based payments expense represents the expense recorded as a result of share options and RSU issued to employees and board members. This expense has been recorded as follows in the consolidated statements of operations:
| | Quarter ended December 31 | | Change | |
| | 2019 | | | 2018 | | | 2017 | | | 2019 vs 2018 | | | 2018 vs 2017 | |
Cost of sales and other production expenses | | $ | 12 | | | $ | 128 | | | $ | 71 | | | $ | (116 | ) | | $ | 57 | |
Research and development expenses | | | 963 | | | | 1,008 | | | | 1,280 | | | | (45 | ) | | | (272 | ) |
Administration, selling and marketing expenses | | | 1,995 | | | | 2,603 | | | | 1,220 | | | | (608 | ) | | | 1,383 | |
| | $ | 2,970 | | | $ | 3,739 | | | $ | 2,571 | | | $ | (769 | ) | | $ | 1,168 | |
The above table includes the share-based payment expense included in both continuing and discontinued operations.
Share-based payments expense decreased by $0.8 million during the quarter ended December 31, 2019 compared to the corresponding period in 2018. The decrease is mainly due to the change in the RSU vesting period for the 2019 grant compared to previous year grants, as the 2019 RSU were issued and vested during the first half of 2019 instead of being amortized over several years, as we did in previous years. As such the expense during the fourth quarter is lower since there was less expense to recognize for unvested RSU.
Share-based payments expense increased by $1.2 million during the quarter ended December 31, 2018 compared to the corresponding period in 2017. The increase was mainly due to an additional charge of $1.2 million during the fourth quarter of 2018, in anticipation of the vesting of certain awards might be accelerated as part of termination benefits still being negotiated, for our former CEO, at the end of the year.
Finance costs
Finance costs increased significantly from 2017 to 2018 as the interest expense on the long-term debt increased until the debt restructuring on April 23, 2019. Post debt restructuring, interest expense has declined significantly as the principal amount of loans outstanding decreased to below $11.0 million. Offsetting some of this decrease in 2019 was the impact of the adoption of IFRS 16 whereby the interest expense on the lease liability was captured under finance costs.
Bad debt expense, gain on extinguishments of liabilities, change in fair value of financial instruments measured at fair value through profit or loss and impairment losses
The details regarding the transaction for the gain on extinguishment of liabilities due to debt modification, the bad debt expense, the change in fair value of financial instruments measured at fair value through profit or loss and the impairment losses and the explanation of the variances over the various periods can be found in the results of operations for the years ended December 31, 2019, 2018 and 2017.
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Income taxes
Current income tax recovery during the quarter ended December 31, 2019, decreased by $0.3 million compared to the corresponding period in 2018. The decrease was primarily because we were no longer eligible for certain R&D tax credits in the U.K. in 2019 following the change in control that resulted after our debt restructuring in April 2019. This decrease was partially offset by the revision of the amount we recorded as R&D tax credit receivable following more advanced discussions with the applicable regulatory authority eliminating certain uncertainties we previously had about the eligibility of certain expenditures. Current income tax recovery during the quarter ended December 31, 2018 decreased by $2.8 million compared to the corresponding period in 2017. The decrease was mainly due to timing of the recognition of R&D tax credits for the U.K. in 2017 which were delayed until the end of the year since we were unsure whether we would still qualify for the SME R&D tax credit until that time.
Deferred income tax recovery in 2019 was $0.1 million, as we no longer recognized deferred tax assets in regards to the losses attributed to us as a partner in NantPro Biosciences, LLC since there was no longer a balance of deferred tax liabilities against which such deferred tax assets can be recognized.
Deferred income tax recovery was $11.7 million during the quarter ended December 31, 2018 compared to $8.0 million for the corresponding period of 2017, representing an increase of $3.7 million.
During the first three quarters of 2018 and during the year ended December 31, 2017, we recorded income tax recoveries from the recognition of deferred tax assets pertaining to the unused tax losses attributable to us as a partner in NantPro. During the fourth quarter of 2017, there was a significant increase in the deferred income tax recovery recorded due to the change in the US federal income tax rate from 35% to 21%, producing a significant decrease in the deferred tax liability that was recognized in the business combination of NantPro. During the fourth quarter of 2018, following the impairment of the NantPro license, the deferred tax liability of $27.5 million for that asset was reversed and the deferred tax assets of $14.6 million relating to the unused tax losses were derecognized.
Non-controlling interest
The non-controlling interests for the quarter ended December 31, 2019 compared to the same periods in 2018 and 2017, shown by entity are presented in the following tables:
| | Quarter ended December 31 | | Change | |
| | 2019 | | | 2018 | | | 2017 | | | 2019 vs 2018 | | | 2018 vs 2017 | |
Consolidated statements of operations: | | | | | | | | | | | | | | | | | | | | |
Prometic Bioproduction Inc. | | $ | - | | | $ | (1 | ) | | $ | (1,305 | ) | | $ | 1 | | | $ | 1,304 | |
Pathogen Removal and Diagnostic Technologies Inc. | | | (92 | ) | | | (7 | ) | | | (76 | ) | | | (85 | ) | | | 69 | |
NantPro Biosciences, LLC | | | (63 | ) | | | (38,353 | ) | | | (1,986 | ) | | | 38,290 | | | | (36,367 | ) |
Total non-controlling interests | | $ | (155 | ) | | $ | (38,361 | ) | | $ | (3,367 | ) | | $ | 38,206 | | | $ | (34,994 | ) |
The increase in the non-controlling interests of $38.2 million during the quarter ended December 31, 2019 compared to the corresponding period in 2018 was mainly due to the impairment of the carrying amounts of the NantPro license in NantPro Biosciences, LLC in 2018 and its effect on the non-controlling interest. We also acquired the full ownership of Prometic Bioproduction Inc. in April 2018 which explains why there was no non‑controlling interest share in the losses recognized for this subsidiary in the consolidated statements of operations in the quarters ended December 31, 2019 and 2018. The low level of operational activities in Pathogen Removal and Diagnostic Technologies Inc. and NantPro Biosciences, LLC explain the low value of the non-controlling interests pick up in the consolidated statements of operations.
Net loss from continuing operations
The net loss from continuing operations decreased by $102.6 million during the quarter ended December 31, 2019 compared to the corresponding period in 2018. This was mainly driven by a decrease of impairment losses of $137.6 million, the reduction in finance costs due to the debt restructuring in April 2019 and the absence of
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a gain on extinguishment of liabilities of $34.9 million due to debt modification during the quarter ended December 31, 2019 as there was in the same period in 2018.
The net loss from continuing operations increased by $98.2 million during the quarter ended December 31, 2018 compared to the corresponding period in 2017. The increase was mainly generated by the impairment losses recognized in 2018 which was partially offset by the gain on extinguishment of liabilities, by a reduction in R&D in the same period and as a result of the recognition of $20.5 million bad debt expense recorded on the JRP during the quarter ended December 31, 2017.
Discontinued operations, net of taxes
The results from discontinued operations have been separated into two components to distinguish the gain we made upon the sale of the business from the results from its operations.
Net income from discontinued operations decreased by $2.1 million during the quarter ended December 31, 2019 compared to the corresponding period in 2018. This decrease is due to the reduction of the contribution from the net margin of $1.2 million due to a reduction in sales and was also due to the recording of bonus expenses paid to employees upon the successful completion of the sale of the bioseparations operations and regular bonuses under our employee bonus program while no bonuses were paid for 2018.
Net income from discontinued operations decreased by $1.5 million for the quarter ended December 31, 2018 compared to the corresponding period of 2017 mainly because a higher portion of the sales were for lower margin products in 2018 compared to 2017.
During the quarter ended December 31, 2019, we realized a gain upon the sale of the bioseparations operations of $26.3 million which was determined as follows:
Fair value of the consideration received and receivable: | | | $ | 51,927 | |
Less: | | | | | |
Carrying amount of net assets sold | | | | | | | | | | (22,015 | ) |
Transaction costs | | | | (5,015 | ) |
Add: Reclassification of foreign currency translation reserve from other comprehensive income into the statement of operations | | | | 1,449 | |
Gain on sale of subsidiaries (income tax $nil) | | | $ | 26,346 | |
The details of this transaction are described in Note 5 of the consolidated financial statements for the year ended December 31, 2019
Adjusted EBITDA analysis
Adjusted EBITDA is a measure that is not defined or standardized under IFRS and it is unlikely to be comparable to similar measures presented by other companies. We believe that adjusted EBITDA provides additional insight regarding cash used in operating activities on an on-going basis. It also reflects how management analyses performance and compares that performance against other companies. In addition, we believe that adjusted EBITDA is a useful measure as some investors and analysts use EBITDA and similar measures to compare us against other companies. Adjusted EBITDA adjusts net loss for the elements presented in the table above.
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The Adjusted EBITDA for the years ended December 31, 2019, 2018 and 2017 are presented in the following table:
| | Year ended December 31 | | Change | |
| | 2019 | | | 2018 | | | 2017 | | | 2019 vs 2018 | | | 2018 vs 2017 | |
Net loss from continuing operations | | $ | (234,224 | ) | | $ | (239,828 | ) | | $ | (121,950 | ) | | $ | 5,604 | | | $ | (117,878 | ) |
| | | | | | | | | | | | | | | | | | | | |
Adjustments to obtain adjusted EBITDA: | | | | | | | | | | | | | | | | | | | | |
Loss (gain) on foreign exchange | | | (1,451 | ) | | | 4,696 | | | | (781 | ) | | | (6,147 | ) | | | 5,477 | |
Finance costs | | | 14,056 | | | | 22,041 | | | | 7,889 | | | | (7,985 | ) | | | 14,152 | |
Loss (gain) on extinguishments of liabilities | | | 92,374 | | | | (33,626 | ) | | | 4,191 | | | | 126,000 | | | | (37,817 | ) |
Change in fair value of financial instruments measured at fair value through profit or loss | | | (1,140 | ) | | | 1,000 | | | | - | | | | (2,140 | ) | | | 1,000 | |
Impairment losses | | | 12,366 | | | | 149,952 | | | | - | | | | (137,586 | ) | | | 149,952 | |
Share of losses of an associate | | | - | | | | 22 | | | | - | | | | (22 | ) | | | 22 | |
Income tax recovery | | | (237 | ) | | | (19,637 | ) | | | (14,302 | ) | | | 19,400 | | | | (5,335 | ) |
Depreciation and amortization | | | 8,858 | | | | 4,539 | | | | 3,669 | | | | 4,319 | | | | 870 | |
Share-based payments expense | | | 21,541 | | | | 6,400 | | | | 8,268 | | | | 15,141 | | | | (1,868 | ) |
Adjusted EBITDA from continuing operations | | $ | (87,857 | ) | | $ | (104,441 | ) | | $ | (113,016 | ) | | $ | 16,584 | | | $ | 8,575 | |
Plus: adjusted EBITDA from discontinued operations | | | 29,722 | | | | 2,795 | | | | 2,896 | | | | 26,927 | | | | (101 | ) |
Adjusted EBITDA | | $ | (58,135 | ) | | $ | (101,646 | ) | | $ | (110,120 | ) | | $ | 43,511 | | | $ | 8,474 | |
The comparability of the 2019 adjusted EBITDA figures compared to those of 2018 and 2017 have been impacted by the adoption of IFRS 16 in 2019. The effect of the adoption of IFRS 16 is discussed further in this MD&A under the section titled “Changes in Accounting Policies”. Since the lease component costs of lease agreements are now captured in the statement of operations as depreciation of right-of-use assets, the depreciation expense is higher in 2019 and the interest component is now captured in financing costs. Therefore, the effect of IFRS 16 is to improve adjusted EBITDA as these items are excluded from the computation. The 2018 and 2017 comparative adjusted EBITDA figures have not been restated for IFRS 16.
The increase of $43.5 million of the total adjusted EBITDA for the year ended December 31, 2019 compared to the corresponding period in 2018 was mainly due to the gain from the sale of the bioseparations operations which increased the adjusted EBITDA from discontinued operations by $26.9 million and the decrease in R&D expenses, excluding share-based payments, of $14.6 million. This is also explained by the increase in margin from the sales of goods from continuing operations of $3.2 million. This was partially offset by the increase in administration, selling and marketing, excluding share-based payments expense, of $5.2 million. The removal of the depreciation of right-of-use assets of $4.9 million and the interest expense on the lease liabilities of $7.1 million in the year ended December 31, 2019 are other factors explaining the difference. This comparison is limited however as the accounting for leases is different in each period.
The increase of $8.5 million of the total adjusted EBITDA for the year ended December 31, 2018 compared to the corresponding period in 2017 was mainly a result of the decrease in R&D expenditures, excluding share based payments of $6.8 million during the year ended December 31, 2018 compared to the corresponding period in 2017.
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The adjusted EBITDA for the quarters ended December 31, 2019, 2018 and 2017 are presented in the following tables:
| | Quarter ended December 31 | | Change | |
| | 2019 | | | 2018 | | | 2017 | | | 2019 vs 2018 | | | 2018 vs 2017 | |
Net loss from continuing operations | | $ | (39,552 | ) | | $ | (142,145 | ) | | $ | (43,930 | ) | | $ | 102,593 | | | $ | (98,215 | ) |
| | | | | | | | | | | | | | | | | | | | |
Adjustments to obtain adjusted EBITDA: | | | | | | | | | | | | | | | | | | | | |
Loss (gain) on foreign exchange | | | (205 | ) | | | 3,819 | | | | (1,518 | ) | | | (4,024 | ) | | | 5,337 | |
Finance costs | | | 1,858 | | | | 6,554 | | | | 2,621 | | | | (4,696 | ) | | | 3,933 | |
Loss (gain) on extinguishments of liabilities | | | - | | | | (34,904 | ) | | | - | | | | 34,904 | | | | (34,904 | ) |
Change in fair value of financial instruments measured at fair value through profit or loss | | | - | | | | 1,000 | | | | - | | | | (1,000 | ) | | | 1,000 | |
Impairment losses | | | 12,366 | | | | 149,952 | | | | - | | | | (137,586 | ) | | | 149,952 | |
Income tax recovery | | | (1,476 | ) | | | (13,612 | ) | | | (12,644 | ) | | | 12,136 | | | | (968 | ) |
Depreciation and amortization | | | 2,322 | | | | 1,210 | | | | 1,039 | | | | 1,112 | | | | 171 | |
Share-based payments expense | | | 2,745 | | | | 3,608 | | | | 2,468 | | | | (863 | ) | | | 1,140 | |
Adjusted EBITDA from continuing operations | | $ | (21,942 | ) | | $ | (24,518 | ) | | $ | (51,964 | ) | | $ | 2,576 | | | $ | 27,446 | |
Plus: adjusted EBITDA from discontinued operations | | | 25,535 | | | | 870 | | | | 2,539 | | | | 24,665 | | | | (1,669 | ) |
Adjusted EBITDA | | $ | 3,593 | | | $ | (23,648 | ) | | $ | (49,425 | ) | | $ | 27,241 | | | $ | 25,777 | |
The increase of $27.2 million of the total adjusted EBITDA for the quarter ended December 31, 2019 compared to the corresponding period in 2018 was mainly due to the increase in adjusted EBITDA from discontinued operations due to the gain from the sale of the bioseparations operations. This is also explained by the decrease in R&D expenses. The removal of the depreciation of right-of-use assets of $1.2 million and the interest expense on the lease liabilities of $1.6 million in the year ended December 31, 2019 are other factors explaining the difference.
The increase of $25.8 million of the total adjusted EBITDA for the quarter ended December 31, 2018 compared to the corresponding period in 2017 was mainly explained by the bad debt expense of $20.5 million recorded during the quarter ended December 31, 2017 compared to none being recorded during the corresponding period in 2018. A decrease in R&D expenses, excluding share-based payments, of $7.0 million between both periods explains the remainder of this increase in adjusted EBITDA.
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Segmented information analysis
Comparison of years ended December 31, 2019, 2018 and 2017
The loss and the net loss before income taxes from continuing operations for each segment for the years ended December 31, 2019, 2018 and 2017 are presented in the following tables.
For the year ended December 31, 2019 | | Small molecule therapeutics | | | Plasma- derived therapeutics | | | Reconciliation to statement of operations | | | Total | |
Revenues | | $ | 34 | | | $ | 4,736 | | | $ | 134 | | | $ | 4,904 | |
| | | | | | | | | | | | | | | | |
Cost of sales and other production expenses | | | - | | | | 2,633 | | | | 130 | | | | 2,763 | |
Manufacturing and purchase cost of product candidates used for R&D activities | | | 132 | | | | 37,107 | | | | (195 | ) | | | 37,044 | |
R&D - Other expenses | | | 15,419 | | | | 22,366 | | | | 285 | | | | 38,070 | |
Administration, selling and marketing expenses | | | 4,709 | | | | 8,368 | | | | 32,206 | | | | 45,283 | |
Segment loss | | $ | (20,226 | ) | | $ | (65,738 | ) | | $ | (32,292 | ) | | $ | (118,256 | ) |
Gain on foreign exchange | | | | | | | | | | | | | | | (1,451 | ) |
Finance costs | | | | | | | | | | | | | | | 14,056 | |
Loss on extinguishments of liabilities | | | | | | | | | | | | | | | 92,374 | |
Change in fair value of financial instruments measured at fair value through profit or loss | | | | | | | | | | | | | | | (1,140 | ) |
Impairment loss | | | | | | | | | | | | | | | 12,366 | |
Net loss before income taxes from continuing operations | | | | | | | | | | | | | | $ | (234,461 | ) |
Other information | | | | | | | | | | | | | | | | |
Depreciation and amortization | | $ | 779 | | | $ | 7,400 | | | $ | 679 | | | $ | 8,858 | |
Share-based payment expense | | | 4,782 | | | | 4,390 | | | | 12,369 | | | | 21,541 | |
For the year ended December 31, 2018 | | Small molecule therapeutics | | | Plasma- derived therapeutics | | | Reconciliation to statement of operations | | | Total | |
Revenues | | $ | - | | | $ | 24,521 | | | $ | 112 | | | $ | 24,633 | |
| | | | | | | | | | | | | | | | |
Cost of sales and other production expenses | | | - | | | | 25,297 | | | | 410 | | | | 25,707 | |
Manufacturing and purchase cost of product candidates used for R&D activities | | | 1,692 | | | | 37,107 | | | | (132 | ) | | | 38,667 | |
R&D - Other expenses | | | 14,234 | | | | 31,727 | | | | 230 | | | | 46,191 | |
Administration, selling and marketing expenses | | | 3,522 | | | | 10,393 | | | | 15,533 | | | | 29,448 | |
Segment loss | | $ | (19,448 | ) | | $ | (80,003 | ) | | $ | (15,929 | ) | | $ | (115,380 | ) |
Loss on foreign exchange | | | | | | | | | | | | | | | 4,696 | |
Finance costs | | | | | | | | | | | | | | | 22,041 | |
Gain on extinguishments of liabilities | | | | | | | | | | | | | | | (33,626 | ) |
Share of losses of an associate | | | | | | | | | | | | | | | 22 | |
Impairment losses | | | | | | | | | | | | | | | 149,952 | |
Change in fair value of financial instruments measured at fair value through profit or loss | | | | | | | | | | | | | | | 1,000 | |
Net loss before income taxes from continuing operations | | | | | | | | | | | | | | $ | (259,465 | ) |
Other information | | | | | | | | | | | | | | | | |
Depreciation and amortization | | $ | 480 | | | $ | 3,644 | | | $ | 415 | | | $ | 4,539 | |
Share-based payment expense | | | 1,270 | | | | 1,524 | | | | 3,606 | | | | 6,400 | |
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For the year ended December 31, 2017 | | Small molecule therapeutics | | | Plasma- derived therapeutics | | | Reconciliation to statement of operations | | | Total | |
Revenues | | $ | 19,724 | | | $ | 2,529 | | | $ | 60 | | | $ | 22,313 | |
| | | | | | | | | | | | | | | | |
Cost of sales and other production expenses | | | - | | | | 4,014 | | | | (325 | ) | | | 3,689 | |
Manufacturing and purchase cost of product candidates used for R&D activities | | | 1,755 | | | | 32,764 | | | | 184 | | | | 34,703 | |
R&D - Other expenses | | | 17,426 | | | | 40,963 | | | | 431 | | | | 58,820 | |
Administration, selling and marketing expenses | | | 3,669 | | | | 13,488 | | | | 12,406 | | | | 29,563 | |
Bad debt expense | | | 20,491 | | | | - | | | | - | | | | 20,491 | |
Segment loss | | $ | (23,617 | ) | | $ | (88,700 | ) | | $ | (12,636 | ) | | $ | (124,953 | ) |
Loss (gain) on foreign exchange | | | | | | | | | | | | | | | (781 | ) |
Finance costs | | | | | | | | | | | | | | | 7,889 | |
Loss (gain) on extinguishments of liabilities | | | | | | | | | | | | | | | 4,191 | |
Net loss before income taxes from continuing operations | | | | | | | | | | | | | | $ | (136,252 | ) |
Other information | | | | | | | | | | | | | | | | |
Depreciation and amortization | | $ | 428 | | | $ | 2,880 | | | $ | 361 | | | $ | 3,669 | |
Share-based payment expense | | | 1,509 | | | | 2,269 | | | | 4,490 | | | | 8,268 | |
As mentioned previously, the amounts for depreciation and amortization expense during 2019 have increased for all segments since the adoption of IFRS 16 captures part of the lease cost as depreciation of right-of-use assets.
Small molecule therapeutics segment
The loss for the small molecule therapeutics segment was $20.2 million during the year ended December 31, 2019 compared $19.4 million during the corresponding period in 2018, representing an increase of segment loss of $0.8 million. This increase was mainly due to an increase of share-based payment expense of $3.5 million which was partially offset by a reduction in the purchases of product candidates manufactured by third parties used for clinical trials and pre-clinical research, as no purchases were required in 2019, as well as a reduction in the clinical trials and pre-clinical research expenditures.
The loss for the small molecule therapeutics segment was $19.4 million during the year ended December 31, 2018 compared $23.6 million during the corresponding period in 2017, representing a decrease of segment loss of $4.2 million mainly due to a decrease of $3.2 million in other R&D expenses reflecting the lower spending on pre-clinical studies carried out during 2018. With regard to the 2017 segment results, the revenues as well as bad debt expense reflects the impact of a transaction concluded with JRP during that year. During the quarter ended September 30, 2017, the segment recognized $19.7 million in milestone and licensing revenues for a licensing agreement signed with JRP, an affiliate of SRAM. During the quarter ended December 31, 2017, the segment wrote-off the related accounts receivable since the license agreement was subsequently terminated. The net impact of this transaction was effectively Nil for the year ended December 31, 2017.
Plasma-derived therapeutic segment
2019 compared to 2018
The revenues for the plasma-derived therapeutics segment are usually generated from the sales of specialty plasma to third parties. However, in 2018 and to a smaller extent in 2019, revenues have also been generated from the sale of excess normal source plasma to third parties as a result of the change in production forecasts due to the complete response letter we received from the FDA, following the submission of our BLA for Ryplazim®. Revenues were $4.7 million in the year ended December 31, 2019 compared to $24.5 million in the corresponding period of 2018, representing a decrease of $19.8 million. This decrease was mainly due to a $22.4 million reduction in sales of normal source plasma in 2019, offset by an increase of $3.7 million in sales of specialty plasma products. The normal source plasma sales generate lower margin while the other specialty plasma products generate higher margins. Other production costs that are not capitalizable into inventories are also included in cost of sales and other production expenses, which were higher in 2018 compared to 2019.
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The manufacturing cost of plasma-derived product candidates to be used in clinical trials and for the development of our production processes was at similar levels during the years ended December 31, 2019 and 2018 at around $37.1 million. Despite this overall comparability, some expenses comprised in this R&D category changed more notably than others. The decrease in expense was mainly due to 1) lower expensing of inventories for the production of Ryplazim®, that are expected to be supplied to clinical trial patients and certain other patients in connection with expanded access programs, including on a named patient basis and via a compassionate use programs until Ryplazim® is commercially approved and available, if ever, or for engineering runs at our manufacturing locations, and 2) the lower rental costs included in R&D due to the impact of the adoption of IFRS 16 in 2019. These decreases were partially offset by an increase in employee compensation due to an increase in manufacturing headcount and bonuses paid for 2019 (not for 2018), an increase in share-based payments expense and a decrease in Quebec R&D tax credits recognized, as we reduced the amount we previously recorded as receivable following more advanced discussions with the applicable regulatory authority, which clarified certain uncertainties about the eligibility of certain expenditures.
Other R&D expenses were $22.4 million during the year ended December 31, 2019 compared to $31.7 million during the corresponding period in 2018, representing a decrease of $9.4 million. The decrease was mainly due to the reduction in spending of $7.7 million on clinical trials, pre-clinical research and the implementation and validation of additional analytical assays and in-process controls in the manufacturing of Ryplazim® over the comparative period. This reflects the completion of the IVIG primary immunodeficiencies Phase 3 clinical trial and our decision not to do further work on the development of new proteins. Wages and other payroll benefits expenses also decreased by $2.2 million mainly due to a reduction in headcount. These reductions are reflective of the segment’s focus on Ryplazim®, whereas several product candidates in this segment were being developed in the past. These decreases were partially offset by an increase in the share-based payment expenses recognized in other R&D expenses of $2.5 million.
Administration, selling and marketing expenses decreased by $2.0 million during the year ended December 31, 2019 compared to the corresponding period in 2018, mainly due to the reduction of spending for consulting fees related to the preparation of an expected commercial launch in the current period compared to the same period in 2018. The decrease was also due to a reduction in salary expenses due to a reduction in headcount for the plasma-derived therapeutics segment.
The segment loss for the year ended December 31, 2019 was $65.7 million compared to $80.0 million for the corresponding period of 2018, representing a decrease in segment loss of $14.3 million. This decrease was mainly driven by the overall reduction of R&D expenses and administration, selling and marketing expenses.
2018 compared to 2017
The revenues for the Plasma-derived therapeutics segment are usually generated from the sales of specialty plasma to third parties, the provision of services to licensees and rental revenues. During the year ended December 31, 2018, the segment sold $19.7 million of normal source plasma which it had not done in the previous years. This was a result of the change in the production forecast due to the complete response letter we received from the FDA, following the submission of our BLA for Ryplazim®. We sold excess normal source plasma inventory we had at the beginning of the year, in addition to the quantities we were contractually obligated to purchase during the year. We were also able to reduce our purchasing commitments from 2018 to 2022. The normal source plasma sold during the year ended December 31, 2018 was sold at a value slightly below its carrying amount, generating a negative margin of $0.7 million. The remainder of the sales in 2018 pertain to specialty plasma products.
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The manufacturing cost of plasma-derived product candidates used for R&D activities was higher during the year ended December 31, 2018 at $37.1 million compared to $32.8 million during the corresponding period of 2017, representing an increase of $4.3 million. In 2018, there was a reduction in production activities at the Laval plant while the facility focused on addressing comments received by the FDA following the FDA’s plant inspection of the facility at the end of 2017, as part of the FDA’s review of the BLA submission for Ryplazim®. This resulted in a reduction in overall manufacturing expenses for the plasma-derived product candidates, however since there was no commercial production in 2018, none of these expenses were capitalized to inventories compared to 2017. In addition, the plasminogen inventory that was on hand as of the previous year end was expensed throughout the current year. We determined that a portion of the inventory would be used for additional process testing runs while the balance would be supplied to clinical trial patients and certain other patients in connection with expanded access programs, including on a named patient basis and via a compassionate use programs until Ryplazim® is commercially approved and available, if ever. The reduction in plasminogen inventory capitalized more than offset the overall reduction in manufacturing expenses, thus causing an increase in the manufacturing cost of product candidates used for R&D activities for the year ended December 31, 2018 compared to the corresponding period of 2017.
Other R&D expenses were $31.7 million during the year ended December 31, 2018 compared to $41.0 million during the corresponding period of 2017 representing a decrease of $9.2 million. The decrease is mainly due to the reduction in the clinical trial and pre-clinical research expenses which were partially offset by additional spending in relation to the implementation and validation of additional analytical assays and “in-process” controls in the manufacturing of Ryplazim®. The plasminogen congenital deficiency clinical trial and the adult cohort of the IVIG clinical trial were substantially completed in 2017. During the current year, the IVIG clinical trial for pediatric cohort was ongoing and nearing its completion towards the end of 2018 with the last patient receiving their last dose in the first quarter of 2019. This was partially offset by slightly higher compensation expense reflecting the hiring of some of the staff required to start up our Amherst, New York plasma collection center.
Administration, selling and marketing expenses decreased by $3.1 million during the year ended December 31, 2018 compared to the corresponding period in 2017 mainly due to a reduction in commercial launch preparation expenses for Ryplazim®. Additionally, the administrative support that the segment received from our corporate service centers decreased compared to previous year as activities were reduced or postponed due to the delay in the anticipated commercialization.
Overall, the segment loss for Plasma-derived product candidates of $80.0 million during the year ended December 31, 2018 compared to $88.7 million during the corresponding period of 2017, represented a decrease of $8.7 million.
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Comparison of quarters ended December 31, 2019, 2018 and 2017
The loss for each segment and the net loss before income taxes from continuing operations for the quarters ended December 31, 2019, 2018 and 2017 are presented in the following tables:
| | Small | | | Plasma- | | | Reconciliation | | | | | |
| | molecule | | | derived | | | to statement | | | | | |
For the quarter ended December 31, 2019 | | therapeutics | | | therapeutics | | | of operations | | | Total | |
Revenues | | $ | 1 | | | $ | 1,015 | | | $ | 34 | | | $ | 1,050 | |
| | | | | | | | | | | | | | | | |
Cost of sales and other production expenses | | | - | | | | 493 | | | | 35 | | | | 528 | |
Manufacturing and purchase cost of product candidates used for R&D activities | | | 78 | | | | 6,511 | | | | 3 | | | | 6,592 | |
R&D - Other expenses | | | 5,062 | | | | 5,444 | | | | 155 | | | | 10,661 | |
Administration, selling and marketing expenses | | | 1,268 | | | | 2,418 | | | | 6,592 | | | | 10,278 | |
Segment loss | | $ | (6,407 | ) | | $ | (13,851 | ) | | $ | (6,751 | ) | | $ | (27,009 | ) |
Loss (gain) on foreign exchange | | | | | | | | | | | | | | | (205 | ) |
Finance costs | | | | | | | | | | | | | | | 1,858 | |
Impairment losses | | | | | | | | | | | | | | | 12,366 | |
Net loss before income taxes from continuing operations | | | | | | | | | | | | | | $ | (41,028 | ) |
Other information | | | | | | | | | | | | | | | | |
Depreciation and amortization | | $ | 206 | | | $ | 1,899 | | | $ | 217 | | | $ | 2,322 | |
Share-based payment expense | | | 525 | | | | 562 | | | | 1,658 | | | | 2,745 | |
| | Small | | | Plasma- | | | Reconciliation | | | | | |
| | molecule | | | derived | | | to statement | | | | | |
For the quarter ended December 31, 2018 | | therapeutics | | | therapeutics | | | of operations | | | Total | |
Revenues | | | - | | | | 3,352 | | | | 27 | | | | 3,379 | |
| | | | | | | | | | | | | | | | |
Cost of sales and other production expenses | | | - | | | | 3,230 | | | | 129 | | | | 3,359 | |
Manufacturing and purchase cost of product candidates used for R&D activities | | | (59 | ) | | | 10,508 | | | | 14 | | | | 10,463 | |
R&D - Other expenses | | | 2,587 | | | | 6,033 | | | | 108 | | | | 8,728 | |
Administration, selling and marketing expenses | | | 700 | | | | 2,120 | | | | 7,345 | | | | 10,165 | |
Segment loss | | $ | (3,228 | ) | | $ | (18,539 | ) | | $ | (7,569 | ) | | $ | (29,336 | ) |
Loss (gain) on foreign exchange | | | | | | | | | | | | | | | 3,819 | |
Finance costs | | | | | | | | | | | | | | | 6,554 | |
Loss (gain) on extinguishments of liabilities | | | | | | | | | | | | | | | (34,904 | ) |
Impairment losses | | | | | | | | | | | | | | | 149,952 | |
Change in fair value of financial instruments measured at fair value through profit or loss | | | | | | | | | | | | | | | 1,000 | |
Net loss before income taxes from continuing operations | | | | | | | | | | | | | | $ | (155,757 | ) |
Other information | | | | | | | | | | | | | | | | |
Depreciation and amortization | | $ | 130 | | | $ | 920 | | | $ | 160 | | | $ | 1,210 | |
Share-based payment expense | | | 691 | | | | 735 | | | | 2,182 | | | | 3,608 | |
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For the quarter ended December 31, 2017 | | Small molecule therapeutics | | | Plasma- derived therapeutics | | | Reconciliation to statement of operations | | | Total | |
Revenues | | $ | - | | | $ | 437 | | | $ | 21 | | | $ | 458 | |
| | | | | | | | | | | | | | | | |
Cost of sales and other production expenses | | | (533 | ) | | | 1,119 | | | | 161 | | | | 747 | |
Manufacturing and purchase cost of product candidates used for R&D activities | | | 341 | | | | 10,566 | | | | 4 | | | | 10,911 | |
R&D - Other expenses | | | 4,867 | | | | 10,571 | | | | 91 | | | | 15,529 | |
Administration, selling and marketing expenses | | | 859 | | | | 4,253 | | | | 3,139 | | | | 8,251 | |
Bad debt expense | | | 20,491 | | | | - | | | | - | | | | 20,491 | |
Segment loss | | $ | (26,025 | ) | | $ | (26,072 | ) | | $ | (3,374 | ) | | $ | (55,471 | ) |
Loss (gain) on foreign exchange | | | | | | | | | | | | | | | (1,518 | ) |
Finance costs | | | | | | | | | | | | | | | 2,621 | |
Net loss before income taxes from continuing operations | | | | | | | | | | | | | | $ | (56,574 | ) |
Other information | | | | | | | | | | | | | | | | |
Depreciation and amortization | | $ | 118 | | | $ | 823 | | | $ | 98 | | | $ | 1,039 | |
Share-based payment expense | | | 492 | | | | 717 | | | | 1,259 | | | | 2,468 | |
Small molecule therapeutics segment
The small molecule therapeutics segment loss was $6.4 million for quarter ended December 31, 2019 compared to $3.2 million in the corresponding period in 2018, representing an increase in segment loss of $3.2 million. The increase in segment loss was mainly due to an increase in R&D expenses due to an increase in employee compensation expense due to severance expense incurred following reduction in headcount during the quarter and higher bonus expense for 2019 whereas in 2018, no bonuses were accrued. These increases were partially offset by a decrease in Quebec R&D tax credits compared to 2018. Administration, selling and marketing expenses increased as more resources and administrative support was provided to the segment from the corporate service centers compared to the previous year.
The loss for small molecule therapeutics segment was $3.2 million for the quarter ended December 31, 2018 compared to $26.0 million during the corresponding period in 2017, representing a decrease in segment loss of $22.8 million. The decrease in loss was primarily due to a write-off in the fourth quarter of 2017 of the license and milestone revenues pertaining to a licencing agreement signed with JRP, an affiliate of SRAM, during the third quarter of 2017. The royalty expense initially recorded was subsequently reversed during the fourth quarter in 2017 in cost of sales. The reduction in other R&D expenditures of $2.3 million during the quarter ended December 31, 2018 compared to the corresponding period, is mainly due to the reduction in pre-clinical studies expenses.
Plasma-derived therapeutic segment
The decrease of $2.3 million in the revenues during the quarter ended December 31, 2019 compared to the corresponding period in 2018 and the increase of $2.9 million during the year ended December 31, 2018 compared to the corresponding period in 2017 are mainly due to $3.1 million of sales of excess normal source plasma inventory that occurred in the quarter ended December 31, 2018. In 2019, this decrease was partially offset by the increase in sales of specialty plasma of $0.8 million in the quarter ended December 31, 2019 compared to the corresponding period in 2018. The increase in sales of specialty plasma impacted the segment profitability positively during the quarter ended December 31, 2019, as the margins were stronger on this product.
The manufacturing and purchase cost of product candidates used for R&D activities for the plasma-derived therapeutics segment decreased by $4.0 million for the quarter ended December 31, 2019 compared to the corresponding period in 2018, mainly due to less expensing of inventories that were expected to be supplied to clinical trial patients and certain other patients in connection with expanded access programs, including on a named patient basis and via a compassionate use programs until Ryplazim® is commercially approved and available, if ever, and the lower rental costs included in R&D due to the impact of the adoption of IFRS 16 in
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2019. The manufacturing and purchase cost of product candidates used for R&D activities for the quarters ended December 31, 2018 and 2017 remained stable.
Other R&D expenses decreased slightly by $0.6 million during the quarter ended December 31, 2019 compared to the corresponding period in of 2018 whereas the decrease from the quarter ended December 31, 2017 to the corresponding period in 2018 was $4.5 million. This last decrease is explained by a decrease in clinical trial expenditures reflecting the fact that our IVIG clinical trial for the pediatric cohort was nearing completion at the end of 2018 whereas towards the end of 2017, the adult cohort still had some patients receiving doses and most of the pediatric cohort had started their participation in the trial. There was also less expenses relating to the plasminogen congenital deficiency trial during the fourth quarter of 2018 as the main trial supporting the BLA submission was completed in 2017.
Administration, selling and marketing expenses remained stable during the quarter ended December 31, 2019 compared to the corresponding period in 2018 whereas they were notably higher during the quarter ended December 31, 2017. The decrease of $2.1 million from 2017 to 2018 was mainly caused by a reduction in marketing expenses related to Ryplazim®.
The loss for plasma-derived therapeutics segment was $13.9 million for the quarter ended December 31, 2019 compared to $18.5 million in the corresponding period in 2018, representing a decrease in segment loss of $4.7 million. The decrease was mainly driven by the reduction in manufacturing and purchase cost used for R&D.
The loss for plasma-derived therapeutics segment was $18.5 million for the quarter ended December 31, 2018 compared to $26.1 million in the corresponding period in 2017, representing a decrease in segment loss of $7.5 million. The decrease in loss is mainly due to the decrease in other R&D and administration, selling and marketing expenses. Those decreases are due to reduction in clinical trial expenditures and marketing expenses related to pre-commercialization activities.
Selected annual information
The following table presents selected audited annual information for the years ended December 31, 2019, 2018 and 2017.
| | | | | | 2019 | | | 2018 | | | 2017 | |
Revenues | | | | | | $ | 4,904 | | | | 24,633 | | | $ | 22,313 | |
Net loss from continuing operations attributable to owners of the parent | | | | | | | (233,180 | ) | | | (197,298 | ) | | | (111,645 | ) |
Net loss from continuing operations per share attributable to owners of the parent (basic and diluted) | | | | | | | (14.52 | ) | | | (238.28 | ) | | | (140.26 | ) |
Total assets | | | | | | | 165,098 | | | | 102,892 | | | | 283,873 | |
Total long-term financial liabilities | | | | | | $ | 38,721 | | | $ | 126,965 | | | $ | 86,735 | |
Revenues from the sales of goods increased by $22.4 million during 2018 compared 2017 and decreased by $19.1 million in 2019 mainly due $22.9 million in sales of excess normal source plasma in 2018. Milestone and licensing revenues were recognized in 2017 upon the signature of a license agreement, for an amount of $19.7 million.
The net loss from continuing operations attributable to the owners of the parent, defined as the amount attributable to the shareholders of Liminal Biosciences, increased significantly by $85.7 million from 2017 to 2018 due to the impact of two key events: 1) the recording of impairment losses totalling $150.0 million (and its impact on the non-controlling interests share in this loss) which was partially offset by 2) the recognition of a gain on extinguishments of liabilities of $33.6 million following the modifications to the credit facility and OID loans in November 2018. R&D expenses declined by $8.7 million from the previous year while financing cost increased by $14.2 million. The net loss from continuing operations attributable to owners of the parent then increased by $35.9 million in 2019 despite the net loss from continuing operations being slightly lower since the non-controlling interests did not partake in the share of those losses.
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The net loss from continuing operations per share attributable to the owners of the parent on a basic and diluted basis reflects the changes in the net loss from continuing operations attributable to the owner of the parent but also the increase in the number of common shares outstanding from year to year and was significantly impacted by the number of shares issued in April 2019 upon a debt restructuring transaction and the issuance of equity following private placements. The weighted average number of shares increased from 796 thousand common shares in 2017 to 828 thousand common shares in 2018 then to 16,062 thousand common shares in 2019, causing the per share amounts in 2019 to be significantly lower.
Total assets increased by $62.2 million from $102.9 million at December 31, 2018 to $165.1 million at December 31, 2019 mainly due to recognition of the right-of-use assets following the adoption of IFRS 16 and a higher cash and cash equivalents balance at December 31, 2019 by $53.9 million. Total assets decreased to $102.9 million at December 31, 2018 from $283.9 million at December 31, 2017, mainly due to the impairment losses recognized on intangible assets, namely the NantPro license, and the reduction in inventories and cash.
Long-term financial liabilities decreased by $88.2 million at December 31, 2019 from December 31, 2018, mainly due to the restructuring of the long-term debt on April 23, 2019, which was partially offset by the recording of the long-term portion of lease liabilities following the adoption of IFRS 16 on January 1, 2019. From December 31, 2017 to December 31, 2018, long-term financial liabilities increased by $40.2 million, mainly due to the increase in debt of $71.7 million from the drawdowns on the then-existing credit facility. This increase was partially offset by the impact of the debt repayment terms modification which reduced the long-term debt by $47.4 million.
Summary of consolidated quarterly results
The following table presents selected quarterly financial information for the last eight quarters:
| | | | | | | | Net income (loss) attributable to the owners of the parent | |
| | | | | | | | | | | | | | | | Per share | |
Quarter ended | | | | Revenues | | | Continuing operations | | | Discontinued operations | | | Continuing basic & diluted | | | Discontinued basic & diluted | |
December 31, 2019 | | | | $ | 1,050 | | | $ | (39,397 | ) | | $ | 25,043 | | | $ | (1.69 | ) | | $ | 1.07 | |
September 30, 2019 | | | | | 828 | | | | (29,521 | ) | | | (81 | ) | | | (1.27 | ) | | | (0.00 | ) |
June 30, 2019 | | | | | 762 | | | | (135,846 | ) | | | 2,229 | | | | (8.26 | ) | | | 0.14 | |
March 31, 2019 | | | | | 2,264 | | | | (28,416 | ) | | | 280 | | | | (33.59 | ) | | | 0.33 | |
December 31, 2018 | | | | | 3,379 | | | | (103,784 | ) | | | 831 | | | | (125.04 | ) | | | 1.00 | |
September 30, 2018 | | | | | 6,223 | | | | (29,020 | ) | | | 548 | | | | (34.96 | ) | | | 0.66 | |
June 30, 2018 | | | | | 14,473 | | | | (34,217 | ) | | | 1,947 | | | | (41.32 | ) | | | 2.35 | |
March 31, 2018 | | | | | 558 | | | | (30,277 | ) | | | (1,394 | ) | | | (36.74 | ) | | | (1.69 | ) |
Revenues were $0.6 million during the quarter ended March 31, 2018. Revenues from continuing operations are generally those generated from our plasma-derived therapeutics segment via the sale of specialty plasma products. Cost of goods sold were higher due to an inventory write-off on a portion of the normal source plasma held in inventory to net realisable value in advance of a sales transaction to take place during the following quarter but for which the selling price had been settled in advance. R&D expenses were $20.7 million, and administration, selling and marketing expenses were $7.2 million for the quarter. Financing cost were $4.2 million during the quarter. The net loss attributable to the owners of the parent from discontinued operations was $1.4 million during the quarter.
Revenues during the quarter ended June 30, 2018 were $14.5 million, of which the majority was driven by a $14.0 million sale of excess normal source plasma inventory. Cost of sales and other production expenses were $14.5 million, R&D expenses at $22.5 million increased slightly over the previous quarter while administration, selling and marketing expense decreased slightly to $6.4 million. Financing cost increased to $5.3 million reflecting the continuous increase in the debt level and the higher borrowing cost of the credit facility. The net income attributable to the owners of the parent from discontinued operations in the quarter was $1.9 million compared to a net loss attributable to the owners of the parent from discontinued operations of $1.4 million in the previous quarter. The increase was driven by an increase in bioseparation sales of $1.9 million and a
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decrease in cost of sales and production of $0.6 million as the increase in sales was mainly driven by higher margin product.
Revenues during the quarter ended September 30, 2018 were $6.2 million due to sales of excess normal source plasma inventory in the amount of $5.7 million. Cost of sales and other production expenses were $5.6 million. R&D expenses at $22.5 million were similar to the previous quarter while administration, selling and marketing expenses decreased slightly to $5.7 million. Financing cost at $5.9 million, continued to increase reflecting the higher debt level as we continued to draw on the credit facility. The net income attributable to the owners of the parent from discontinued operations decreased by $1.4 million to $0.6 million. This decrease is mainly due to the decrease in the net margin of $1.3 million. The sales from discontinued operations were higher during the quarter by $0.4 million but were driven by lower margin product.
Revenues during the quarter ended December 31, 2018 were $3.4 million, which is mainly due to the sale of excess normal source plasma inventory of $3.1 million. Cost of sales and other production expenses decreased by $2.3 million to $3.4 million in line with the decrease in the sale of gods of $2.6 million. R&D expenses decreased slightly to $19.2 million while administration, selling and marketing expenses increased to $10.2 million, impacted by severance expenses. Financing cost increased to $6.6 million reflecting the higher debt level and the higher borrowing cost of the credit facility. During the quarter, a gain on extinguishment of liabilities of $34.9 million was recorded as a result of the modifications to the terms of our long-term debt, namely the extension of the maturity date. Impairments, mainly pertaining to IVIG assets totalling $150.0 million were recognized following changes to our strategic plans which would delay the development of IVIG significantly, if approved. The net income attributable to the owners of the parent from discontinued operations remains relatively stable at $0.8 million, a decrease of $0.3 million.
Revenues were $2.3 million during the quarter ended March 31, 2019 which were lower than those recorded in the previous three quarters as there was no sale of normal source plasma. R&D expenses at $17.5 million were $1.7 million lower and finance costs at $7.1 million increased slightly by $0.6 million compared to the previous quarter. Both R&D and finance costs were impacted by the adoption of IFRS 16 which caused the implicit interest component of the leases to be recorded in finance costs. Administration, selling and marketing decreased by $3.1 million from its higher level in December 2018 which included significant termination benefits. The net income attributable to the owners of the parent from discontinued operations decreased by $0.6 million to $0.3 million mainly due to R&D tax credit recorded in the previous quarter.
Revenues were $0.8 million during the quarter ended June 30, 2019 and were mainly generated from sales of specialty plasma. R&D expenses at $22.3 million were $4.8 higher and administration, selling and marketing expenses at $18.0 million were $11.0 higher, mainly as a result of an increase of the share-based payment expenses recognized in R&D expenses of $4.3 million and in administration, selling and marketing expenses of $8.9 million over the previous quarter as we made various changes to our long-term equity incentive plans to ensure competitiveness of the plans. Finance cost decreased by $3.8 million as the long-term debt declined significantly on April 23, 2019 as part of the debt restructuring which resulted in a loss on extinguishment of liabilities of $92.3 million. The net loss attributable to the owners of the parent from continuing operations for the quarter ended June 30, 2019 was $135.8 million which represents an increase of $107.4 million from the previous quarter. The increase was driven by the loss on extinguishment of liabilities and the increase in share-based payment expense. The net income attributable to the owners of the parent from discontinued operations increased by $1.9 million to $2.2 million mainly due to increase in the sales of goods of $2.0 million related to higher margin product, not having any impact on the cost of sales and production expenses.
Revenues remained stable at $0.8 million during the quarter ended September 30, 2019. R&D expenses at $18.1 million declined by $4.2 million and administration, selling and marketing expenses at $9.9 million were $8.2 million lower than the previous quarter. These decreases were mainly driven by a decrease of $4.7 million and $7.5 million in the share-based payment expenses recognized in R&D and in administration, selling and marketing expenses, respectively as such expenditures returned to more normalized levels following the impact of the changes to the long-term equity incentive plans during the quarter ended June 30, 2019. Finance cost decreased by $1.6 million as the balance of long-term debt declined significantly on April 23, 2019 as a result of the debt restructuring. The net income attributable to the owners of the parent from discontinued operations
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decreased by $2.3 million to a loss of$0.1 million mainly driven by the decrease in the sales of goods of $3.5 million.
Revenues were $1.1 million during the quarter ended December 31, 2019 and were mainly generated from our specialty plasma sales. Expenses remained relatively stable in the fourth quarter as R&D expenses declined by $0.8 million to $17.3 million and administration, selling and marketing expenses were $0.4 million higher than the previous quarter at $10.3 million. Finance cost increased by $0.2 million to $1.9 million during the fourth quarter of 2019. The net income attributable to the owners of the parent from discontinued operations increased by $25.1 million at $25.0 million mainly driven by the gain of the sales of the discontinued operations of $26.3 million which was offset by an increase in the administration, selling and marketing expenses of $1.4 million due to bonuses we paid to employees upon the successful completion of the sale of the business which were included in the operating results of the discontinued operations.
Outstanding share data
We are authorized to issue an unlimited number of common shares. At March 19, 2020, 23,420,352 common shares, 2,200,864 options to purchase common shares, 4,238 restricted share units and 172,735 warrants to purchase common shares were issued and outstanding.
Transactions between related parties (as defined per IAS 24)
Balances and transactions between our subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. These transactions have been recorded at the exchange amount, meaning the amount agreed to between the parties.
Following the debt modification on November 14, 2018, we assessed whether SALP, the holder of the debt, had gained significant influence for accounting purposes, despite holding less than 20% of voting rights. We deemed that qualitative factors were significant enough to conclude that the holder of the debt had gained significant influence over us and had become a related party. SALP subsequently became our majority shareholder following the debt restructuring completed on April 23, 2019.
Details of transactions between us and other related parties are disclosed below and for financing transactions with SALP, they are disclosed in detail in notes 15, 16, and 18a in the consolidated financial statements for the year ended December 31, 2019.
2019
Our former Chief Executive Officer or CEO had a share purchase loan outstanding in the amount of $0.4 million at December 31, 2018. The loan bore interest at prime plus 1% and had a maturity date of the earlier of (i) March 31, 2019 or (ii) 30 days preceding a targeted Nasdaq or New York Stock Exchange listing date of our common shares. As part of the settlement agreement concluded in April 2019 with our former CEO, common shares held in escrow as security for a share purchase loan of $0.4 million to the former CEO were released and the loan extinguished in exchange for the receipt of a payment of $137,000, representing the fair value of the shares at the time of the settlement.
During the year ended December 31, 2019 we paid interest on the loan with SALP in the amount of $7.8 million. We also recorded professional fee expenses, incurred by SALP and recharged to us, during the year ended December 31, 3019 of $0.5 million, all of which were paid as of December 31, 2019.
On November 11, 2019, together with SALP, we amended the April 23, 2019 loan agreement to include a non-revolving line of credit, or LOC, with a limit of up to $75.0 million, bearing a stated interest of 10%, payable quarterly, and maturing on April 23, 2024. The line of credit limit available to draw upon will be automatically reduced by the amounts of net proceeds generated, upon the occurrence of all or any of the following transactions; the sale of the bioseparations operations, a licensing transaction for Ryplazim® or equity raises. Our ability to draw on the line of credit expires on May 11, 2021. As at December 31, 2019, the amount drawn on the line of credit was nil and the amount available to be drawn was $30.3 million. As of the date of this MD&A, the amount drawn on the line of credit was $nil and the amount available to be drawn was $29.1 million.
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During the year ended December 31, 2019 we recorded $47,000 R&D expenses, relating to a consulting service agreement with one of our directors in 2019 of which $37,000 remains payable as at December 31, 2019.
2018
During the year ended December 31, 2018, we earned interest revenues on the share purchase loan to our former CEO in the amount of $19,000 and at December 31, 2018, the unpaid interest was $31,000.
Changes in accounting policies
We have applied the accounting policies used in the annual consolidated financial statements in a consistent manner with those applied by us in our December 31, 2018 and 2017 audited annual consolidated financial statements except for the amendments to certain accounting standards which are relevant to us and were adopted as of January 1, 2018 and 2019 as described below.
IFRS 9, Financial Instruments
IFRS 9 replaces the provisions of IAS 39, Financial Instruments – Recognition and Measurement and provides guidance on the recognition, classification and measurement of financial assets and financial liabilities, the derecognition of financial instruments, impairment of financial assets and hedge accounting.
We adopted IFRS 9 as of January 1, 2018 and the new standard has been applied retrospectively in accordance with the transitional provisions of IFRS 9. The following table presents the carrying amount of financial assets held by us at December 31, 2017 and their measurement category under IAS 39 and the new model under IFRS 9.
| | | IAS 39 | | | IFRS 9 | |
| | | Measurement | | Carrying | | | Measurement | | Carrying | |
| | | category | | amount | | | category | | amount | |
Cash and cash equivalents | | | FVPL | | $ | 23,166 | | | Amortized cost | | $ | 23,166 | |
Trade receivables | | | Amortized cost | | | 1,796 | | | Amortized cost | | | 1,796 | |
Other receivables | | | Amortized cost | | | 397 | | | Amortized cost | | | 397 | |
Restricted cash | | | FVPL | | | 226 | | | Amortized cost | | | 226 | |
Long-term receivables | | | Amortized cost | | | 1,856 | | | Amortized cost | | | 1,856 | |
Equity investments | | | Cost | | | 1,228 | | | FVPL | | | 1,228 | |
Convertible debt | | | Cost | | | 87 | | | FVPL | | | 87 | |
There has been no impact caused by the new classification of financial assets under IFRS 9. The classification of all financial liabilities at amortized cost remains unchanged as well as their measurement resulting from their classification.
Under IFRS 9, modifications to financial assets and financial liabilities, must be accounted for by recalculating the present value of the modified contractual cashflows at the original effective interest rate and the adjustment must be recognized as a gain or loss in profit or loss. Under IAS 39, the impact of modifications was recognized prospectively over the remaining term of the debt.
The adoption of the accounting for modifications under the new standard has resulted in the restatement of the opening deficit and the long-term debt at January 1, 2018 as follows:
Deficit | | | | | | | | | $ | 110 | |
Long-term debt | | | | | | | | | | (110 | ) |
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IFRS 15, Revenue from contracts with customers
IFRS 15 replaces IAS 11, Construction Contracts, and IAS 18, Revenue and related interpretations and represents a new single model for recognition of revenue from contracts with customers. The model features a five-step analysis of transactions to determine the nature of an entity’s obligation to perform and whether, how much, and when revenue is recognized.
We adopted IFRS 15 as of January 1, 2018 and the new standard has been applied retrospectively using the modified retrospective approach, where prior periods are not restated and the cumulative effect of initially applying this standard is recognized in the opening deficit balance on January 1, 2018. We have also availed ourselves of the following practical expedients:
the standard was applied retrospectively only to contracts that were not completed on January 1, 2018; and
| • | for contracts that were modified before January 1, 2018, we analyzed the effects of all modifications when identifying whether performance obligations were satisfied, determining the transaction price and allocating the transaction price to the satisfied or unsatisfied performance obligations. |
There has been no impact of the adoption of IFRS 15 as at January 1, 2018 and for the year end December 31, 2018.
IFRIC 22, Foreign Currency Transactions and Advance Consideration (“IFRIC 22”)
IFRIC 22 addresses how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) and on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency. IFRIC 22 is effective for annual periods beginning on or after January 1, 2018. We adopted IFRIC 22 retrospectively on January 1, 2018. The adoption of the standard did not have a significant impact on the financial statements.
IFRS 16, Leases
IFRS 16 replaces IAS 17, Leases (“IAS 17”). IFRS 16 provides a single lessee accounting model, requiring the recognition of assets and liabilities for all leases, unless the lease term is less than 12 months, or the underlying asset has a low value. IFRS 16 substantially carries forward the lessor accounting in IAS 17 with the distinction between operating leases and finance leases being retained.
Effective January 1, 2019, we adopted IFRS 16 using the modified retrospective approach and accordingly the information presented for 2018 has not been restated. The cumulative effect of initially applying the standard is recognized at the date of initial application. The current and long-term portions of operating and finance lease inducements and obligations presented in the statement of financial position at December 31, 2018, reflect the accounting treatment under IAS 17 and related interpretations.
We elected to use the transitional practical expedient allowing the standard to be applied only to contracts that were previously identified as leases under IAS 17 and IFRIC 4, Determining whether an arrangement contains a lease at the date of initial application. We applied the definition of a lease under IFRS 16 to contracts entered into or changed on or after January 1, 2019.
We also elected to record right-of-use assets for leases previously classified as operating leases under IAS 17 based on the corresponding lease liability, adjusted for prepaids or liabilities existing at the date of the transition that relate to the lease. When measuring lease liabilities, we discounted lease payments using its incremental borrowing rate at January 1, 2019. The weighted average discount rate applied to the total lease liabilities recognized on transition was 18.54%. For leases that were previously classified as finance leases under IAS 17, the carrying amount of the right-of-use asset and the lease liability at the date of adoption was established as the carrying amount of the lease asset classified in capital assets and the finance lease obligation at December 31, 2018. These assets and liabilities are grouped under right-of-use assets and lease liabilities as of January 1, 2019 and IFRS 16 applies to these leases as of that date.
In addition, we elected to apply the practical expedient to account for leases for which the lease term ends within 12 months of the date of initial application as short-term leases for which it is not required to recognize
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a right-of-use asset and a corresponding lease liability. We also elected to not apply IFRS 16 when the underlying asset in a lease is of low value.
We have elected, for the class of assets related to the lease of building space, not to separate non-lease components from lease components, and instead account for each lease component and any associated non-lease components as a single lease component.
The table below shows which line items of the consolidated financial statements were affected by the adoption of IFRS 16 and the impact. There was no net impact on the deficit.
| | | | | | | | As reported | | | Adjustments | | | Balance | |
| | | | | | | | as at | | | for the | | | as at | |
| | | | | | | | December 31, | | | transition | | | January 1, | |
| | | | | | | | 2018 | | | to IFRS 16 | | | 2019 | |
Assets | | | | | | | | | | | | | | | | | | |
Prepaids | | | | | | | | $ | 1,452 | | | $ | (84 | ) | | $ | 1,368 | |
Capital assets | | | | | | | | | 41,113 | | | | (1,043 | ) | | | 40,070 | |
Right-of-use assets | | | | | | | | | - | | | | 39,149 | | | | 39,149 | |
| | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | |
Accounts payable and accrued liabilities | | | | | | | | $ | 31,855 | | | $ | (2,499 | ) | | $ | 29,356 | |
Current portion of lease liabilities | | | | | | | | | - | | | | 8,575 | | | | 8,575 | |
Long-term portion of lease liabilities | | | | | | | | | - | | | | 34,126 | | | | 34,126 | |
Long-term portion of operating and finance lease inducements and obligations | | | | | | | | | 1,850 | | | | (1,850 | ) | | | - | |
Other long-term liabilities | | | | | | | | | 5,695 | | | | (330 | ) | | | 5,365 | |
Prior to adopting IFRS 16, the total minimum operating lease commitments as at December 31, 2018 were $75.0 million. The decrease between the total of the minimum lease payments set out in Note 29 of the audited annual consolidated financial statements for the year ended December 31, 2018 and the total lease liabilities recognized on adoption of $42.7 million was principally due to the effect of discounting on the minimum lease payments. The amount also decreased slightly due to the fact that certain costs that are contractually committed under lease contracts, but which do not qualify to be accounted for as a lease liability, such as variable lease payments not tied to an index or rate, were previously included in the lease commitment table whereas they are not included in the calculation of the lease liabilities. These impacts were partially offset by the inclusion of lease payments beyond minimum commitments relating to reasonably certain renewal periods that had not yet been exercised as at December 31, 2018 which effect is to increase the liability. Right-of-use assets at transition have been measured at an amount equal to the corresponding lease liabilities, adjusted for any prepaid or accrued rent relating to that lease.
The consolidated statement of operations for the year ended December 31, 2019 was impacted by the adoption of IFRS 16 as the recording of depreciation of the right-of-use assets continues to be recorded in the same financial statement line items as it was previously while the implicit financing component of leasing agreements is now recorded under finance costs. The impact is not simply in the form of a reclassification but also in terms of measurement, which are significantly affected by the discount rates used and whether we have included renewal periods when calculating the lease liability.
The consolidated cash flow statement for the year ended December 31, 2019 was also impacted since the cash flows attributable to the lease component of the lease agreements are now shown as payments of principal and interest on lease liabilities which are now part of cash flows from financing activities.
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IFRIC 23, Uncertainty over income tax treatments (“IFRIC 23”)
IFRIC 23 clarifies how the recognition and measurement requirements of IAS 12 – Income Taxes are applied where there is uncertainty over income tax treatments. The Interpretation is effective for annual periods beginning on or after January 1, 2019 and was adopted on that date. We assessed the impact of this Interpretation and concluded that it had no impact on the amounts recorded in its consolidated statements of financial position on the date of adoption.
New Standards and interpretations not yet adopted
There are currently no new standards or interpretations not yet in effect that we reasonably expect would have an impact on its consolidated financial statements.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with IFRS. Some of the accounting methods and policies used in preparing our financial statements under IFRS are based on complex and subjective assessments by our management or on estimates based on past experience and assumptions deemed realistic and reasonable based on the facts and circumstances concerned. The actual value of our assets, liabilities and shareholders’ equity and of our EPS could differ from the value derived from these estimates if conditions changed and these changes had an impact on the assumptions adopted. We believe that the most significant management judgments and assumptions in the preparation of our financial statements are described below. We have also provided the critical accounting policies. See Note 2 to our consolidated financial statements for the year ended December 31, 2019 for a description of our other significant accounting policies.
Critical accounting policies
Impairment of tangible and intangible assets
At the end of each reporting period, we review the carrying amounts of our tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If impairment indicators exist, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. For intangible assets not yet available for use, we perform an impairment test annually at November 30, until amortization commences, whether or not there are impairment indicators. When it is not possible to estimate the recoverable amount of an individual asset, we estimate the recoverable amount of the cash-generating unit (CGU) which represents the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets, groups of assets or CGUs to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, the corporate assets are also allocated to individual CGUs, or otherwise they are allocated to the smallest group of CGUs for which a reasonable and consistent allocation basis can be identified.
The recoverable amount is the higher of the fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
An impairment loss is recognized when the carrying amount of an asset or a CGU exceeds its recoverable amount by the amount of this excess. An impairment loss is recognized immediately in profit or loss in the period during which the loss is incurred. Where an impairment loss subsequently reverses, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount; on reversal of an impairment loss, the increased carrying amount does not exceed the carrying amount that would have been determined had an impairment loss not been recognized for the asset or CGU in prior periods. A reversal of an impairment loss is recognized immediately in profit or loss.
Lease liabilities
At the commencement date of a lease, we recognize a lease liability measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives, variable lease payments that depend on an index or a rate, and
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amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by us and payments of penalties for terminating a lease, if the lease term reflects that we will be exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognized as expense in the period on which the event or condition that triggers the payment occurs.
In calculating the present value of lease payments, we use the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of a lease liability is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of a lease liability is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment whether the underlying asset will be purchased.
We apply the short-term lease recognition exemption to leases of 12 months or less, as well as the lease of low-value assets recognition exemption i.e. leases with a value below seven dollars. Lease payments on short-term leases and leases of low-value assets are recognized as expense on a straight-line basis over the lease term.
Prior to the adoption of IFRS 16, Leases on January 1, 2019, as a lessor, we only recognized finance lease obligations while operating leases obligations were only disclosed.
Revenue recognition
To determine revenue recognition for contracts with customers, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The five-step model is only applied to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer. At contract inception, we assess the goods or services promised within each contract, determine those that are performance obligations, and assess whether each promised good or service is distinct. The transaction price that is allocated to the respective performance obligation is recognized as revenue when (or as) the performance obligation is satisfied.
Sale of goods
Revenue from sale of goods is recognized when the terms of a contract with a customer have been satisfied. This occurs when:
| • | The control over the product has been transferred to the customer; and |
| • | The product is received by the customer or transfer of title to the customer occurs upon shipment. |
Following delivery, the customer bears the risks of obsolescence and loss in relation to the goods. Revenue is recognized based on the price specified in the contract, net of estimated sales discounts and returns.
Rendering of services
Revenues from contracted services are generally recognized as the performance obligations are satisfied over time, and the related expenditures are incurred pursuant to the terms of the agreement. Contract revenue is recognized on a percentage of completion basis based on key milestones contained within the contract.
Unbilled revenues and deferred revenues
If we have recognized revenues but has not issued an invoice, the entitlement is recognized as a contract asset and is presented in the statement of financial position as unbilled revenues. When the amounts are invoiced, then the amounts are transferred into trade receivables. If we have received payments prior to satisfying our performance obligation, the obligation is recognized as a contract liability and is presented in the consolidated statement of financial position as deferred revenues.
Licensing fees and milestone payments
Under IFRS 15, we determine whether our promise to grant a license provides the customer with either a right to access our intellectual property ("IP") or a right to use our IP. A license will provide a right to access the intellectual property if there is significant development of the intellectual property expected in the future
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whereas for a right to use, the intellectual property is to be used in the condition it is at the time the license is signed. Revenue from a license that provides to a customer the right to use the Company’s IP is recognized at a point in time when the transfers to the licensee is completed and the license period begins. When a license provides access to our IP over a license term, the performance obligation is satisfied over time and, therefore, revenue is recognized over the term of the license arrangement. Milestone payments are immediately recognized as licensing revenue when the condition is met, if the milestone is not a condition to future deliverables and collectability is reasonably assured. Otherwise, they are recognized over the remaining term of the agreement or the performance period.
Rental revenue
We account for the lease or sub-lease with a tenant as an operating lease when we have not transferred substantially all of the risks and benefits of ownership of our property or leased property. Revenue recognition under an operating lease commences when the tenant has a right to use the leased asset, and the total amount of contractual rent to be received from the operating lease is recognized on a straight-line basis over the term of the lease. Rental revenue also includes recoveries of operating expenses and property taxes.
Share-based payments
We have a stock option plan and an RSU plan. The fair value of stock options granted is determined at the grant date using the Black-Scholes option pricing model and is expensed over the vesting period of the options. Awards with graded vesting are considered to be multiple awards for fair value measurement. The fair value of RSU is determined using the market value of our shares on the grant date. The expense associated with RSU awards that vest over time are recognized over the vesting period. When the vesting of RSU is dependent on meeting performance targets as well as a service requirement, we will estimate the outcome of the performance targets to determine the expense to recognize over the vesting period and revise those estimates until the final outcome is determined. An estimate of the number of awards that are expected to be forfeited is also made at the time of grant and revised periodically if actual forfeitures differ from those estimates.
Our policy is to issue new shares upon the exercise of stock options and the release of RSU for which conditions have been met.
Significant judgments and estimates
Going concern - In assessing whether the going concern assumption is appropriate and whether there are material uncertainties that may cast significant doubt about our ability to continue as a going concern, management must estimate future cash flows for a period of at least twelve months following the end of the reporting period by considering relevant available information about the future. We have considered a wide range of factors relating to expected cash inflows such as whether we will earn licensing and milestone revenues, obtain regulatory approval for commercialization of product candidates, if ever, and potential sources of debt and equity financing available to it. We have also estimated expected cash outflows such as operating and capital expenditures and debt repayment schedules, including the ability to delay uncommitted expenditures. These cash flow estimates are subject to uncertainty.
Accounting for loan modifications – When the terms of a loan are modified, we must evaluate whether the terms of the loan are substantially different in order to determine the accounting treatment. If they are considered to be substantially different, the modification will be accounted for as a derecognition of the carrying value of the pre-modified loan and the recognition of a new loan at its fair value. Otherwise, the changes will be treated as a modification which will result in adjusting the carrying amount to the present value of the modified cash flows using the original effective interest rate of the loan instrument. In assessing whether the terms of a loan are substantially different, we perform an analysis of the changes in the cash flows under the previous agreement and the new agreement and we also consider other modifications that have no cash flow impacts. In the context of the simultaneous modification to the terms of several loans with the same lender, we use judgment to determine if the cash flow analysis should be performed on the loans in aggregate or individually. Judgment is also used to evaluate the relative importance of additional rights given to the lender such as additional Board of Director seats and the extension of the term of the security compared to the quantitative analysis.
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Revenue recognition – We enter into revenue agreements from time to time which provide, among other payments, up-front and milestone payments in exchange for licenses and other access to intellectual property. We may also enter into several agreements simultaneously that are different in nature such as license agreements, R&D services, supply and manufacturing agreements. In determining the appropriate method for recognizing revenues in a given contract, we may be required to apply significant judgment including the identification of performance obligations.
Determining whether performance obligations are distinct involves evaluating whether the customer can benefit from the good or service on its own or together with other resources that are readily available to the customer. Once the distinct performance obligations are identified, we must then determine if each performance obligation is satisfied at a point in time or over time. For license agreements, this requires us to assess the level of advancement of the intellectual property being licensed.
Functional currency – The functional currency of foreign subsidiaries is reviewed on an ongoing basis to assess if changes in the underlying transactions, events and conditions have resulted in a change. During the years ended December 31, 2019, 2018 and 2017 no changes were deemed necessary. This assessment is also performed for new subsidiaries. When assessing the functional currency of a foreign subsidiary, management’s judgment is applied in order to determine, amongst other things, the primary economic environment in which an entity operates, the currency in which the activities are funded and the degree of autonomy of the foreign subsidiary from the reporting entity in its operations and financially. Judgment is also applied in determining whether the inter-company loans denominated in foreign currencies form part of our net investment in the foreign subsidiary. Considering such loans as part of the net investment in the foreign subsidiary results in foreign currency translation gains or losses from the translation of these loans being recorded in other comprehensive loss instead of the consolidated statement of operations.
Fair value of financial instruments – The individual fair values attributed to the different components of a financing transaction, are determined using valuation techniques. we use judgment to select the methods used to determine certain inputs/assumptions used in the models and the models used to perform the fair value calculations in order to determine, 1) the values attributed to each component of a transaction at the time of their issuance, 2) the fair value measurements for certain instruments that require subsequent measurement at fair value on a recurring basis and 3) for disclosing the fair value of financial instruments subsequently carried at amortized cost. When the determination of the fair value of a new loan is required, discounted cash flow techniques which includes inputs that are not based on observable market data and inputs that are derived from observable market data are used. When determining the appropriate discount rates to use, we seek comparable interest rates where available. If unavailable, we use those considered appropriate for the risk profile of a company in the industry.
The fair value estimates could be significantly different because of the use of judgment and the inherent uncertainty in estimating the fair value of these instruments that are not quoted in an active market.
Leases - We determine the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain that this option will not be exercised.
We have the option, under some of its leases to lease the assets for additional terms of up to fifteen years. Judgement is applied in evaluating whether it is reasonably certain to exercise the option to renew. That is, all relevant factors that create an economic incentive for it to exercise the renewal are considered. After the commencement date, the lease term is reassessed if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew.
The renewal period is included as part of the lease term for a manufacturing plant lease since we estimated it is reasonably certain to exercise due to the importance of this asset to its operations, the limited availability on the market of a similar asset with similar rental terms and the related cost of moving the production equipment to another facility.
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Uncertainty over income tax treatments - R&D tax credits for the current period and prior periods are measured at the amount we expects to recover, based on its best estimate and judgment, of the amounts it expects to receive from the tax authorities as at the reporting date, either in the form of income tax refunds or refundable grants. However, there are uncertainties as to the interpretation of the tax legislation and regulations, in particular regarding what constitutes eligible R&D activities and expenditures, as well the amount and timing of recovery of these tax credits. In order to determine whether the expenses it incurs are eligible for R&D tax credits, we must use judgment and may resort to complex techniques, which makes the recovery of tax credits uncertain. As a result, there may be a significant difference between the estimated timing and amount recognized in the consolidated financial statements in respect of tax credits receivable and the actual amount of tax credits received as a result of the tax administrations' review of matters that were subject to interpretation. The amounts recognized in the consolidated financial statements are based on our best estimates and in our best possible judgment, as noted above.
Assessing the recoverable amount of long-lived assets - We evaluate the recoverable value of long-lived assets when indicators of impairment arise or as part of the annual impairment test, if they are intangible assets not yet available for use. The recoverable value is the higher of the value in use and the fair value less cost to sell.
Long-lived assets include capital assets and intangible assets such as licenses and other rights and some of these rights are considered not available for use.
When calculating the value in use, we must make estimates and assumptions regarding the estimated future cash flows and their timing including the amount and timing of the capital expenditure investments necessary to increase manufacturing capacities, to bring the facilities to Good Manufacturing Practices standards, timing of production capacities coming on-line, production costs, ongoing research and clinical trial expenses, market penetration and selling prices for our product candidates and, the date of approval of the product candidates for commercial sale, if ever. The future cash flows are estimated using a five-year projection of cash flows before taxes which are based on the most recent budgets and forecasts available. If the projections include revenues in the fifth year, then that year is extrapolated, using an expected annual growth rate. The estimated cash flows are then discounted to their net present value using a pre-tax discount rate that includes a risk premium specific to the line of business.
When calculating the fair value less cost to sell of an asset or a group of assets for which selling price information for comparable assets are not readily available, we also must make assumptions regarding the value it may recuperate from its sale.
During the year ended December 31, 2019 and 2018, as a result of strategic decisions made on the areas where we would focus our resources, several impairments recorded on intangible assets (see section impairment losses in the operations results).
Expense recognition of restricted share units – The RSU expense recognized for RSU in which the performance conditions have not yet been met, is based on an estimation of the probability of successful achievement of a number of performance conditions, many of which depend on research, regulatory process and business development outcomes which are difficult to predict, as well as the timing of their achievement. The final expense is only determinable when the outcome is known.
Valuation of deferred income tax assets – To determine the extent to which deferred income tax assets can be recognized, we estimate the amount of probable future taxable profits that will be available against which deductible temporary differences and unused tax losses can be utilized. We exercise judgment to determine the extent to which realization of future taxable benefits is probable, considering the history of taxable profits, budgets and forecasts and availability of tax strategies.
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Financial instruments
Use of financial instruments
The financial instruments that we used result from our operating and investing activities, namely in the form of accounts receivables and payables, and from our financing activities resulting usually in the issuance of long‑term debt. We do not use financial instruments for speculative purposes and have not issued or acquired derivative financial instruments for hedging purposes. The following table presents the carrying amounts of our financial instruments at December 31, 2019 and 2018.
| | | | | | 2019 | | | 2018 | |
Financial assets | | | | | | | | | | | | |
Cash and cash equivalents | | | | | | $ | 61,285 | | | $ | 7,389 | |
Trade receivables | | | | | | | 1,677 | | | | 7,371 | |
Restricted cash | | | | | | | 169 | | | | 245 | |
Long-term deposits | | | | | | | 143 | | | | 142 | |
Other | | | | | | | - | | | | 24 | |
Financial liabilities | | | | | | | | | | | | |
Trade payables | | | | | | $ | 10,496 | | | $ | 21,097 | |
Wages and benefits payable | | | | | | | 5,593 | | | | 1,975 | |
Settlement fee payable | | | | | | | - | | | | 102 | |
Royalty payment obligations | | | | | | | 3,148 | | | | 3,077 | |
License acquisition payment obligation | | | | | | | 1,302 | | | | 2,726 | |
Warrant liability | | | | | | | - | | | | 157 | |
Long-term debt | | | | | | | 8,834 | | | | 125,804 | |
Impact of financial instruments in the consolidated statements of operations
The following line items in the consolidated statement of operations for the quarter and the year ended December 31, 2019 include income, expense, gains and losses relating to financial instruments:
| • | loss on extinguishments of liabilities |
| • | change in fair value of financial instruments measured at fair value through profit or loss |
| • | foreign exchange gains and losses. |
Subsequent events
Consistent with our strategy to limit our involvement in the plasma-derived therapeutics segment to the commercialization of Ryplazim®, we decided to close our Rockville, Maryland R&D facility by the end of the 2020 and made an announcement to the employees during the first quarter of 2020. As a result of this decision, we will be recognizing, during the service period in 2020, an expense of approximately $2.0 million (US$1.5 million) in the consolidated statement of operations representing the maximum termination benefits we have committed to pay the employees. In connection with this closure, we also recognized impairments on our capital related to this facility in 2019.
On January 29, 2020, we issued 96,833 common shares as a consideration for the final payment for the licence acquired on January 29, 2018.
JOBS Act Exemptions and Foreign Private Issuer Status
We qualify as an “emerging growth company” as defined in the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. This includes an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act. We may take advantage of this exemption for up to five years or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company if we have more than $1.07 billion in total annual gross revenue, have more than $700.0 million in market value of our common shares held by non-affiliates or issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced burdens.
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We will not take advantage of the extended transition period provided under Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Since IFRS makes no distinction between public and private companies for purposes of compliance with new or revised accounting standards, the requirements for our compliance as a private company and as a public company are the same.
Additionally, we report under the Exchange Act as a non-U.S. company with foreign private issuer status. Even after we no longer qualify as an emerging growth company, as long as we qualify as a foreign private issuer under the Exchange Act, we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including:
| • | the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; |
| • | the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; |
| • | the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events; and |
| • | Regulation FD, which regulates selective disclosures of material information by issuers. |
Liquidity and Capital Resources
Overview
Our primary uses of cash are to fund our ongoing research and development activities. We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development of, continue or initiate clinical trials of, and seek marketing approval for, our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to program sales, marketing, manufacturing and distribution to the extent that such sales, marketing and distribution are not the responsibility of potential collaborators as a result of licensing or partnering deals. Furthermore, we expect to continue to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.
Identifying potential product candidates and conducting nonclinical studies and clinical trials is a time-consuming, expensive and uncertain process that takes many years to complete. Success in the generation of the necessary data or results required to obtain marketing approval and achieve product sales cannot be certain. In addition, successful commercialisation of our product candidates cannot be certain and any resulting revenue derived from product sales would not arise for many years, if at all.
Until such time that we can generate substantial product revenue, if ever, we will need to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, shareholder ownership interest may be diluted, and the terms of any additional securities may include liquidation or other preferences that adversely affect the rights of shareholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.
If we raise funds through additional collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or to grant licenses on terms that may not be favorable to us.
If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
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Liquidity position at December 31, 2019 and analysis of going concern
At December 31, 2019, we had a positive working capital position of $63.6 million. This financial position combined with the remaining amount available to draw on the line of credit from SALP of $29.1 million at the date of this MD&A, should we decide to use it, would provide us sufficient cash runway to fund our operating activities and meet our contractual and financial obligations for a period of at least 12 months from December 31, 2019. The terms of the line of credit from SALP are provided in the related party section of the MD&A.
We believe this working capital position gives us the latitude to continue maintaining our operating activities at a low spending level while we continue taking steps to further transition our company to focus on the development of our small molecule product candidates.
We intend to pursue a number of financing initiatives that could potentially extend our cash runway, if completed. Potential sources of funding include the key ones identified below:
| • | We are continuing our ongoing discussions with potential licensees for our drug pipeline; |
| • | We are continuing to evaluate avenues to monetize non-core assets; and |
| • | We will consider raising funds through the issuance of equity instruments. |
Although we made use of our at-the-market, or ATM facility in the first two months of 2019, the use of this facility was suspended concurrently with the debt restructuring in April 2019 and will not be used as a source of financing.
Despite our improved liquidity situation since April 2019, we are an R&D stage enterprise and until we can generate a sufficient amount of product revenue to finance our cash requirements, management expects to finance future cash needs primarily through a combination of public or private equity offerings, debt financings, strategic collaborations, business and asset divestitures, and grant funding.
Debt Facility
Prior Indebtedness
On April 27, 2017, we entered into a third loan agreement with SALP, or the Third Loan Agreement, which provides for an OID loan in the principal amount of $25.0 million. This loan has been amended. We subsequently entered into a fourth loan agreement with SALP, or the Fourth Loan Agreement, on November 30, 2017, and providing for a delayed-draw term loan of up to US$80.0 million, as amended.
On November 14, 2018, we entered into an omnibus amendment agreement with SALP, extending the maturity dates of all loan agreements with SALP outstanding as of such date. As part of the consideration for the extension of the maturity dates of the indebtedness under these agreements, we cancelled 100,117 existing warrants and granted 128,056 warrants to SALP, bearing a term of eight years and exercisable at a per share price equal to $1,000.00.
We also entered into an amendment agreement to the Fourth Loan Agreement on February 22, 2019 securing an additional amount of up to US$15.0 million from SALP under the Fourth Loan Agreement.
Restructuring Transactions
On April 23, 2019, we completed transactions pursuant to a debt restructuring agreement we entered into on April 15, 2019 with SALP and certain of our subsidiaries, or the Restructuring Agreement. In accordance with the Restructuring Agreement, (i) SALP acquired 15,050,312 of our common shares, or the New Common Shares, at a price per common share of $15.21, or the Transaction Price, for a total purchase price of $228.9 million, which was satisfied by the cancellation of outstanding indebtedness owed by us, and (ii) certain Warrants to purchase our common shares held by SALP were amended, with new warrants being issued, or the New Warrants, exercisable for 168,735 common shares at a per-share exercise price equal to the Transaction Price. Under the Restructuring Agreement, all but $10.0 million of the outstanding debt we owed to SALP in the
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aggregate amount of $238.9 million was converted into common shares. We also entered into a consolidated loan agreement with SALP on April 23, 2019, relating to future indebtedness.
Line of Credit
On November 11, 2019, we entered into an amendment to our April 23, 2019 consolidated loan agreement with SALP to include a non-revolving $75.0 million secured line of credit, or the LOC. The LOC limit available to draw upon will be automatically reduced by the amounts of net proceeds generated, upon the occurrence of all or any of the following transactions; the sale of the bioseparations operations, a licensing transaction for our Ryplazim® or equity raises. As a result of the closing of the sale of our bioseparation business to KKR, the principal amount available under the LOC was automatically reduced by an amount equal to the net proceeds we received for such sale, which was $44.7 million. Our ability to draw on the LOC expires on May 11, 2021. As of the date of this MD&A, we have not drawn any amount on the LOC and $30.3 million was available to be drawn as at December 31, 2019 and $29.1 million was available to be drawn as at March 19, 2020.
Cash flow analysis
The following major cash flow components are presented on a total company basis, inclusive of continuing and discontinued operations.
The summarized consolidated statements of cash flows for the year ended December 31, 2019 and the corresponding period in 2018 and 2017 are presented below.
| | Year ended December 31 | | Change | |
| | 2019 | | | 2018 | | | 2017 | | | 2019 vs 2018 | | | 2018 vs 2017 | |
Cash flows used in operating activities | | $ | (99,390 | ) | | $ | (82,454 | ) | | $ | (122,573 | ) | | $ | (16,936 | ) | | $ | 40,119 | |
Cash flows from financing activities | | | 117,919 | | | | 72,158 | | | | 117,452 | | | | 45,761 | | | | (45,294 | ) |
Cash flows used in investing activities | | | 36,096 | | | | (5,859 | ) | | | 1,119 | | | | 41,955 | | | | (6,978 | ) |
Net change in cash and cash equivalents during the year | | | 54,625 | | | | (16,155 | ) | | | (4,002 | ) | | | 70,780 | | | | (12,153 | ) |
Net effect of currency exchange rate on cash and cash equivalents | | | (729 | ) | | | 378 | | | | (638 | ) | | | (1,107 | ) | | | 1,016 | |
Cash and cash equivalents, beginning of the year | | | 7,389 | | | | 23,166 | | | | 27,806 | | | | (15,777 | ) | | | (4,640 | ) |
Cash and cash equivalents, end of the year | | $ | 61,285 | | | $ | 7,389 | | | $ | 23,166 | | | $ | 53,896 | | | $ | (15,777 | ) |
Cash flows used in operating activities increased by $16.9 million during the year ended December 31, 2019 compared to the same period in 2018. The cash flows used in operating activities before change in non-working capital decreased by $8.9 million while the change in non-cash working capital spending increased by $25.9 million. The increase was mainly due to a significant increase in payments to suppliers as we paid our past due invoices following the receipt of funding during the quarter ended June 30, 2019. This was partially offset by lower operating expenses and by the fact that under IFRS 16, the cash disbursements pertaining to leases are now part of cash flows from financing activities whereas in 2018 and 2017, these payments were mostly part of cash flows from operating activities.
Cash flow used in operating activities decreased by $40.1 million during the year ended December 31, 2018 compared to the same period in 2017. The decrease was mainly a result of inflows from the sale of normal source plasma in 2018, the reduced spending in clinical and pre-clinical studies and marketing, and a reduction in plasminogen inventory build that occurred in 2017 in preparation for expected commercialization.
Cash flows from financing activities increased by $45.8 million during the year ended December 31, 2019 compared to the same period in 2018. This increase was mainly due to the April 23, 2019 equity financings that raised gross proceeds of $75.0 million and the rights offering in June 2019 that raised $39.4 million. This increase was partially offset by the decrease in proceeds from debt and warrant issuances on the credit facility during the year ended December 31, 2019 by $59.2 million compared to the same period in 2018. This increase was also offset by the fact that all lease payments, interest and principal, are now included as part of cash flows from financing activities whereas in 2018, only payments on leases classified as finance leases under the
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previous standard, which is a small portion our leases, were presented under this caption, increasing the disbursements by $9.3 million.
Cash flows from financing activities decreased by $45.3 million during the year ended December 31, 2018 compared to the same period in 2017. This decrease was mainly due to a decrease in proceeds being received from common shares issued under our existing ATM facility and no proceeds from the exercise of future investment rights in 2018, whereas future investment rights and proceeds from common share issuances contributed $74.2 million in financing activities in 2017. This decrease was partially offset by the receipt of proceeds from the issuance of debt and warrants under the then-existing credit facility during 2018 being higher by $28.4 million than in 2017.
Cash flows from investing activities increased by $42.0 million during the year ended December 31, 2019 compared to the same period in 2018 mainly due to the proceeds from the sales of the bioseparations operations, net of cash divested and transaction cost, of $39.7 million. Cash flows from investing activities decreased by $7.0 million during the year ended December 31, 2018 compared to the same period in 2017 mainly due to the proceeds from the sale of marketable securities and short-term investments.
In November 2018, we entered into an ATM equity distribution agreement or EDA under which we were able, at our discretion and from time to time, subject to conditions in the EDA, to offer common shares through ATM issuances on the TSX or any other marketplace for aggregate proceeds not exceeding $31 million. This agreement provided that common shares were to be sold at market prices prevailing at the time of sale. For the year ended December 31, 2018, a total of 1,945 common shares were issued under the ATM, at an average price of $386.12 per share, for aggregate gross proceeds of $0.8 million and total net proceeds of $0.7 million. For the year ended December 31, 2019, a total of 12,865 common shares were issued under the ATM at an average price of $327.55 per share, for aggregate gross proceeds of $4.2 million and total net proceeds of $4.0 million. The ATM facility was suspended concurrently with the debt restructuring in April 2019.
Research and Development, Patents and Licences
For a discussion of our research and development activities, see “Item 4.B—Business Overview” and “Item 5.A—Operating Results.” of the AIF.
Trend Information
Other than as disclosed elsewhere in MD&A, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2019 to December 31, 2019 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions. For a discussion of trends, see “Item 4.B.—Business overview,” “Item 5.A.—Operating results,” and “Item 5.B.—Liquidity and capital resources.” of the AIF.
Off-balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
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Tabular Disclosure of Contractual Obligations
The timing and expected contractual outflows required to settle our financial obligations recognized in the consolidated statement of financial position at December 31, 2019 and unrecognized purchase obligations are presented in the table below:
| | | | | | Contractual Cash flows | |
| | Carrying amount | | | Less than 1 year | | | 1-3 years | | | 3 - 5 years | | | More than 5 years | | | Total | |
Accounts payable and accrued liabilities 1) | | $ | 22,808 | | | $ | 22,808 | | | $ | - | | | $ | - | | | $ | - | | | $ | 22,808 | |
Long-term portion of royalty payment obligations | | | 105 | | | | - | | | | 52 | | | | 52 | | | | 254 | | | | 358 | |
Lease liabilities | | | 38,237 | | | | 8,901 | | | | 16,824 | | | | 13,529 | | | | 37,658 | | | | 76,912 | |
Long-term portion of other employee benefit liabilities | | | 180 | | | | - | | | | 180 | | | | | | | | - | | | | 180 | |
Long-term debt | | | 8,834 | | | | 1,176 | | | | 2,017 | | | | 11,322 | | | | - | | | | 14,515 | |
Purchase obligations | | n/a | | | | 4,816 | | | | 19,524 | | | | - | | | | - | | | | 24,340 | |
| | $ | 70,164 | | | $ | 37,701 | | | $ | 38,597 | | | $ | 24,903 | | | $ | 37,912 | | | $ | 139,113 | |
1)Short term portions of the royalty payment obligations and of other employee benefit liabilities are included in the account payable and accrued liabilities.
Commitments
The minimum lease payments under lease agreements are now included on the statement of financial position under lease liabilities following the adoption of IFRS 16. As of December 31, 2018, we had $75.0 million of lease commitments compared to contractual cash flows of $76.9 million relating to lease liabilities included in the financial obligations as at December 31, 2019 following the adoption of IFRS 16. The increase is mainly due to the inclusion of lease payments beyond minimum commitments when we believe it is reasonably certain we will exercise our options to extend the lease period for certain leases even though we have not yet exercised the renewal option. The increase is also due to the new lease commenced during the year for the new plasma collection center in Amherst, New York and the Liminal Biosciences Limited office in Cambridge, UK.
Royalties
SALP has a right to receive a 2% royalty on future revenues relating to patents of a specified small molecule product candidate and analogues, existing as of the date of the agreement was signed. The obligation under this royalty agreement is secured by all of our assets until the expiry of the last patent anticipated in 2033.
In the normal course of business, we enter into license agreements for the market launching or commercialization of product candidates, if approved. Under these licenses, including the ones mentioned above, we have committed to pay royalties ranging generally between 0.5% and 12.0% of net sales from products we may commercialize, if approved, and 3% of license revenues in regard to certain small molecule product candidates.
Other commitments
We signed a long-term manufacturing contract with a third party which provides us with additional manufacturing capacity, or the CMO contract. In connection with this CMO contract, we have committed to a minimum annual spending of $7.0 million for 2020 and $9.0 million for 2021 to 2030 (the end of the initial term) which includes all expenditures under the contract. As of December 31, 2019, the remaining payment under the CMO contract was $98.9 million or $48.7 million after deduction of the minimum lease payments under the CMO contract recognized in the consolidated financial statements as a lease liability following the
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adoption of IFRS 16.
As at December 31, 2019, total commitment remaining under the CMO agreement that are not recognized in the lease liability are as follows:
| | | Within 1 year | | | 2 - 5 years | | | Later than 5 years | | | Total | |
CMO operating expense commitment | | | $ | 3,464 | | | $ | 20,761 | | | $ | 24,509 | | | $ | 48,734 | |
Quantitative and Qualitative Disclosures about Market Risk
We have exposure to credit risk, liquidity risk and market risk. Our Board of Directors has the overall responsibility for the oversight of these risks and reviews our policies on an ongoing basis to ensure that these risks are appropriately managed.
i) Credit risk:
Credit risk is the risk of financial loss to our company if a customer, partner or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company’s cash, investments, receivables and share purchase loan to a former officer. The carrying amount of the financial assets represents the maximum credit exposure.
We mitigate credit risk through its reviews of new customer’s credit history before extending credit and conducts regular reviews of its existing customers’ credit performance. We evaluate at each reporting period, the lifetime expected credit losses on our accounts receivable balances based on the age of the receivable, credit history of the customers and past collection experience.
In 2017, we recorded bad debt expense of $20.5 million in regard to the JRP license agreement during the fourth quarter and the year ended December 31, 2017. In 2018 and 2019, there was no bad debt expense.
ii) Liquidity risk:
Liquidity risk is the risk that we will not be able to meet financial obligations as they come due. We manage our liquidity risk by continuously monitoring forecasts and actual cash flows. Our current liquidity situation is discussed in the liquidity and contractual obligation section of this MD&A.
iii) Market risk:
Market risk is the risk that changes in market prices, such as interest rates and foreign exchange rates, will affect our income or the value of its financial instruments.
Our interest-bearing financial liabilities have fixed rates and as such there is limited exposure to changes in interest payments as a result of interest rate risk.
b) Foreign exchange risk:
We are exposed to the financial risk related to the fluctuation of foreign exchange rates. We operate in the U.S. and the U.K., and previously had operations in the Isle of Man (discontinued operations) and a portion of our expenses incurred are in U.S. dollars and in pounds sterling (£). Historically, the majority of our revenues have been in U.S. dollars and in £, continuing operations revenues are in U.S. dollars, which serve to mitigate a portion of the foreign exchange risk relating to the expenditures. Financial instruments that have exposed us to foreign exchange risk have been cash and cash equivalents, short-term investments, receivables, trade and other payables, lease liabilities, licence payment obligations and the amounts drawn on the credit facility. We manage foreign exchange risk by holding foreign currencies we received to support forecasted cash outflows in foreign currencies.
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Safe Harbor
This MD&A contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and as defined in the Private Securities Litigation Reform Act of 1995. See “Forward-Looking Statements.”
Risk factors
For a detailed discussion of risk factors which could impact the our results of operations and financial position, other than those risks pertaining to the financial instruments, please refer to our AIF filed on www.sedar.com or our 20-F filed on www.sec.gov/edgar.
Disclosure controls and procedures and internal controls over financial reporting
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation.
The CEO and CFO have evaluated, or caused the evaluation of, under their supervision, the design and operating effectiveness of our disclosure controls and procedures. Based upon the evaluation, the CEO and CFO have concluded that the disclosure controls and procedures were effective as of December 31, 2019.
Internal control over Financial Reporting
Internal controls over financial reporting (ICFR) are designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.
Due to its inherent limitation, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
The CEO and CFO are responsible for establishing and maintaining adequate ICFR. They have evaluated, or caused the evaluation of, under their supervision, the design and operating effectiveness of the Company’s ICFR as of December 31, 2019 based on the framework established in Internal Control – Integrated Framework (2013) by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, the CEO and CFO concluded that the ICFR were effective as of December 31, 2019.
Change in Internal Controls over Financial Reporting
In accordance with the National Instrument 52-109, we have filed certificates signed by the CEO and CFO that, among other things, report on the design of disclosure controls and procedures and the design of ICFR as at December 31, 2019.
There have been no changes in the Company’s ICFR that occurred during the quarter ended December 31, 2019 that have materially affected or are reasonably likely to materially affect its ICFR.
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