Transition Therapeutics (TTHI) 6-K Transition Therapeutics Announces Second Quarter Fiscal 2016 Financial Results

Exhibit 99.3

Consolidated Financial Statements

(Unaudited)

Transition Therapeutics Inc.

For the three and six months ended December 31, 2015 and 2014

Transition Therapeutics Inc.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

In Canadian Dollars	Note		As At December 31, 2015			As at June 30, 2015
Assets
Current assets
Cash				29,070,189			40,510,758
Other receivables				72,553			265,189
Income tax and investment tax credits receivable				399,668			399,668
Prepaid expenses and deposits				328,921			259,143
				29,871,331			41,434,758
Non-current assets
Property and equipment				152,530			191,944
Intangible assets		5		7,759,188			8,022,383
Total assets				37,783,049			49,649,085
Liabilities
Current liabilities
Trade and other payables		6		2,064,780			8,549,895
Contingent consideration payable		7		935,848			858,257
				3,000,628			9,408,152
Non-current liabilities
Contingent consideration payable		7		3,980,476			3,503,344
Total liabilities				6,981,104			12,911,496
Equity attributable to owners of the Company
Share capital		9		233,623,544			233,633,493
Warrants		9		3,150,558			5,176,397
Contributed surplus				17,170,146			14,771,907
Share-based payment reserve		9		6,472,380			5,892,305
Accumulated other comprehensive income				(662,748	)		(281,814	)
Deficit				(228,951,935	)		(222,454,699	)
Total equity				30,801,945			36,737,589
Total liabilities and equity				37,783,049			49,649,085
Contingencies and commitments		12

The notes are an integral part of these consolidated financial statements

On behalf of the Board:

Tony Cruz	Christopher Henley
Director	Director

2

Transition Therapeutics Inc.

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

For the six and three months ended December 31, 2015 and 2014

(Unaudited)

In Canadian Dollars, except per share data	Note	Six month period ended December 31, 2015		Six month period ended December 31, 2014		Three month period ended December 31, 2015		Three month period ended December 31, 2014
Expenses
Research and development	10	6,388,426		31,939,780		1,662,946		15,904,889
Selling, general and administrative expenses	10	2,619,202		2,509,281		1,218,794		1,203,449
Operating Loss		(9,007,628	)	(34,449,061	)	(2,881,740	)	(17,108,338	)
Change in fair value of contingent consideration payable	7	(230,422	)	(470,959	)	(1,563	)	(245,658	)
Interest income		63,719		112,247		26,255		46,554
Foreign exchange gain		2,677,095		2,202,310		851,268		397,303
Net loss for the period		(6,497,236	)	(32,605,463	)	(2,005,780	)	(16,910,139	)
Other Comprehensive loss for the period
Items that may be subsequently reclassified to net income:
Cumulative translation adjustment		(380,934	)	(39,676	)	(384,448	)	(57,099	)
Comprehensive loss for the period		(6,878,170	)	(32,645,139	)	(2,390,228	)	(16,967,238	)
Basic and diluted net loss per common share	11	(0.17	)	(0.93	)	(0.05	)	(0.48	)

The notes are an integral part of these consolidated financial statements.

3

Transition Therapeutics Inc.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the six month periods ended December 31, 2015 and 2014

(Unaudited)

					Attributable to equity holders of the Company
In Canadian Dollars	Note		Number of common shares		Share capital			Warrants			Contributed surplus		Share-based payment reserve			Accumulated Other Comprehensive Income			Deficit			Total equity
			#		$			$			$		$			$			$			$
Balance, July 1, 2015				38,878,879		233,633,493			5,176,397			14,771,907		5,892,305			(281,814	)		(222,454,699	)		36,737,589
Net loss for the period				-		-			-			-		-			-			(6,497,236	)		(6,497,236	)
Cumulative translation adjustment				-		-			-			-		-			(380,934	)		-			(380,934	)
Share issuance costs pursuant to public offering, net		9		-		(9,949	)		-			-		-			-			-			(9,949	)
Share options exercised, expired or cancelled		9		-		-			-			372,400		(372,400	)		-			-			-
Warrants expired		9		-		-			(2,025,839	)		2,025,839		-			-			-			-
Share-based payment compensation expense		9		-		-			-			-		952,475			-			-			952,475
Balance, December 31, 2015				38,878,879		233,623,544			3,150,558			17,170,146		6,472,380			(662,748	)		(228,951,935	)		30,801,945
Balance, July 1, 2014				35,303,913		207,374,493			5,176,397			14,768,221		2,866,292			24,028			(171,115,171	)		59,094,260
Net loss for the period				-		-			-			-		-			-			(32,605,463	)		(32,605,463	)
Cumulative translation adjustment				-		-			-			-		-			(39,676	)		-			(39,676	)
Share options exercised, expired or cancelled		9		12,170		44,764			-			-		(18,535	)		-			-			26,229
Share-based payment compensation expense		9		-		-			-			-		1,565,220			-			-			1,565,220
Balance, December 31, 2014				35,316,083		207,419,257			5,176,397			14,768,221		4,412,977			(15,648	)		(203,720,634	)		28,040,570

The notes are an integral part of these consolidated financial statements.

4

Transition Therapeutics Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six and three month periods ended December 31, 2015 and 2014

(Unaudited)

In Canadian Dollars	Note		Six month period ended December 31, 2015			Six month period ended December 31, 2014			Three month period ended December 31, 2015			Three month period ended December 31, 2014
Cash flows from operating activities
Net loss for the period				(6,497,236	)		(32,605,463	)		(2,005,780	)		(16,910,139	)
Adjustments for:
Change in fair value of contingent consideration payable				230,422			470,959			1,563			245,658
Depreciation and amortization				372,547			332,826			186,447			171,230
Share-based payment compensation expense				952,475			1,565,220			534,960			673,566
Accrued interest				-			34,562			-			34,562
Unrealized foreign exchange gain				(3,033,883	)		(2,653,341	)		(999,294	)		(846,862	)
Change in working capital		13		(6,816,644	)		(3,650,791	)		(1,473,763	)		(3,418,617	)
Net cash used in operating activities				(14,792,319	)		(36,506,028	)		(3,755,867	)		(20,050,602	)
Cash flows from investing activities
Maturity of short term investments				-			3,025,000			-			3,025,000
Purchase of property and equipment				(687	)		(119,722	)		-			(82,256	)
Net cash (used in) provided by investing activities				(687	)		2,905,278			-			2,942,744
Cash flows from financing activities
Share issuance costs paid				(9,949	)		-			-			-
Proceeds from share options exercised		9		-			26,229			-			20,791
Net cash provided by (used in) financing activities				(9,949	)		26,229			-			20,791
Foreign exchange gains on cash				3,362,386			3,118,841			1,022,855			1,061,351
Net decrease in cash				(11,440,569	)		(30,455,680	)		(2,733,012	)		(16,025,716	)
Cash at beginning of period				40,510,758			57,212,004			31,803,201			42,782,040
Cash at end of period				29,070,189			26,756,324			29,070,189			26,756,324

The notes are an integral part of these consolidated financial statements

5

Notes to the Audited Consolidated Financial Statements

December 31, 2015

(Unaudited in Canadian Dollars)

1. GENERAL INFORMATION AND NATURE OF OPERATIONS

Transition Therapeutics Inc. and its subsidiaries (together the Company or Transition) was incorporated by Articles of Incorporation under the Business Corporations Act (Ontario) on July 6, 1998. The Company is a public company with common shares listed on both the NASDAQ and Toronto Stock Exchange and is incorporated and domiciled in Canada. The address of its registered office is 101 College Street, Suite 220, Toronto, Ontario, Canada.

The Company is a product-focused biopharmaceutical company developing therapeutics for disease indications with large markets. The Company’s lead technologies are focused on the treatment of agitation and aggression in Alzheimer’s disease and diabetes.

The success of the Company is dependent on bringing its products to market, obtaining the necessary regulatory approvals and achieving future profitable operations. The continuation of the research and development activities and the commercialization of its products are dependent on the Company’s ability to successfully complete these activities and to obtain adequate financing through a combination of financing activities and operations. It is not possible to predict either the outcome of future research and development programs or the Company’s ability to fund these programs going forward.

2. BASIS OF PREPARATION

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board for interim financial statements, including IAS 34 Interim Financial Reporting. The consolidated financial statements have been prepared using the historical cost convention except for the revaluation of contingent consideration payable to fair value.

The preparation of financial statements in conformity with IFRS requires use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in the annual consolidated financial statements for the year ended June 30, 2015.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Board of Directors approved the interim consolidated financial statements for issuance on February 5, 2016. The significant accounting policies that have been applied in the preparation of these interim consolidated financial statements are described in the Company’s annual financial statements for the year ended June 30, 2015 and have been applied to all periods presented.

IFRS issued but not yet adopted by the Company are disclosed in the Company’s annual financial statements for the year ended June 30, 2015 except as follows:

On January 13, 2016, the International Accounting Standards Board issued IFRS 16, Leases which replaces the current guidance in IAS 17, Leases. IFRS 16 requires lessees to recognize a lease liability reflecting future lease payments and a right of use asset for virtually all lease contracts. IFRS 16 must be applied to an entity’s first annual IFRS financial statements for periods beginning on or after January 1, 2019, with early adoption permitted. Management is evaluating the standard and has not yet determined the impact on its consolidated financial statements.

6

Notes to the Audited Consolidated Financial Statements

December 31, 2015

(Unaudited in Canadian Dollars)

4. FINANCIAL RISK MANAGEMENT

4.1    Categories of financial assets and liabilities

All financial instruments are measured at amortized cost except for the contingent consideration payable which is measured at fair value. The following table outlines the Company’s financial instruments, their classification, carrying value and fair value.

Financial Instruments as at December 31, 2015	Classification	Carrying Value ($)		Fair Value ($)
Cash	Loans and receivables		29,070,189		29,070,189
Other receivables	Loans and receivables		72,553		72,553
Trade and other payables	Other liabilities		2,064,780		2,064,780
Contingent consideration payable	Fair value through profit and loss		4,916,324		4,916,324

Financial Instruments as at June 30, 2015	Classification	Carrying Value ($)		Fair Value ($)
Cash	Loans and receivables		40,510,758		40,510,758
Other receivables	Loans and receivables		265,189		265,189
Trade and other payables	Other liabilities		8,549,895		8,549,895
Contingent consideration payable	Fair value through profit and loss		4,361,601		4,361,601

The Company has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies; however, considerable judgment is required to develop these estimates. The carrying value of cash, other receivables and accounts payable and accrued liabilities approximates fair value due to the short-term nature of the financial instruments.

The contingent consideration is measured at fair value based on level 3 inputs. The contingent consideration is not based on observable inputs and is measured using a discounted cash flow analysis of expected payments in future periods. The significant estimates used in the fair value calculations are as follows:

(a) Management has estimated the timing of the milestone payments based on current expectations and plans for the development of ELND005. The milestone payments are assigned a probability based on industry statistics for the successful development of pharmaceutical products. An increase of 10% applied to the probability assumptions, with all other variables held constant, will increase the contingent consideration payable by $1,624,168. Conversely a decrease of 10% applied to the probability assumptions, with all other variables held constant, would decrease the contingent consideration payable by $1,710,592;

(b) The probability adjusted cash flows are discounted at a rate of 20% which is management’s best estimate of the Company’s cost of capital. An increase of 5% to the discount rate would decrease the contingent consideration payable by $1,191,416. Conversely, a decrease of 5% to the discount rate would increase the contingent consideration payable by $1,682,499.

7

Notes to the Audited Consolidated Financial Statements

December 31, 2015

(Unaudited in Canadian Dollars)

4.2 Financial risk factors

The Company’s activities expose it to a variety of financial risks: market risk (including foreign exchange and interest rate risks), credit risk and liquidity risk. Risk management is the responsibility of the Company’s finance function which identifies, evaluates and where appropriate, mitigates financial risks.

(a)        Foreign exchange risk

The Company operates in Canada and has relationships with entities in other countries. Foreign exchange risk arises from purchase transactions, as well as recognized financial assets and liabilities denominated in foreign currencies, mainly the US dollar. The Company does not enter into hedging or other contracts to mitigate its exposure to foreign exchange risk and maintains sufficient US dollars to meet the Company’s planned US dollar expenses.

Financial instruments in foreign currencies at December 31, 2015 and June 30, 2015 are approximately:

	December 31, 2015			June 30, 2015
	US$			US$
Cash		19,269,111			30,544,014
Trade and other payables		(276,245	)		(102,464	)
		18,992,866			30,441,550

Fluctuations in the US dollar exchange rate could potentially have a significant impact on the Company’s results. At December 31, 2015, if the Canadian dollar weakened 10% against the US dollar, with all other variables held constant, comprehensive loss for the six month period ended December 31, 2015 would have decreased by approximately $1,581,000. Conversely, if the Canadian dollar strengthened 10% against the US dollar, with all other variables held constant, comprehensive loss for the six month period ended December 31, 2015 would have increased by approximately $1,581,000.

(b)        Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its obligations as they become due.

The Company’s investment policies are designed to maintain safety of principal and provide sufficient readily available cash in order to meet liquidity requirements. The Company manages its liquidity risk by forecasting cash flows from operations and anticipated investing and financing activities. All cash and short term investments have maturities less than one year.

At December 31, 2015 the Company’s financial liabilities which include trade and other payables are current and are expected to be repaid within 1 to 3 months of the period end date.

If all contingencies are satisfied, the contingent consideration payable is expected to be paid as follows:

Fiscal year ending June 30, 2017	$	2,847,759
Fiscal year ending June 30, 2021	$	3,797,096
Fiscal year ending June 30, 2022	$	18,111,664
Fiscal year ending June 30, 2023	$	20,760,000
Fiscal year ending June 30, 2024	$	20,760,000

8

Notes to the Audited Consolidated Financial Statements

December 31, 2015

(Unaudited in Canadian Dollars)

4.3 Capital risk management

The Company’s primary objective when managing capital is to ensure its ability to continue as a going concern in order to pursue the development of its drug candidates and the out-license of these drug candidates to pharmaceutical companies. The Company attempts to maximize return to shareholders by minimizing shareholder dilution and, when possible, utilizing non-dilutive arrangements such as collaborative partnership arrangements.

The Company includes equity comprised of issued share capital, warrants, contributed surplus and deficit in the definition of capital. The Company has financed its capital requirements primarily through share issuances since inception and collaborative partnership agreements.

The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and risk characteristics of the underlying assets. The Company monitors its cash requirements and market conditions to anticipate the timing of requiring additional capital to finance the development of its drug candidates. The Company is not subject to externally imposed capital requirements and there has been no change with respect to the overall capital management strategy during the six month period ended December 31, 2015 from the year ended June 30, 2015.

The Company’s current cash projection indicates that the current cash resources should enable the Company to execute its core business plan and meet its projected cash requirements beyond the next 12 months. However, the Company’s working capital may not be sufficient to meet its stated business objectives in the event of unforeseen circumstances or a change in the strategic direction of the Company. When, or if, the Company requires additional capital, there can be no assurance that the Company will be able to obtain further financing on favourable terms, if at all.

5. INTANGIBLE ASSETS

Intangible assets consist of the following:

	ENI Technology acquired (ELND005)			Lilly Licenses acquired (TT401/402)			Lilly SARM License acquired (TT701)			Total
	$			$			$			$
As at July 1, 2015
Cost		20,547,993			1,055,900			624,500			22,228,393
Accumulated amortization		(13,919,829	)		(282,019	)		(4,162	)		(14,206,010	)
Net book value July 1, 2015		6,628,164			773,881			620,338			8,022,383
As at December 31, 2015
Cost		20,547,993			1,055,900			692,000			22,295,893
Accumulated amortization		(14,195,999	)		(308,417	)		(32,289	)		(14,536,705	)
Net book value December 31, 2015		6,351,994			747,483			659,711			7,759,188
Period ended December 31, 2015
Opening net book value		6,628,164			773,881			620,338			8,022,383
Amortization charge		(276,170	)		(26,398	)		(28,127	)		(330,695	)
Foreign exchange		-			-			67,500			67,500
Net book value December 31, 2015		6,351,994			747,483			659,711			7,759,188

9

Notes to the Audited Consolidated Financial Statements

December 31, 2015

(Unaudited in Canadian Dollars)

	Technology acquired (ELND005)			Lilly Licenses acquired (TT401/402)			Lilly SARM License acquired (TT701)			Total
	$			$			$			$
As at July 1, 2014
Cost		20,547,993			1,055,900			-			21,603,893
Accumulated amortization		(13,367,489	)		(229,223	)		-			(13,596,712	)
Net book value		7,180,504			826,677			-			8,007,181
As at June 30, 2015
Cost		20,547,993			1,055,900			624,500			22,228,393
Accumulated amortization		(13,919,829	)		(282,019	)		(4,162	)		(14,206,010	)
Net book value June 30, 2015		6,628,164			773,881			620,338			8,022,383
Year ended June 30, 2015
Opening net book value		7,180,504			826,677			-			8,007,181
Acquisition of intangible assets		-			-			624,500			624,500
Amortization charge		(552,340	)		(52,796	)		(4,162	)		(609,298	)
Net book value June 30, 2015		6,628,164			773,881			620,338			8,022,383

The amortization of all intangible assets relates to the research and development efforts of the Company and has therefore been included in the “research and development” line in the consolidated statement of comprehensive loss.

6. TRADE AND OTHER PAYABLES

Trade and other payables consist of the following:

	December 31, 2015		June 30, 2015
	$		$
Accounts payable		320,679		2,594
Accrued expenses:
Clinical trials and manufacturing		1,062,335		7,769,521
Salaries and benefits		370,131		398,017
Professional fees and services		208,680		235,477
Other		102,955		144,286
		1,744,101		8,547,301
		2,064,780		8,549,895

7. CONTINGENT CONSIDERATION PAYABLE

(a) Under the terms of the ENI step-acquisition agreement, the Company is committed to pay the former shareholders of ENI contingent clinical milestones potentially totaling $10.9 million payable in cash or Transition common shares at the then market price and a royalty of up to 1% on net sales of the ELND005 product. The Company has recognized a liability as at December 31, 2015 of $1,502,576 (June 30, 2015 - $1,429,884) which represents the fair value of the contingent consideration payable to the former shareholders of ENI.

10

Notes to the Audited Consolidated Financial Statements

December 31, 2015

(Unaudited in Canadian Dollars)

(b) Under the terms of the ELND005 milestone and royalty agreement, the Company is committed to pay Perrigo Company Limited contingent approval and commercialization milestones potentially totaling US$40 million and a royalty of up to 6.5% on net sales of the ELND005 product. Accordingly, the Company has recognized a liability as at December 31, 2015 of $3,413,748 (June 30, 2015 - $2,931,717) which represents the fair value of the contingent consideration payable to Perrigo.

	Payable to		Payable to
	ENI		Perrigo			Total
Contingent Consideration Payable	$		$			$
Balance at July 1, 2014		1,030,775		2,807,511			3,838,286
Change in contingent consideration payable		399,109		(333,322	)		65,787
Foreign exchange		-		457,528			457,528
Balance at June 30, 2015		1,429,884		2,931,717			4,361,601
Change in contingent consideration payable		72,692		157,730			230,422
Foreign exchange		-		324,301			324,301
Balance at December 31, 2015		1,502,576		3,413,748			4,916,324

Significant assumptions and the sensitivity of changes to these assumptions are discussed in Note 4.

8. LICENSING AND COLLABORATION AGREEMENTS WITH ELI LILLY AND COMPANY

(a) On March 3, 2010, Transition and Eli Lilly and Company (“Lilly”) entered into a licensing and collaboration agreement granting Transition the rights to a series of preclinical compounds in the area of diabetes. Under the licensing and collaboration agreement, Transition will receive exclusive worldwide rights to develop and potentially commercialize a class of compounds that, in preclinical models showed potential to provide glycemic control and other beneficial effects including weight loss.

Under the terms of the agreement, Lilly received an up-front payment of US$1 million and retained the option to reacquire the rights to the compounds at a later date. The up-front payment of $1,055,900 (US$1 million) has been capitalized as a license acquired from Lilly and will be amortized over 20 years which represents the estimated remaining life of the underlying compounds and patents.

In June 2013, Lilly exercised their option and assumed all development and commercialization rights to type 2 diabetes drug candidate TT401. In conjunction with this assumption of rights, Transition received a milestone payment of $7,118,300 (US$7 million) which has been recognized as revenue during the year ended June 30, 2013. Lilly has assumed all costs and will perform all future development and commercialization activities of TT401. In fiscal 2015, Transition has paid US$14 million ($15,491,600) to Lilly in three separate installments during the Phase 2 clinical study. In return, Transition is eligible to receive up to approximately US$240 million in additional milestone payments and will also be eligible to receive a double-digit royalty on sales of TT401 products and a low single digit royalty on related compounds. The Company has no further funding obligations under the Agreement.

(b) On May 6, 2015, the Company, through its wholly owned subsidiary Transition Therapeutics Ireland Limited (“TTIL”), exclusively licensed worldwide rights to a novel small molecule drug candidate, TT701 from Lilly. Under the terms of the agreement, TTIL has acquired the rights to develop and commercialize TT701. Transition will pay Lilly upfront consideration of up to US$1 million. As of June 30, 2015, Transition has paid Lilly $624,500 (US$500,000) of the upfront consideration and this payment has been capitalized as a license acquired from Lilly and will be amortized over the estimated remaining life of 12.5 years. The remaining upfront payment of US$500,000 is due upon first patient enrollment in a clinical trial and is expected to be paid in fiscal 2016 once the milestone is achieved.

11

Notes to the Audited Consolidated Financial Statements

December 31, 2015

(Unaudited in Canadian Dollars)

9. SHARE CAPITAL

[a] Authorized

At December 31, 2015, the authorized share capital of the Company consists of an unlimited number of no par value common shares. The common shares are voting and are entitled to dividends if, as and when declared by the Board of Directors.

[b] Common shares issued and outstanding during the period

At December 31, 2015, there were 38,878,879 common shares issued and outstanding [June 30, 2015 – 38,878,879].

Warrants

Details of whole warrants outstanding at December 31, 2015 are as follows:

				Fair Value at Date of Issuance			Expiry
Warrants	#			$			Date
US$4.60 Warrants issued August 15, 2013		853,223			1,108,107		August 15, 2015
US$6.50 Warrants issued August 15, 2013		1,050,118			917,732		August 15, 2015
US$7.10 Warrants issued June 23, 2014		1,949,250			3,150,558		June 23, 2016
Warrants outstanding at June 30, 2015		3,852,591			5,176,397
US$4.60 Warrants expired August 15, 2015		(853,223	)		(1,108,107	)
US$6.50 Warrants expired August 15, 2015		(1,050,118	)		(917,732	)
Warrants outstanding at December 31, 2015		1,949,250			3,150,558

On August 15, 2015, the warrants issued on August 15, 2013 expired unexercised and accordingly, the carrying value of the expired warrants of $2,025,839 was reclassified to contributed surplus during the three month period ending September 30, 2015.

The remaining warrants outstanding at December 31, 2015 have a total fair value at date of issuance of $3,150,558 which was calculated using the Black-Scholes pricing model.

[c] Stock Options

							Weighted Average Exercise Price
Stock options	#			$			$
Stock options outstanding, July 1, 2015		2,755,764			5,892,305			4.82
Stock options expired [i]		(175,000	)		(372,400	)		3.48
Stock options forfeited or cancelled [ii]		(172,384	)		-			7.16
Stock based compensation expense		-			952,475			-
Stock options outstanding, December 31, 2015		2,408,380			6,472,380			4.75

12

Notes to the Audited Consolidated Financial Statements

December 31, 2015

(Unaudited in Canadian Dollars)

							Weighted Average Exercise Price
Stock options	#			$			$
Stock options outstanding, July 1, 2014		2,305,589			2,866,292			3.91
Stock options issued [iii]		45,000			-			7.53
Stock options exercised [iv]		(12,170	)		(18,535	)		2.18
Stock options forfeited or cancelled [ii]		(18,484	)		-			5.58
Stock based compensation expense					1,565,220			-
Stock options outstanding, December 31, 2014		2,319,935			4,412,977			3.97

[i] During the six month period ended December 31, 2015, 175,000 stock options expired unexercised. These stock options had a fair value of $372,400 which was reclassified to contributed surplus.

[ii] During the six month period ended December 31, 2015, 172,384 stock options were cancelled. These options had a fair value of $885,865 and were unvested at the time of cancellation. During the six month period ended December 31, 2014, 18,484 stock options were forfeited. These options had a fair value of $75,971 and were unvested at the time of forfeit.

[iii] No stock options were issued during the six month period ended December 31, 2015. The fair value of the 45,000 stock options issued during the six month period ended December 31, 2014 was $248,411.

[iv] No stock options were exercised during the six month period ended December 31, 2015. During the six month period ended December 31, 2014, 12,170 stock options were exercised. These options had a fair value of $18,535 and resulted in cash proceeds to the Company of $26,229.

[v] The maximum possible cash proceeds to the Company from the exercise of the stock options outstanding at December 31, 2015 are $11,430,633 [June 30, 2015 - $13,274,428].

10. EXPENSES BY NATURE

	Six month period ended December 31, 2015		Six month period ended December 31, 2014			Three month period ended December 31, 2015		Three month period ended December 31, 2014
	$		$			$		$
Research and development
Clinical trials and manufacturing		4,285,705		28,671,103			648,649		14,356,285
Salaries and benefits		1,372,201		1,794,558			520,917		911,258
Stock compensation expense		175,420		869,778			211,407		359,889
Depreciation and amortization		329,001		310,687			164,632		155,343
Facility lease costs and utilities		141,581		148,953			71,249		63,573
Insurance		33,273		101,911			17,601		44,833
General laboratory supplies and materials		51,245		128,451			28,491		56,876
Ontario investment tax credits		-		(85,661	)		-		(43,168	)
		6,388,426		31,939,780			1,662,946		15,904,889
Selling, general and administrative expenses
Salaries and benefits		909,756		839,900			444,825		422,939
Professional fees and services		249,419		357,716			122,314		159,248
Insurance		130,693		129,316			69,111		67,139
Stock compensation expense		777,055		695,442			323,553		313,677
Facility lease costs and utilities		80,704		76,238			42,420		38,119
Business development, corporate communication and investor relations		186,991		204,706			121,827		89,120
Regulatory and stock transfer fees		40,717		54,501			13,274		26,716
Office and related expenses		121,321		127,986			59,178		70,096
Business taxes		79,000		-			477		-
Depreciation and amortization		43,546		23,476			21,815		16,395
		2,619,202		2,509,281			1,218,794		1,203,449

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11. EARNINGS (LOSS) PER SHARE

Basic and diluted loss per share is calculated by dividing the loss attributable to equity holders of the Company by the weighted average number of common shares outstanding during the period. Outstanding options to purchase common shares of 2,408,380 [December 31, 2014 – 2,319,935] and warrants of 1,949,250 [December 31, 2014 – 3,852,591] are not included in the calculation of diluted loss per share as the effect is anti-dilutive due to losses incurred in the six and three month periods ended December 31, 2015 and 2014.

For the six and three month periods ended December 31, 2015 and 2014, 79,908 contingently returnable common shares were excluded from the basic and diluted net loss per common share calculation. The contingently returnable common shares relate to employment contracts and will be released from escrow based on the achievement of certain corporate milestones.

	Six month period ended December 31, 2015			Six month period ended December 31, 2014			Three month period ended December 31, 2015			Three month period ended December 31, 2014
Loss attributable to equity holders of the Company	$	(6,497,236	)	$	(32,605,463	)	$	(2,005,780	)	$	(16,910,139	)
Weighted average number of common shares outstanding		38,798,971			35,227,705			38,798,971			35,229,357

12. CONTINGENCIES AND COMMITMENTS

At December 31, 2015, the Company is committed to aggregate expenditures of approximately $1,993,000 [June 30, 2015 - $3,541,000] for clinical and toxicity studies to be completed during fiscal 2016, approximately $51,000,[June 30, 2015 - $215,000] for manufacturing agreements and approximately $156,000 [June 30, 2015 - $327,000] for consulting and other agreements.

The Company may also be required to pay commercial milestone payments of US$10,000,000 to Brigham and Women’s Hospital in respect of TT701.

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Notes to the Audited Consolidated Financial Statements

December 31, 2015

(Unaudited in Canadian Dollars)

13. CHANGE IN WORKING CAPITAL

The change in working capital consists of the following:

	Six month period ended December 31, 2015			Six month period ended December 31, 2014			Three month period ended December 31, 2015			Three month period ended December 31, 2014
	$			$			$			$
Other receivables		192,636			(1,167,342	)		257,607			(1,183,648	)
Income tax and investment tax credits receivable		-			(272,936	)		-			(230,443	)
Prepaid expenses and deposits		(69,778	)		(204,402	)		127,039			85,026
Trade and other payables		(6,939,502	)		(2,006,111	)		(1,858,409	)		(2,089,552	)
		(6,816,644	)		(3,650,791	)		(1,473,763	)		(3,418,617	)

14. RELATED PARTY TRANSACTIONS

Key management compensation

Key management includes the Company’s directors, and members of the senior management team. The compensation paid or payable to key management for employee services is show below:

	Six month period ended December 31, 2015		Six month period ended December 31, 2014		Three month period ended December 31, 2015		Three month period ended December 31, 2014
	$		$		$		$
Salaries and other short-term employee benefits		851,826		1,046,777		373,912		530,680
Stock-compensation expenses		780,160		1,107,302		405,261		462,472
Termination benefits		127,542		-		-		-
		1,759,528		2,154,079		779,173		993,152

During the three month period ended September 30, 2015, the Chief Medical Officer and the ELND005 Program Lead left the Company, which resulted in a termination payment of $127,542.

15. SEGMENT DISCLOSURE

The Company operates in one operating segment, the research and development of therapeutic agents. The Company’s non-current assets are primarily located in Canada.

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