Lorus Therapeutics Inc.
Consolidated Balance Sheets
As at | As at | |||||
August 31, 2006 | May 31, 2006 | |||||
(amounts in Canadian 000's) | (Unaudited) | (Audited) | ||||
ASSETS | ||||||
Current | ||||||
Cash and cash equivalents | $ | 13,286 | $ | 2,692 | ||
Short-term investments (note 4) | 4,873 | 5,627 | ||||
Prepaid expenses and other assets | 703 | 515 | ||||
18,862 | 8,834 | |||||
Long-term | ||||||
Fixed assets | 785 | 885 | ||||
Deferred financing charges | 456 | 481 | ||||
Goodwill | 606 | 606 | ||||
Acquired patents and licenses | 262 | 655 | ||||
2,109 | 2,627 | |||||
$ | 20,971 | $ | 11,461 | |||
LIABILITIES | ||||||
Current | ||||||
Accounts payable | $ | 596 | $ | 555 | ||
Accrued liabilities | 2,448 | 2,460 | ||||
3,044 | 3,015 | |||||
Long-term | ||||||
Secured convertible debentures | 11,221 | 11,002 | ||||
SHAREHOLDERS' EQUITY (DEFICIT) | ||||||
Share capital (note 2) | ||||||
Common shares | 156,928 | 145,001 | ||||
Equity portion of secured convertible debentures | 3,814 | 3,814 | ||||
Stock options (note 3) | 4,614 | 4,525 | ||||
Contributed surplus | 7,681 | 7,665 | ||||
Warrants | 991 | 991 | ||||
Deficit accumulated during development stage | (167,322 | ) | (164,552 | ) | ||
6,706 | (2,556 | ) | ||||
$ | 20,971 | $ | 11,461 |
See accompanying notes to the unaudited consolidated financial statements
Lorus Therapeutics Inc.
Consolidated Statements of Loss and Deficit (unaudited)
Period | |||||||||
Three | Three | from inception | |||||||
months ended | months ended | Sept. 5, 1986 to | |||||||
(amounts in Canadian 000's except for per common share data) | Aug 31, 2006 | Aug 31, 2005 | Aug 31, 2006 | ||||||
REVENUE | $ | 7 | $ | 1 | $ | 713 | |||
EXPENSES | |||||||||
Cost of sales | 3 | - | 90 | ||||||
Research and development | 1,331 | 3,957 | 111,806 | ||||||
General and administrative | 788 | 1,076 | 48,263 | ||||||
Stock-based compensation (note 3) | 113 | 291 | 6,863 | ||||||
Depreciation and amortization | 100 | 130 | 8,923 | ||||||
Operating expenses | 2,335 | 5,454 | 175,945 | ||||||
Interest expense on convertible debentures | 265 | 198 | 1,447 | ||||||
Accretion in carrying value of convertible debentures | 219 | 186 | 1,435 | ||||||
Amortization of deferred financing charges | 25 | 20 | 196 | ||||||
Interest income | (67 | ) | (115 | ) | (10,988 | ) | |||
Loss for the period | 2,770 | 5,742 | 167,322 | ||||||
Deficit, beginning of period | 164,552 | 146,643 | - | ||||||
Deficit, end of period | $ | 167,322 | $ | 152,385 | $ | 167,322 | |||
Basic and diluted loss per common share | $ | 0.01 | $ | 0.03 | |||||
Weighted average number of common shares | |||||||||
outstanding used in the calculation of | |||||||||
basic and diluted loss per share | 186,529 | 172,713 |
See accompanying notes to the unaudited consolidated financial statements
Lorus Therapeutics Inc.
Consolidated Statements of Cash Flows (unaudited)
Period | |||||||||
Three | Three | from inception | |||||||
months ended | months ended | Sept. 5, 1986 to | |||||||
(amounts in Canadian 000's) | Aug 31, 2006 | Aug 31, 2005 | Aug 31, 2006 | ||||||
OPERATING ACTIVITIES | |||||||||
Loss for the period | $ | (2,770 | ) | $ | (5,742 | ) | $ | (167,322 | ) |
Add items not requiring a current outlay of cash: | |||||||||
Stock-based compensation | 113 | 291 | 6,863 | ||||||
Interest expense on convertible debentures | 265 | 198 | 1,447 | ||||||
Accretion in carrying value of convertible debentures | 219 | 186 | 1,435 | ||||||
Amortization of deferred financing charges | 25 | 20 | 196 | ||||||
Depreciation, amortization and write-down of fixed assets | 493 | 523 | 21,222 | ||||||
Other | - | - | 707 | ||||||
Net change in non-cash working capital | |||||||||
balances related to operations | (159 | ) | (285 | ) | 1,433 | ||||
Cash used in operating activities | (1,814 | ) | (4,809 | ) | (134,019 | ) | |||
INVESTING ACTIVITIES | |||||||||
Maturity (purchase) of short-term investments, net | 754 | 8,229 | (4,873 | ) | |||||
Business acquisition, net of cash received | - | - | (539 | ) | |||||
Acquired patents and licenses | - | - | (715 | ) | |||||
Additions to fixed assets | - | (70 | ) | (6,049 | ) | ||||
Cash proceeds on sale of fixed assets | - | - | 348 | ||||||
Cash provided by (used in) | |||||||||
investing activities | 754 | 8,159 | (11,828 | ) | |||||
FINANCING ACTIVITIES | |||||||||
Issuance of debentures, net proceeds | - | - | 12,948 | ||||||
Issuance of warrants | - | - | 37,405 | ||||||
Issuance of common shares, net of issuance costs | 11,654 | - | 109,025 | ||||||
Additions to deferred financing charges | - | - | (245 | ) | |||||
Cash provided by financing activities | 11,654 | - | 159,133 | ||||||
Increase in cash and cash | |||||||||
equivalents during the period | 10,594 | 3,350 | 13,286 | ||||||
Cash and cash equivalents, | |||||||||
beginning of period | 2,692 | 2,776 | - | ||||||
Cash and cash equivalents, | |||||||||
end of period | $ | 13,286 | $ | 6,126 | $ | 13,286 |
See accompanying notes to the unaudited consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three months ended August 31, 2006 and 2005
1.
Basis of presentation
These unaudited consolidated interim financial statements of Lorus Therapeutics Inc. (“the Company”) have been prepared by the Company in accordance with Canadian generally accepted accounting principles for interim financial statements and do not include all the information required for complete financial statements. The unaudited interim financial statements follow the same accounting policies and methods of application as the audited annual financial statements for the year ended May 31, 2006 and as set out in Note 2. These statements should be read in conjunction with the audited consolidated financial statements for the year ended May 31, 2006.
The information presented as at and for the three months ended August 31, 2006 and August 31, 2005 reflect, in the opinion of management, all adjustments consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. Interim results are not necessarily indicative of results for a full year.
The Company has not earned substantial revenues from its drug candidates and is therefore considered to be in the development stage. The continuation of the Company’s research and development activities is dependent upon the Company’s ability to successfully finance its cash requirements through a combination of equity financing and payments from strategic partners. The Company has no current sources of payments from strategic partners. In addition, the Company will need to repay or refinance the secured convertible debentures on their maturity should the holder not chose to convert the debentures into common shares. There can be no assurance that additional funding will be available at all or on acceptable terms to permit further clinical development of the Company’s product candidates or to repay the convertible debentures on maturity.
Management believes that the Company’s current level of cash and short-term investments will be sufficient to execute the Company’s current planned expenditures for the next twelve months. If the Company is not able to raise additional funds, it may not be able to continue as a going concern and realize its assets and pay its liabilities as they fall due. The financial statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate. If the going concern basis were not appropriate for these financial statements, then adjustments would be necessary in the carrying value of the assets and liabilities, the reported revenues and expenses and the balance sheet classifications used.
2. Share capital
(a) Continuity of common shares and warrants
(amounts and units in 000's) | Common Shares | Warrants | ||||
Number Amount | Number Amount | |||||
Balance at May 31, 2005 | 172,541 | $ | 144,119 | 3,000 | $ | 991 |
Interest payments (b) | 265 | 198 | — | — | ||
Balance at August 31, 2005 | 172,806 | $ | 144,317 | 3,000 | $ | 991 |
Interest payments (b) | 537 | 209 | — | — | ||
Balance at November 30, 2005 | 173,343 | $ | 144,526 | 3,000 | $ | 991 |
Interest payments (b) | 672 | 224 | — | — | ||
Balance at February 28, 2006 | 174,015 | $ | 144,750 | 3,000 | $ | 991 |
Interest payments (b) | 679 | 251 | — | — | ||
Balance at May 31, 2006 | 174,694 | $ | 145,001 | 3,000 | $ | 991 |
Equity issuance (c) | 33,800 | 11,640 | — | — | ||
Interest payments (b) | 792 | 265 | — | — | ||
Stock option exercises | 46 | 22 | — | — | ||
Balance at August 31, 2006 | 209,332 | $ | 156,928 | 3,000 | $ | 991 |
(b) Interest payments
Interest payments relate to interest payable on the $15.0 million convertible debentures payable at a rate of prime +1% until such time as the Company’s share price reaches $1.75 for 60 consecutive trading days, at which time, interest will no longer be charged. Common shares issued in payment of interest were issued at a price equal to the weighted average trading price of such shares for the ten trading days immediately preceding their issue in respect of each interest payment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three months ended August 31, 2006 and 2005
(c) Equity issuances
On August 30, 2006, the Company raised gross proceeds of $10,368,000 by way of a subscription agreement for 28,800,000 common shares at a price of $0.36 per common share. The 28,800,000 common shares have been qualified for distribution in Canada under a short form prospectus filed on August 25, 2006 with the Ontario Securities Commission. In connection with the transaction, the investor received demand registration rights that will enable the investor to request the registration or qualification of the common shares for resale in the United States and Canada, subject to certain restrictions. These demand registration rights will expire on June 30, 2012.
On August 31, 2006, the Company raised gross proceeds of $1,800,000 by way of a private placement for 5,000,000 common shares at a price of $0.36 per common share.
The Company incurred expenses of $527,000 related to these issuances, which have been recorded as a reduction to share capital.
During the quarter ended August 31, 2006, 46,000 stock options were exercised for cash proceeds of $14,000 (August 31, 2005 – nil)
(d) Loss per share
The Company has excluded from the calculation of diluted loss per share all common shares potentially issuable upon the exercise of stock options, warrants and the convertible debenture that could dilute basic loss per share, because to do so would be anti-dilutive.
(e) Continuity of contributed surplus
(amounts in 000's) | 2007 | 2006 | ||
Balance at beginning of the year | $ | 7,665 | $ | 6,733 |
Forfeiture of vested options | 16 | — | ||
Balance at end of the period | $ | 7,681 | $ | 6,733 |
3. Stock-Based Compensation
(a) Continuity of stock options
Three | ||||||||
months | Three months | |||||||
ended | Weighted | ended | ||||||
Aug 31, 2006 | average exercise | Aug 31, 2005 | Weighted average | |||||
(000’s) |
| price | (000’s) | exercise price | ||||
Outstanding at beginning | ||||||||
of period | 10,300 | $ | 0.70 | 8,035 | $ | 0.96 | ||
Granted | 2,417 | $ | 0.33 | 3,713 | $ | 0.78 | ||
Exercised | (46 | ) | $ | 0.30 | — | — | ||
Forfeited | (389 | ) | $ | 0.58 | (227 | ) | $ | 0.86 |
Outstanding at end of | ||||||||
period | 12,282 | $ | 0.63 | 11,521 | $ | 0.90 |
In the first quarter of 2007, stock compensation expense of $113,000 (August 31, 2005 - $291,000) was recognized, representing the amortization applicable to the current period of the estimated fair value of options granted since June 1, 2002.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three months ended August 31, 2006 and 2005
(b) Fair value assumptions
The following assumptions were used in the Black-Scholes option-pricing model to determine the fair value of stock options granted during the period:
Three months | Three months ended | Year ended | |||||||
ended | August 31, 2005 | May 31, 2006 | |||||||
August 31, 2006 | |||||||||
Risk free interest rate | 4.5 | % | 2.25 | % | 2.25-4.00 | % | |||
Expected dividend yield | 0 | % | 0 | % | 0 | % | |||
Expected volatility | 80 | % | 70 | % | 70-81 | % | |||
Expected life of options | 5 years | 5 years | 2.5-5 years | ||||||
Weighted average fair value of options | |||||||||
granted or modified in the period | $ | 0.22 | $ | 0.46 | $ | 0.33 |
The amounts estimated according to the Black-Scholes option pricing model may not be indicative of the actual values realized upon the exercise of these options by the holders.
(c) Continuity of stock options
(amounts in 000's) | 2007 | 2006 | |||
Balance at beginning of the year | $ | 4,525 | $ | 4,252 | |
Forfeiture of stock options | (16 | ) | — | ||
Stock option exercise | (8 | ) | |||
Stock option expense | 113 | 291 | |||
Balance at August 31 | $ | 4,614 | $ | 4,543 |
4. Short term investments
As at August 31, 2006(amounts in 000’s)
Less than | Greater than | ||||||
one year | one year | Yield to | |||||
maturities | maturities | Total | maturity | ||||
Fixed income government | |||||||
investments | $ | 2,823 | $ | — | $ | 2,823 | 3.55-3.64% |
Corporate instruments | 2,050 | — | 2,050 | 3.84-3.87% | |||
Balance | $ | 4,873 | $ | — | $ | 4,873 |
The Company received proceeds of $12.2 million just prior to the end of the quarter from the equity issuances disclosed in note 2 above. This amount is reported in cash and cash equivalents at the end of the quarter.
As at May 31, 2006 (amounts in 000’s)
Less than | Greater than | ||||||
one year | one year | Yield to | |||||
maturities | maturities | Total | maturity | ||||
Fixed income government | |||||||
investments | $ | 2,838 | $ | — | $ | 2,838 | 3.55-3.64% |
Corporate instruments | 2,789 | — | 2,789 | 3.46-3.87% | |||
Balance | $ | 5,627 | $ | — | $ | 5,627 |
At August 31, 2006 and May 31, 2006, the carrying values of short term investments approximate their quoted market values. Short term investments held at August 31, 2006 have varying maturities from one to four months (May 2006 – one to six months).
5. Corporate changes
In November 2005, as a means to conserve cash and refocus operations, the Company scaled back some activities related to the Virulizin® technology and implemented a workforce reduction of approximately 39% or 22 employees.
In accordance with EIC 134 –Accounting for Severance and Termination Benefits, during the period ended November 30, 2005 the Company recorded severance compensation expense for former employees of $557,000 in the prior year. Of this expense, $468,000 was presented in the income statement as general and administrative expense and $89,000 as research and development expense. Accounts payable and accrued liabilities at August 31, 2006 include severance and compensation expense liabilities relating to the Company’s November 2005 corporate changes of $64,000 that are expected to be paid by December 2006.
6. Secured convertible debentures
The terms of the secured convertible debentures are described in note 13 to the Company's annual consolidated financial for the year ended May 31, 2006. The debentures are due on October 6, 2009 and may be convertible at the holder's option at any time in to common shares of the Company at a conversion price of $1.00 per share. The lender has the option to demand repayment in the event of default, including the failure to maintain certain subjective covenants, representations and warranties.
Management assesses on a quarterly basis whether or not events during the quarter could be considered an event of default. This assessment was performed and management believes that there has not been an event of default and that, at August 31, 2006; the term of the debt remains unchanged.
7. Subsequent Event
On September 19, 2006 the Company announced that Dr. Jim A Wright would step down as the President and Chief Executive Officer effective September 21, 2006. The departure of Dr. Wright resulted in a liability based on a mutual separation agreement executed subsequent to the quarter end of approximately $500 thousand. The amount will be paid by the end of the third quarter 2007.