EXHIBIT 99.1
Lorus Therapeutics Inc. | ||||
Interim Consolidated Balance Sheets |
As at | As at | |||||||
(amounts in 000's) | August 31, 2007 | May 31, 2007 | ||||||
(Canadian dollars) | (Unaudited) | |||||||
ASSETS | ||||||||
Current | ||||||||
Cash and cash equivalents | $ | 3,382 | $ | 1,405 | ||||
Short term investments (note 5) | 13,686 | 7,265 | ||||||
Prepaid expenses and other assets | 727 | 335 | ||||||
Amount held in escrow (note 1) | 600 | - | ||||||
18,395 | 9,005 | |||||||
Long-term | ||||||||
Marketable securities and other investments (note 5) | - | 3,728 | ||||||
Fixed assets | 462 | 503 | ||||||
Deferred arrangement costs | - | 1,262 | ||||||
Goodwill | 606 | 606 | ||||||
1,068 | 6,099 | |||||||
$ | 19,463 | $ | 15,104 | |||||
LIABILITIES | ||||||||
Current | ||||||||
Accounts payable | $ | 1,022 | $ | 1,104 | ||||
Liability to repurchase warrants | - | 252 | ||||||
Deferred gain on sale of shares (note 1) | 600 | - | ||||||
Accrued liabilities | 880 | 1,421 | ||||||
2,502 | 2,777 | |||||||
Long-term | ||||||||
Secured convertible debentures (note 6) | 11,863 | 11,566 | ||||||
SHAREHOLDERS' EQUITY | ||||||||
Common shares (note 3) | 157,984 | 157,714 | ||||||
Equity portion of secured convertible debentures | 3,814 | 3,814 | ||||||
Stock options (note 4(c)) | 4,983 | 4,898 | ||||||
Contributed surplus (note 3(e)) | 8,543 | 8,525 | ||||||
Accumulated other comprehensive income | - | - | ||||||
Deficit accumulated during development stage | (170,226 | ) | (174,190 | ) | ||||
5,098 | 761 | |||||||
$ | 19,463 | $ | 15,104 | |||||
See accompanying notes to the unaudited consolidated interim financial statements | ||||||||
Basis of Presentation (note 1) |
Lorus Therapeutics Inc. | |||
Interim Consolidated Statements of Loss and Deficit (unaudited) |
Period | ||||||||||||
Three | Three | from inception | ||||||||||
(amounts in 000's except for per common share data) | months ended | months ended | Sept. 5, 1986 to | |||||||||
(Canadian dollars) | Aug. 31, 2007 | Aug. 31, 2006 | Aug 31, 2007 | |||||||||
REVENUE | $ | 26 | $ | 7 | $ | 839 | ||||||
EXPENSES | ||||||||||||
Cost of sales | 1 | 3 | 104 | |||||||||
Research and development | 782 | 1,331 | 114,641 | |||||||||
General and administrative | 736 | 788 | 52,059 | |||||||||
Stock-based compensation (note 4) | 103 | 113 | 7,356 | |||||||||
Depreciation and amortization of fixed assets | 79 | 100 | 9,304 | |||||||||
Operating expenses | 1,701 | 2,335 | 183,464 | |||||||||
Interest expense on convertible debentures | 270 | 265 | 2,502 | |||||||||
Accretion in carrying value of convertible debentures | 266 | 219 | 2,417 | |||||||||
Amortization of deferred financing charges | 32 | 25 | 313 | |||||||||
Interest income | (140 | ) | (67 | ) | (11,564 | ) | ||||||
Loss from operations for the period | 2,103 | 2,770 | 176,293 | |||||||||
Gain on sale of shares (note 1) | (6,094 | ) | - | (6,094 | ) | |||||||
Net (earnings)/loss and other comprehensive income for the period | (3,991 | ) | 2,770 | 170,199 | ||||||||
Deficit, beginning of period as previously reported | 174,190 | 164,554 | - | |||||||||
Change in accounting policy (note 2) | 27 | - | 27 | |||||||||
Deficit, beginning of period as revised | 174,217 | 164,554 | - | |||||||||
Deficit, end of period | $ | 170,226 | $ | 167,324 | $ | 170,226 | ||||||
Basic (earnings) loss per common share | $ | (0.02 | ) | $ | 0.01 | |||||||
Diluted (earnings) loss per common share | $ | (0.02 | ) | n/a | ||||||||
Weighted average number of common shares outstanding used in the calculation of: | ||||||||||||
Basic (earnings) loss per share | 213,057 | 186,529 | ||||||||||
Diluted (earnings) loss per share | 227,266 | n/a | ||||||||||
See accompanying notes to the unaudited consolidated interim financial statements |
Lorus Therapeutics Inc. | |||
Interim Consolidated Statements of Cash Flows (unaudited) |
Period | ||||||||||||
Three | Three | from inception | ||||||||||
(amounts in 000's) | months ended | months ended | Sept. 5, 1986 to | |||||||||
(Canadian Dollars) | Aug. 31, 2007 | Aug. 31, 2006 | Aug. 31, 2007 | |||||||||
Cash flows from operating activities: | ||||||||||||
Earnings (loss) for the period | $ | 3,991 | $ | (2,770 | ) | $ | (170,199 | ) | ||||
Less: Gain on sale of shares | (6,094 | ) | - | (6,094 | ) | |||||||
Items not involving cash: | ||||||||||||
Stock-based compensation | 103 | 113 | 7,356 | |||||||||
Interest on convertible debentures | 270 | 265 | 2,502 | |||||||||
Accretion in carrying value of convertible debentures | 266 | 219 | 2,417 | |||||||||
Amortization of deferred financing charges | 32 | 25 | 313 | |||||||||
Depreciation, amortization and write-down of fixed assets and acquired patents and licenses | 79 | 493 | 21,865 | |||||||||
Other | 20 | - | 727 | |||||||||
Change in non-cash operating working capital | (1,015 | ) | (159 | ) | 267 | |||||||
Cash used in operating activities | (2,348 | ) | (1,814 | ) | (140,846 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Issuance of debentures, net of issuance costs | - | - | 12,948 | |||||||||
Issuance of warrants | - | - | 37,405 | |||||||||
Repurchase of warrants | (252 | ) | - | (252 | ) | |||||||
Proceeds on sale of shares, net of amount held in escrow and arrangement costs | 7,356 | - | 6,094 | |||||||||
Issuance of common shares, net | - | 11,654 | 109,025 | |||||||||
Additions to deferred financing charges | - | - | (245 | ) | ||||||||
Cash provided by financing activities | 7,104 | 11,654 | 164,975 | |||||||||
Cash flows from investing activities: | ||||||||||||
Maturity (purchase) of marketable securities and other investments, net | (2,740 | ) | 754 | (13,733 | ) | |||||||
Business acquisition, net of cash received | - | - | (539 | ) | ||||||||
Acquired patents and licenses | - | - | (715 | ) | ||||||||
Additions to fixed assets | (39 | ) | - | (6,108 | ) | |||||||
Proceeds on sale of fixed assets | - | - | 348 | |||||||||
Cash provided by (used in) investing activities | (2,779 | ) | 754 | (20,747 | ) | |||||||
Increase (decrease) in cash and cash equivalents | 1,977 | 10,594 | 3,382 | |||||||||
Cash and cash equivalents, beginning of period | 1,405 | 2,692 | - | |||||||||
Cash and cash equivalents, end of period | $ | 3,382 | $ | 13,286 | $ | 3,382 | ||||||
See accompanying notes to the unaudited consolidated interim financial statements |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three months ended August 31, 2007 and 2006
1. | Basis of presentation |
These unaudited interim consolidated financial statements of Lorus Therapeutics Inc., formerly 6650309 Canada Inc. (the “Company” or “New Lorus”) 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, 2007. These statements should be read in conjunction with the audited consolidated financial statements for the year ended May 31, 2007, including the Supplemental Financial Information attached thereto.
a) Reorganization
On November 1, 2006, the Company was incorporated as 6650309 Canada Inc. pursuant to the provisions of the Canada Business Corporation Act and did not carry out any active business from the date of incorporation to July 10, 2007. From its incorporation to July 10, 2007, the Company was a wholly owned subsidiary of 4325231 Canada Inc, formerly Lorus Therapeutics Inc. ("Old Lorus").
On July 10, 2007, the Company and Old Lorus completed a plan of arrangement and corporate reorganization with, among others, 6707157 Canada Inc. (the “Investor”) and its affiliate, Pinnacle International Lands, Inc. (the “Arrangement”). As part of the Arrangement, all of the assets and liabilities of Old Lorus (including all of the shares of its subsidiaries held by it), with the exception of certain future tax assets were transferred, directly or indirectly, from Old Lorus to the Company. Securityholders in Old Lorus exchanged their securities in Old Lorus for equivalent securities in New Lorus (the "Exchange") and the board of directors and management of Old Lorus continued as the board of directors and management of New Lorus. New Lorus obtained substitutional listings of its common shares on both the Toronto Stock Exchange and the American Stock Exchange.
In connection with the Arrangement and after the Exchange, the share capital of Old Lorus was reorganized into voting common shares and non-voting common shares and Investor acquired from New Lorus and Selling Shareholders (as defined below) approximately 41% of the voting common shares and all of the non-voting common shares of Old Lorus for a cash consideration of approximately $8.5 million less an escrowed amount of $600 thousand, subject to certain post-closing adjustments and before transaction costs. The remaining 59% of the voting common shares of Old Lorus were distributed to the shareholders of New Lorus who were not residents of the United States on a pro-rata basis. Shareholders of New Lorus who were residents of the United States received a nominal cash payment in lieu of their pro-rata share of voting common shares of Old Lorus. After completion of the Arrangement, New Lorus is not related to Old Lorus, which was subsequently renamed 4325231 Canada Inc.
As a condition of the Arrangement, High Tech Beteiligungen GmbH & Co. KG and certain other shareholders of Old Lorus (the “Selling Shareholders”) agreed to sell to Investor the voting common shares of Old Lorus to be received under the Arrangement at the same price per share as was paid to shareholders who are residents of the United States. The proceeds received by the Selling Shareholders was nominal.
Also as a condition of the Arrangement, the holder of Old Lorus' secured convertible debenture agreed to vote in favour of the transaction subject to the repurchase by New Lorus of its outstanding three million common share purchase warrants at a purchase price of $252 thousand upon closing of the Arrangement.
Under the Arrangement, New Lorus and its subsidiaries have agreed to indemnify Old Lorus and its directors, officers and employees from and against all damages, losses, expenses (including fines and penalties), other third party costs and legal expenses, to which any of them may be subject arising out of any matter occurring (i) prior to, at or after the effective time of the Arrangement (“Effective Time”) and directly or indirectly relating to any of the assets of Old Lorus transferred to New Lorus pursuant to the Arrangement (including losses for income, sales, excise and other taxes arising in connection with the transfer of any such asset) or conduct of the business prior to the Effective Time; (ii) prior to, at or after the Effective Time as a result of any and all interests, rights,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three months ended August 31, 2007 and 2006
liabilities and other matters relating to the assets transferred by Old Lorus to New Lorus pursuant to the Arrangement; and (iii) prior to or at the Effective Time and directly or indirectly relating to, with certain exceptions, any of the activities of Old Lorus or the Arrangement.
As part of the Arrangement, the Company changed its name to Lorus Therapeutics Inc. and continued as a biopharmaceutical company, specializing in the research and development of pharmaceutical products and technologies for the management of cancer as a continuation of the business of Old Lorus.
The Arrangement has been accounted for on a continuity of interest basis and accordingly, the consolidated financial statements of New Lorus reflects the financial position, results of operations and cash flows as if New Lorus has always carried on the business formerly carried on by Old Lorus. Consequently, all comparative figures presented in these interim consolidated financial statements are those of Old Lorus.
As a result of the Arrangement, the Company recognized a gain on the sale of the shares of Old Lorus to the Investor of approximately $6.1 million. Under the Arrangement, numerous steps were undertaken as part of a taxable reorganization. However, these steps did not result in any taxes payable as the tax benefit of income tax attributes was applied to eliminate any taxes otherwise payable. Of the total unrecognized future tax assets available at the time of the Arrangement, approximately $7.0 million was transferred to New Lorus and the balance remained with Old Lorus and is subject to the indemnification agreement as described above. Those tax attributes remaining with Old Lorus are no longer available to the Company. In reference to those indemnifications, $600 thousand of the proceeds on the transaction have been held in escrow until the first anniversary of the transaction (July 2008). The Company has deferred any gain on this escrow amount until they are released at which time the fair value of the indemnity will be reassessed.
The information presented as at August 31, 2007 and for the three months ended August 31, 2007 and August 31, 2006 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.
b) Future operations
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 choose 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 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. Change in Accounting policy - Financial instruments
Effective June 1, 2007, the Company adopted the recommendations of CICA Handbook Section 1530, Comprehensive Income ("Section 1530"); Section 3855, Financial Instruments - Recognition and Measurement ("Section 3855), retroactively without restatement of prior periods. These sections provide standards for recognition, measurement, disclosure and presentation of financial assets,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three months ended August 31, 2007 and 2006
financial liabilities and non-financial derivatives. Section 1530 provides standards for the reporting and presentation of comprehensive income, which represents the change in equity, from transactions and other events and circumstances from non-owner sources. Other comprehensive income refers to items recognized in comprehensive income that are excluded from net income calculated in accordance with Canadian GAAP. As a result of adopting the above standards, the Company did not recognize any other comprehensive income in its financial statements.
Upon adoption of the new standards on June 1, 2007, the Company designated its financial assets and liabilities as follows:
Cash and cash equivalents:
Cash and cash equivalents as at June 1, 2007 and acquired thereafter continue to be classified as held-for-trading investments and measured at fair value. By virtue of the nature of these assets, fair value is generally equal to cost plus accrued interest. Where applicable, any significant change in market value would result in a gain or loss being recognized in the consolidated statement of loss and deficit. As a result of adopting the new standards, there was no material change in valuation of these assets resulting in a gain or loss to be recognized in the current financial statements.
Short term investments:
Short term investments consist of fixed income government investments and corporate instruments. Any fixed income government investments and corporate instruments that are not cash equivalents are classified as held-to-maturity investments except where the Company cannot reasonably demonstrate that the investment could be expected to be held to maturity by virtue of its long term nature in which case the investment instrument is considered a held-for-trading investment. Held-to-maturity investments are measured at amortized cost while held-for-trading investments are measured at fair value and the resulting gain or loss is recognized in the consolidated statement of loss and deficit. As a result of adopting the new standards, the Company designated certain corporate instruments previously carried at amortized cost as held for trading investments. This change in accounting policy resulted in a reduction of the opening deficit accumulated during the development stage by $27 thousand and recognized a loss in the consolidated statement of loss and deficit in the current period of $20 thousand.
Accounts payable and accrued liabilities:
Accounts payable and accrued liabilities are typically short-term in nature and classified as other financial liabilities. These liabilities are valued at amortized cost. As a result of adopting the new standards, there was no material change in valuation of these liabilities resulting in a gain or loss to be recognized in the current financial statements.
Secured convertible debentures:
The secured convertible debentures are classified as other financial liabilities and accounted for at amortized cost using the effective interest method, which is consistent with the Company's accounting policy prior to the adoption of Section 3855. The deferred financing charges related to the secured convertible debentures, formerly included in long term assets, are now included as part of the carrying value of the secured convertible debentures and continue to be amortized using the effective interest method ($339 thousand at August 31, 2007).
Embedded derivatives:
Section 3855 requires that the Company identify embedded derivatives that require separation from the related host contract and measure those embedded derivatives at fair value. Subsequent change in fair value of embedded derivatives is recognized in the consolidated statement of operations and deficit in the period the change occurs.
The Company did not identify any embedded derivatives that required separation from the related host contract as at June 1, 2007 that resulted in a material adjustment to the consolidated interim financial statements.
Transaction costs:
Transactions costs that are directly attributable to the acquisition or issuance of financial assets or liabilities are accounted for as part of the respective asset or liability's carrying value at inception.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three months ended August 31, 2007 and 2006
Guarantee:
On July 10, 2007, as part of the Arrangement, the Company, including its subsidiaries, indemnified Old Lorus and its directors (note 1). This indemnity is required to be accounted for at fair value in accordance with Section 3855. Management has accrued an amount of $600 thousand being the amount held in escrow and has recorded this amount as a deferred gain on sale of shares within its liabilities. The fair value of the indemnity will be reassessed as the escrowed amount is released in July 2008.
3. Share capital |
(a) Continuity of common shares and warrants |
Common shares | Warrants | |||||||||||||||
(Amounts and units in 000’s | ||||||||||||||||
except Original Share amount) | Number | Amount | Number | Amount | ||||||||||||
Balance at November 30, 2006 | ||||||||||||||||
Original Share | 1 | $ | 1 | - | $ | - | ||||||||||
Balance, May 31, 2007 | 1 | $ | 1 | - | $ | - | ||||||||||
Surrender of Original Share | (1 | ) | (1 | ) | - | - | ||||||||||
Share Exchange (note 1) | 212,628 | 157,800 | - | - | ||||||||||||
Interest payments (note b) | 865 | 184 | - | - | ||||||||||||
Balance, August 31, 2007 | 213,493 | $ | 157,984 | - | $ | - |
On July 10, 2007 as part of the Arrangement described in note 1, the Company surrendered its Original Share, and exchanged all of the shares in Old Lorus for an equivalent number of shares of the Company. Based on a continuity of interests accounting, the following share transactions reflect transactions in share capital as if the Company has always carried on the business of Old Lorus:
Common Shares | Warrants | |||||||||||||||
(amounts and units in 000's) | Number | Amount | Number | Amount | ||||||||||||
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 | ||||||||||
Interest payments (b) | 1,031 | 262 | - | - | ||||||||||||
Balance at November 30, 2006 | 210,363 | $ | 157,190 | 3,000 | $ | 991 | ||||||||||
Interest payments (b) | 915 | 259 | - | - | ||||||||||||
Balance at February 28, 2007 | 211,278 | $ | 157,449 | 3,000 | $ | 991 | ||||||||||
Interest payments (b) | 988 | 265 | - | - | ||||||||||||
Repurchase of Warrants | - | - | (3,000 | ) | (991 | ) | ||||||||||
Balance at May 31, 2007 | 212,266 | $ | 157,714 | - | - | |||||||||||
Interest payments (b) | 1,227 | 270 | - | - | ||||||||||||
Balance at August 31, 2007 | 213,493 | $ | 157,984 | - | - |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three months ended August 31, 2007 and 2006
(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.
(c) Equity issuances |
On July 10, 2007 as part of the Arrangement described in note 1, the Company surrendered its Original Share, and exchanged all of the shares in Old Lorus for an equivalent number of shares of the Company. The transactions below occurred in Old Lorus, however as a result of the exchange in shares, the shares issued in these transactions became shares in New Lorus.
On August 30, 2006, the Company raised gross proceeds of $10.4 million by way of a subscription agreement for 28.8 million common shares at a price of $0.36 per common share. The 28.8 million 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 $1.8 million by way of a private placement for 5.0 million common shares at a price of $0.36 per common share.
The Company incurred expenses of $527 thousand related to these issuances, which have been recorded as a reduction to share capital.
During the quarter ended August 31, 2007, nil stock options were exercised (August 31, 2006 - 46 thousand stock options were exercised for proceeds of $14 thousand)
(d) Earnings/Loss per share |
For the three months ended August 31, 2007, the determination of diluted earnings per share includes in the calculation all common shares potentially issuable upon the exercise of stock options, using the “treasury stock method” and the secured convertible debentures, using the “if converted” method.
Diluted earnings per share, using the treasury stock method, assumes outstanding stock options are exercised at the beginning of the period, and the Company’s common shares are purchased at the average market price during the period from the funds derived on the exercise of these outstanding options. Stock options with a strike price above the average market price for the period were excluded from the calculation of fully diluted earnings per share as to include them would have increased the earnings per share.
Diluted earnings per share, using the “If converted” method and to the extent the conversion is dilutive, assumes all convertible securities have been converted at the beginning of the period, or at the time of issuance, if later, and any charges of returns on the convertible securities, on an after-tax basis, are removed from net earnings. For the three months ended August 31, 2007, the after-tax interest on the secured convertible debentures has been removed from net earnings and the weighted average number of common shares has been increased by the number of common shares which would have been issued on conversion of the secured convertible debentures, pro rated for the number of days in the period the secured convertible debentures was outstanding. As the interest expense was settled by issuing common shares of the Company, these common shares issued were also excluded from the weighted average number of shares used in the computation of diluted earnings per share.
For the three months ended August 31, 2006, the stock options, warrants to purchase common shares and the secured convertible debentures were not included in the calculation of diluted loss per share because the Company had a loss for that period and to do so would have been anti-dilutive.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three months ended August 31, 2007 and 2006
(e) Continuity of contributed surplus |
Three months ended August 31, 2007 | Three months ended August 31, 2006(1) | |||||||
Balance, beginning of year | $ | 8,525 | $ | 7,665 | ||||
Forfeiture of stock options | 18 | 16 | ||||||
Balance, end of period | $ | 8,543 | $ | 7,681 |
(1) The comparative amounts represent those of Old Lorus - see note 1.
4. Stock-based compensation
Three months ended | Three months ended | |||||||||||||||
August 31, 2007 | August 31, 2006(1) | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | average | |||||||||||||||
Options | exercise | Options | exercise | |||||||||||||
(in thousands) | price | (in thousands) | price | |||||||||||||
Outstanding, beginning of year | 12,988 | $ | 0.59 | $ | 10,300 | $ | 0.70 | |||||||||
Granted | 2,249 | 0.22 | 2,417 | 0.33 | ||||||||||||
Exercised | - | - | (46 | ) | 0.30 | |||||||||||
Forfeited | (503 | ) | 0.69 | (389 | ) | 0.58 | ||||||||||
Outstanding, end of period | 14,734 | $ | 0.53 | 12,282 | $ | 0.63 |
(1) The comparative amounts represent those of Old Lorus - see note 1.
For the three month period ended August 31, 2007 stock compensation expense of $103 thousand (August 31, 2006 - $113 thousand) was recognized, representing the amortization applicable to the current period of the estimated fair value of options granted since June 1, 2002.
(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 | |||||||
ended | August 31, | |||||||
August 31, 2007 | 2006(1) | |||||||
Risk-free interest rate | 4.75 | % | 4.50 | % | ||||
Expected volatility | 80 | % | 80 | % | ||||
Expected life of options | 5 years | 5 years | ||||||
Weighted average fair value of options granted or modified during the period | $ | 0.15 | $ | 0.22 |
(1) The comparative amounts represent those of Old Lorus - see note 1.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three months ended August 31, 2007 and 2006
(c) Continuity of stock options
Three months ended August 31, 2007 | Three months ended August 31, 2006(1) | |||||||
Balance, beginning of the year | $ | 4,898 | $ | 4,525 | ||||
Stock option expense | 103 | 113 | ||||||
Forfeiture of stock options | (18 | ) | (24 | ) | ||||
Balance, end of period | $ | 4,983 | $ | 4,614 |
(1) The comparative amounts represent those of Old Lorus - see note 1.
5. Short term investments
As at August 31, 2007 | ||||||||||||||||
(amounts in 000’s) | Less than one year maturities | Greater than one year maturities | Total | Yield to maturity | ||||||||||||
Held-to-maturity investments: | ||||||||||||||||
Fixed income government investments | $ | 1,525 | $ | - | $ | 1,525 | 3.91 | % | ||||||||
Corporate instruments | 9,627 | 9,627 | 3.85-4.60 | % | ||||||||||||
Held-for-trading investments: | ||||||||||||||||
Corporate instruments | – | 2,534 | 2,534 | 4.00-4.02 | % | |||||||||||
$ | 11,152 | $ | 2,534 | $ | 13,686 |
As at May 31, 2007(1) | ||||||||||||||||
(amounts in 000’s) | Less than one year maturities | Greater than one year maturities | Total | Yield to maturity | ||||||||||||
Fixed income government investments | $ | 1,549 | $ | - | $ | 1,549 | 3.91 | % | ||||||||
Corporate instruments | 5,716 | 3,728 | 9,444 | 3.89-4.11 | % | |||||||||||
$ | 7,265 | $ | 3,728 | $ | 10,993 |
(1) The comparative amounts represent those of Old Lorus - see note 1.
At August 31, 2007, held to maturity investments are carried at amortized cost. These investments have maturities varying from one to eleven months. Certain corporate instruments have maturities greater than one year, however, the Company has designated these investments as “held-for-trading”, and have classified these investments as short term investments on the balance sheet. These investments are carried at fair value. The change in fair value for the three months ended August 31, 2007 amounted to $20 thousand and has been charged to the statement of loss and deficit.
At May 31, 2007 the carrying values of fixed income government investments and corporate instruments with maturities less than one year are carried at amortized cost. At May 31, 2007, these investments had maturities of one to ten months. Certain corporate instruments have maturities varying from one to five years and were been classified as long term. These long-term corporate instruments were previously carried at amortized cost. As a result of the adoption of Section 3855, these corporate instruments are now designated as “held-for-trading”, which resulted in an amount of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three months ended August 31, 2007 and 2006
$27 thousand being charged to the opening deficit, being the change in fair value of the instruments prior to May 31, 2007. As this standard was applied retrospectively without restatement, the carrying value of the long-term corporate instruments at May 31, 2007 continue to be disclosed at amortized cost.
6. Secured convertible debentures
The terms of the secured convertible debentures are described in note 12 to the financial statements contained in the Supplemental Financial information of the Company's annual financial statement for the period ended May 31, 2007. The debentures are due on October 6, 2009 and may be converted at the holder's option at any time into 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 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, 2007; the term of the debt remains unchanged.
7. Income taxes
Income tax recoveries attributable to losses from operations differ from the amounts computed by applying the combined Canadian federal and provincial income tax rates to pre-tax income from operations primarily as a result of the provision of a valuation allowance on net future income tax benefits.
Significant components of the Company's future tax assets are as follows:
August 31, 2007 | May 31, 2007 | |||||||
Non-capital losses carried forward | $ | 784 | $ | 24,459 | ||||
Research and development expenditures | 2,204 | 20,156 | ||||||
Book over tax depreciation | 1,065 | 1,904 | ||||||
Intangible asset | 3,855 | - | ||||||
Other | - | 309 | ||||||
Future tax assets | 7,908 | 46,828 | ||||||
Valuation allowance | (7,908 | ) | (46,828 | ) | ||||
$ | - | $ | - |
Under the Arrangement, numerous steps were undertaken as part of a taxable reorganization. However, these steps did not result in any taxes payable as the tax benefit of income tax attributes was applied to eliminate any taxes otherwise payable. Of the total unrecognized future tax assets available at the time of the Arrangement, approximately $7.0 million was transferred to New Lorus and the balance remained with Old Lorus and is subject to the indemnification agreement (note 1(a)). Those tax attributes remaining with Old Lorus are no longer available to the Company.
In assessing the realizable benefit from future tax assets, management considers whether it is more likely than not that some portion or all of the future tax assets will not be realized. The ultimate realization of future tax assets is dependent on the generation of future taxable income during the years in which those temporary differences become deductible. Management considers projected future taxable income, uncertainties related to the industry in which the Company operates and tax planning strategies in making this assessment. Due to the Company's stage of development and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three months ended August 31, 2007 and 2006
operations, and uncertainties related to the industry in which the Company operates, the tax benefit of the above amounts has been completely offset by a valuation allowance.
The Company has undeducted research and development expenditures, totalling $9.2 million for federal purposes and $3.3 million for provincial purposes and these can be carried forward indefinitely. In addition, the Company has non-capital losses carried forward of $2.3 million for federal purposes and $2.5 million for provincial purposes. To the extent that the non-capital loss carried forward are not used, they expire as follows:
2008 | $ | 362 | ||
2009 | 741 | |||
2010 | 141 | |||
2015 | 10 | |||
2026 | 11 | |||
2027 | 4 | |||
2028 | 1,019 | |||
$ | 2,288 |
8. Subsequent events
Subsequent to August 31, 2007, the Company extended the option exercise period to those directors not seeking re-election at the annual general meeting and Dr. Wright in relation to his options earned as president and chief executive officer. These transactions result in modification of the terms of the original awards, and the incremental compensation expense relating to the modified options will be accounted for in the second quarter ended November 30, 2007.
Also subsequent to August 31, 2007, the Company received a statement of claim in respect of a dispute with a former employee. It is currently not possible to determine the outcome of such action or the amount of settlement if any, but the Company believes that the suit is without merit and will defend the action vigorously. No provision has been made in the consolidated financial statements.