MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING AND AUDITORS' REPORT
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying financial statements of Hemosol Inc. and all the information in
this annual report are the responsibility of management and have been approved
by the Board of Directors.
The financial statements have been prepared by management in accordance with
Canadian generally accepted accounting principles. When alternative accounting
methods exist, management has chosen those it deems most appropriate in the
circumstances. Financial statements are not precise since they include certain
amounts based on estimates and judgement. Management has determined such amounts
on a reasonable basis in order to ensure that the financial statements are
presented fairly, in all material respects. Management has prepared the
financial information presented elsewhere in the annual report and has ensured
that it is consistent with that in the financial statements. Hemosol Inc.
maintains systems of internal accounting and administrative controls of high
quality, consistent with reasonable cost. Such systems are designed to provide
reasonable assurance that the financial information is relevant, reliable and
accurate and the Company's assets are appropriately accounted for and adequately
safeguarded.
The Board of Directors is responsible for ensuring that management fulfills its
responsibilities for financial reporting and is ultimately responsible for
reviewing and approving the financial statements. The Board carries out this
responsibility principally through its Audit Committee. The Audit Committee is
appointed by the Board and all its members are outside directors, The Committee
meets periodically with management, as well as the external auditors, to discuss
internal controls over the financial reporting process, auditing matters and
financial reporting issues, to satisfy itself that each party is properly
discharging its responsibilities, and to review the annual report, the financial
statements and the external auditors' report. The Committee reports its findings
to the Board for consideration when approving the financial statements for
issuance to the shareholders. The Committee also considers, for review by the
Board and approval by the shareholders, the engagement or re-appointment of the
external auditors.
Financial statements have been audited by Ernst & Young LLP, the external
auditors, on behalf of the shareholders. Ernst & Young LLP has full and free
access to the Audit Committee.
/s/ Lee Hartwell
- -----------------------------------
Lee Hartwell
President & Chief Executive Officer
AUDITORS' REPORT
TO THE SHAREHOLDERS OF HEMOSOL INC.
We have audited the consolidated balance sheets of HEMOSOL INC. [A Development
Stage Company] as at December 31, 2003 and 2002 and the consolidated statements
of loss, deficit and cash flows for each of the years in the three-year period
ended December 31, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian and United States generally
accepted auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2003
and 2002 and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2003 in accordance with
Canadian generally accepted accounting principles.
Toronto, Canada,
March 10, 2004.
/s/ Ernst & Young LLP
-------------------------------
Chartered Accountants
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA - U.S. REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph, following the opinion paragraph, when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
note 1 to the consolidated financial statements. Our report to the shareholders
dated March 10, 2004 is expressed in accordance with Canadian reporting
standards which do not permit a reference to such events and conditions in the
auditors' report when these are adequately disclosed in the financial
statements.
Toronto, Canada,
March 10, 2004.
/s/ Ernst & Young LLP
------------------------------
Chartered Accountants
2003 Annual Report 17
Hemosol Inc. [A Development Stage Company] - Incorporated under the laws of
Ontario
CONSOLIDATED BALANCE SHEETS
SEE NOTE 1 - BASIS OF PRESENTATION
As at December 31
(in thousands of dollars)
2003 2002
$ $
-------- ------------------
ASSETS [note 10[a]] [restated - note 2]
CURRENT
Cash and cash equivalents 8,125 17,579
Cash held in escrow [notes 8[a] and 11] 448 5,000
Amounts receivable and prepaids [note 8[c]] 735 1,077
Inventory [note 3] 1,274 2,877
-------- -------
TOTAL CURRENT ASSETS 10,582 26,533
-------- -------
Property, plant and equipment, net [note 4] 83,881 88,907
Patents and trademarks, net [note 5] 1,368 2,176
License technology [note 6] 2,520 --
Deferred charges, net [note 7] 2,026 6,696
-------- -------
TOTAL OTHER ASSETS 89,795 97,779
-------- -------
100,377 124,312
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities 3,394 15,249
Short-term debt [note 10] 20,000 --
Debentures payable [note 11] -- 5,000
-------- -------
TOTAL CURRENT LIABILITIES 23,394 20,249
-------- -------
Commitments and contingencies [notes 4, 12 and 14]
SHAREHOLDERS' EQUITY
Common shares [note 2[b] and 8[a]] 305,983 303,463
Non-employee warrants and options 8[b]] 15,642 10,300
Contributed surplus 8,535 8,535
-------- -------
Deficit (253,177) (218,235)
-------- -------
TOTAL SHAREHOLDERS' EQUITY 76,983 104,063
-------- -------
100,377 124,312
======== =======
See accompanying notes
On behalf of the Board:
/s/ E. Rygiel /s/ Lee Hartwell
- ------------------------- --------------------------------------
Edward K. Rygiel Lee Hartwell
Chairman of the Board President & Chief Executive Officer
and Director
18 Annual Report 2003
Hemosol Inc. [A Development Stage Company]
CONSOLIDATED STATEMENTS OF LOSS
Years ended December 31
(in thousands of dollars, except per share data) 2003 2002 2001
$ $ $
------- ------- -------
EXPENSES
Research and development
Scientific and process [note 3] 10,773 15,271 18,386
Regulatory and clinical 5,817 17,173 11,771
Administration 6,586 6,115 5,137
Marketing and business development 1,760 6,018 5,561
Support services 1,297 2,602 1,594
Write-off of property, plant and equipment [note 4 [v]] 4,654 -- --
Write-off of patents and trademarks [note 5] 846 -- --
Foreign currency translation loss (gain) 380 246 (970)
------- ------- -------
Loss from operations 32,113 47,425 41,479
Amortization of deferred charges [note 7] 5,009 1,587 360
Write-off of deferred charges [note 7] -- 6,453 --
Interest income (153) (842) (3,488)
Interest expense 688 -- --
Miscellaneous income [note 13] (2,871) -- --
------- ------- -------
Loss before income taxes 34,786 54,623 38,351
Provision for income taxes [note 9] 156 211 226
------- ------- -------
NET LOSS FOR THE YEAR 34,942 54,834 38,577
======= ======= =======
BASIC AND DILUTED LOSS PER SHARE $ 0.75 $ 1.23 $ 0.98
======= ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING [000'S] 46,837 44,514 39,215
======= ======= =======
See accompanying notes
CONSOLIDATED STATEMENTS OF DEFICIT
Years ended December 31
(in thousands of dollars) 2003 2002 2001
$ $ $
-------- -------- --------
DEFICIT, BEGINING OF YEAR AS ORGINALLY PRESENTED (240,761) (183,858) (136,388)
Adjustment for change in accounting policy [note 2[b]] 22,526 20,457 11,564
-------- -------- --------
Deficit, beginning of year as restated (218,235) (163,401) (124,824)
-------- -------- --------
Net loss for the year (34,942) (54,834) (38,577)
-------- -------- --------
DEFICIT, END OF YEAR (253,177) (218,235) (163,401)
======== ======== ========
See accompanying notes
2003 Annual Report 19
Hemosol Inc. [A Development Stage Company]
CONSOLIDATED STATEMENTS OF CASH FLOW
Years ended December 31
(in thousands of dollars) 2003 2002 2001
$ $ $
------- ------- --------
OPERATING ACTIVITIES
Net loss for the year (34,942) (54,834) (38,577)
Add (deduct) items not involving cash
Amortization of property, plant and equipment 2,276 2,450 2,303
Write-off of property, plant and equipment [note 4[v]] 4,654 -- --
Amortization of patents and trademarks 134 115 74
Write-down of patents and trademarks [note 5] 846 -- --
Amortization of deferred charges 5,009 1,587 360
Write-off of deferred charges [note 7] -- 6,453 --
Write-down of inventory [note 3] 1,676 -- --
Expense for non-employee stock options -- -- 134
Gain on sale of equipment [note 4[iii]] (1,100) -- --
Foreign currency translation gain (loss) (79) 52 (42)
------- ------- --------
(21,526) (44,177) (35,748)
Net change in non-cash working capital balances
related to operations [note 16] (5,129) 3,818 (2,186)
------- ------- --------
CASH USED IN OPERATING ACTIVITIES (26,655) (40,359) (37,934)
------- ------- --------
INVESTING ACTIVITIES
Patent and trademark costs (172) (327) (568)
Purchase of short-term investments -- -- (87,647)
Proceeds on sale of equipment 1,100 -- --
Sale of short-term investments -- 67,052 20,595
Purchase of property, plant and equipment (8,361) (31,699) (38,415)
------- ------- --------
Cash provided by (used in) investing activities (7,433) 35,026 (106,035)
------- ------- --------
FINANCING ACTIVITIES
Proceeds on issuance of common shares -- 22,170 113,078
Proceeds on issuance of series A special warrants 5,021 -- --
Proceeds on issuance of series B special warrants 448 -- --
Proceeds from short-term debt 20,000 -- --
Payment of share issue costs (466) (1,351) (8,393)
Payment of debentures (5,000) -- --
Payment of debt issue costs -- (640) --
Proceeds on issuance of debentures -- 5,000 --
Cash put in escrow (448) (5,000) --
Cash released from escrow 5,000 -- --
------- ------- --------
CASH PROVIDED BY FINANCING ACTIVITIES 24,555 20,179 104,685
------- ------- --------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS 79 (52) 42
------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING THE YEAR (9,454) 14,794 (39,242)
Cash and cash equivalents, beginning of year 17,579 2,785 42,027
------- ------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR 8,125 17,579 2,785
======= ======= ========
See accompanying notes
20 Annual Report 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[All dollar amounts in thousands, except as noted]
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hemosol Inc. [the "Company" or "Hemosol"] is an integrated biopharmaceutical
company developing a family of products for the treatment of human hemoglobin
deficiencies and the discovery, development and manufacture of a wide array of
products derived from human blood proteins. To date, the Company has not earned
significant revenues and is considered to be an enterprise in the development
stage.
The consolidated financial statements of the Company have been prepared by
management in accordance with Canadian generally accepted accounting principles.
The impact of material differences between Canadian and U.S. generally accepted
accounting principles is set out in note 19. Significant accounting policies are
as follows:
BASIS OF PRESENTATION These consolidated financial statements have been prepared
on a going concern basis, which presumes that the Company will be able to
realize its assets and discharge its liabilities in the normal course of
operations for the foreseeable future.
The Company in its development stage has incurred cumulative net losses since
inception, including a net loss of $34,942 in 2003, an accumulated deficit of
$253,177 and a working capital deficit of $12,812 as at December 31, 2003.
The Company's ability to continue as a going concern is dependent upon its
ability to secure additional financing in order to be able to continue its
development activities and successfully bring its products to market, either on
it's own or with partners.
On March 13, 2003, based on the recommendation of the Company's Data Safety
Monitoring Board [the "DSMB"], the Company elected to halt enrolment in its
cardiac surgery trial HLK 213/304 at 152 patients in order to fully review the
safety data. The DSMB's comments were based on an observation of an imbalance in
the incidence of certain adverse events between the HEMOLINK and control groups.
As a precaution, the Company also voluntarily suspended enrolment in its Phase
II clinical study involving the use of HEMOLINK in patients undergoing
orthopedic surgery. On June 11, 2003, the Company completed an internal review
of data generated from its cardiac trial HLK 213/304 for the use of HEMOLINK in
patients undergoing cardiac bypass grafting ["CABG"] surgery. The review
confirmed the observation made by the DSMB of an imbalance in the incidence of
certain adverse events between the HEMOLINK and control groups in the HLK
213/304 trial with a higher number occurring in the HEMOLINK group.
On February 12, 2004, Hemosol announced that it had entered into an agreement
[the "Arrangement Agreement"] with MDS Inc. ["MDS"] under which Hemosol will
benefit from its existing accumulated income tax losses and other tax assets
through a reorganization of Hemosol's business and certain MDS assets. MDS is a
shareholder with greater than 10% shareholding in Hemosol, has a number of
appointees to the Board of Directors and has guaranteed Hemosol's $20 million
credit facility. The transaction will involve a cash payment to Hemosol of $16
million along with certain other considerations [note 18[b]].
The Company intends to exercise its option to extend its $20 million credit
facility currently expiring on October 1, 2004 to May 25, 2005, subject to
regulatory approval.
The Company is actively pursuing opportunities to generate revenues and reduce
its cash burn over the short to mid-term by using its Meadowpine facility to
provide manufacturing services to companies in the biotechnology and
biopharmaceutical sectors focused in the area of blood and blood protein
products.
The Company believes that it will successfully conclude these transactions and
as a result will be able to meet its short-term cash flow requirements. However,
the successful conclusion of these transactions cannot be predicted at this time
which casts substantial doubt on the Company's ability to continue as a going
concern.
These consolidated financial statements do not include any adjustments to the
amounts and classification of assets and liabilities that might be necessary
should the Company be unable to continue as a going concern and therefore be
required to realize its assets and discharge its liabilities in other than the
normal course of business and at amounts different from those reflected in the
accompanying consolidated financial statements.
2003 Annual Report 21
BASIS OF CONSOLIDATION The accompanying consolidated financial statements
include the accounts of the Company and all of its wholly-owned subsidiaries.
All significant intercompany transactions and balances are eliminated.
Interests in jointly controlled enterprises are consolidated using the
proportionate consolidation method. Under this method, the Company's
proportionate share of the jointly controlled enterprise's revenues, expenses,
assets and liabilities are included in the consolidated financial statements.
CASH AND CASH EQUIVALENTS The Company considers all highly liquid instruments
with maturities of 90 days or less at date of acquisition to be cash
equivalents. As at December 31, 2003, cash and cash equivalents included cash
equivalents of $5.1 million [2002 - $16.8 million] with effective interest rates
of 2.76% [2002 - 2.29%].
SHORT-TERM INVESTMENTS Short-term investments are generally held to maturity.
Short-term investments are liquid investments with maturities between 90 days
and one year from the date of acquisition and are valued at the lower of cost
and market value.
INVENTORY Inventory consists of raw materials that can be used in production for
commercial or research purposes. Inventory is valued at the lower of direct
acquisition cost, determined on a first-in, first-out basis, and replacement
cost.
INVESTMENT TAX CREDITS Investment tax credits are accrued when qualifying
expenditures are made and there is reasonable assurance that the credits will be
realized. The Company accounts for the investment tax credits using the cost
reduction method.
PATENTS AND TRADEMARKS Patent and trademark costs are carried at cost less
accumulated amortization and are amortized on a straight-line basis over their
economic life, which is estimated to be 17 years. Management periodically
reviews the carrying value of its patents and trademarks and writes down the
costs associated with a specific patent when the value is determined to be
impaired.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at
cost, less accumulated amortization and related investment tax credits.
Amortization commences when property, plant and equipment are available for use
and is provided using the straight-line method at the following annual rates,
which are designed to charge operations with the cost of the assets over their
estimated useful lives as follows:
Building and building services equipment 25 years
Technical equipment 5-15 years
Furniture and fixtures 5 years
Computer equipment 3 years
Leasehold improvements over term of lease
Assets under construction or validation for commercial purposes are not
amortized until available for use.
Management reviews the carrying amount of property, plant and equipment and
intangible assets with finite lives if events or circumstances indicate that the
carrying amount may not be recoverable. Recoverability is measured by comparing
the carrying amounts of a group of assets to the future undiscounted net cash
flows expected to be generated by that group of assets. If the carrying amount
is not recoverable, the Company would recognize an impairment loss equal to the
amount that the carrying value of a group of assets exceeds their fair value.
INCOME TAXES The Company follows the liability method of accounting for income
taxes. Under this method, future tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities, measured using the substantively enacted tax rates and laws which
are expected to be in effect when the differences are expected to reverse.
RESEARCH AND DEVELOPMENT COSTS Research costs are expensed in the year incurred.
Development costs are expensed in the year incurred unless a development project
meets Canadian generally accepted accounting criteria for deferral and
amortization. No development costs have been deferred to date.
22 Annual Report 2003
DEFERRED DEBT ISSUE COSTS Deferred debt issue costs represent the costs related
to the establishment of the Company's credit facilities. The costs are being
amortized over the expected term of the facility. Upon early termination of a
credit facility, the unamortized balance of debt issue costs is written off.
FOREIGN CURRENCY TRANSLATION For integrated foreign operations, monetary assets
and liabilities are translated into Canadian dollars at the year-end exchange
rates while non-monetary assets and liabilities are translated at historic
exchange rates. Revenue and expenses are translated using the average exchange
rate for the fiscal year. Realized and unrealized foreign exchange gains or
losses are included in the consolidated statements of loss and deficit.
Monetary assets and liabilities of the Company's domestic operations denominated
in foreign currencies are translated into Canadian dollars using exchange rates
at the year end while non-monetary assets and liabilities are translated using
exchange rates in effect on the date of the transaction. Revenue and expenses
are translated at the rates of exchange in effect on the dates of the
transactions. Gains or losses arising from the translation of foreign currencies
are included in the consolidated statements of loss and deficit.
LOSS PER SHARE Diluted loss per share reflects the dilution that would occur if
outstanding stock options and warrants were exercised or converted into common
shares using the treasury stock method. The inclusion of the Company's stock
options and warrants in the computation of diluted loss per share would have an
anti-dilutive effect on loss per share and therefore options and warrants are
excluded from the computation.
STOCK-BASED COMPENSATION The Company has two stock-based compensation plans,
which are described in note 8. Stock options and warrants awarded to
non-employees on or after January 1, 2002 are accounted for using the fair value
method. Stock options awarded to employees on or after January 1, 2003 are
accounted for using the fair value method [note 2[a]]. For stock options awarded
to employees prior to January 1, 2003, pro forma disclosure of net loss and net
loss per share is provided as if these awards were accounted for using the fair
value method. Fair value is calculated using the Black-Scholes model with the
assumptions described in note 8. Consideration paid on the exercise of stock
options and warrants is credited to share capital.
USE OF ESTIMATES The preparation of consolidated financial statements in
conformity with Canadian generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the dates of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. Significant estimates made by
management include reserves for amounts receivable and inventory, basis for
stock-based compensation, impairment of patents and trademarks and other
long-lived assets and the useful lives of long-lived assets.
2. CHANGES IN ACCOUNTING POLICY
[a] STOCK-BASED COMPENSATION
Effective January 1, 2003, the Company prospectively adopted the fair value
method for stock-based compensation in accordance with the recommendations of
"Stock-Based Compensation and Other Stock-Based Payments" Section 3870, issued
by The Canadian Institute of Chartered Accountants. Previously, no compensation
expense was recognized for stock options granted to employees. Under the new
policy, compensation expense for employee stock options is accounted for using
the fair value method as described in note 1. The impact to net loss during 2003
or shareholders' equity at December 31, 2003 as a result of the change in
accounting policy was immaterial.
[b] SHARE ISSUE COSTS
Effective January 1, 2003, the Company retroactively changed its method of
accounting for share issue costs to record proceeds on issuance of shares net of
share issue costs in share capital in order to harmonize with United States
Generally Accepted Accounting Principles ["U.S. GAAP"]. Previously, the Company
recognized these costs as a reduction of deficit. For the years ended December
31, 2001, 2002 and 2003, the effect of the change in accounting policy was that
opening deficit decreased by $11,564, $20,457 and $22,526, respectively. As at
December 31, 2001, 2002 and 2003 the effect of the change in accounting policy
was to decrease share capital and decrease the deficit by $20,457, $22,526 and
$23,065, respectively.
2003 Annual Report 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[c] IMPAIRMENT OF LONG-LIVED ASSETS
On January 1, 2003, the Company adopted prospectively the recommendations of
"Impairment of Long-Lived Assets" Section 3063, issued by The Canadian Institute
of Chartered Accountants. Section 3063 requires that management review the
carrying amount of property, plant and equipment and intangible assets with
finite lives if events or circumstances indicate that the carrying amount may
not be recoverable. Recoverability is measured by comparing the carrying amounts
of a group of assets to the future undiscounted net cash flows expected to be
generated by that group of assets. If the carrying amount is not recoverable,
the Company would recognize an impairment loss equal to the amount that the
carrying value of a group of assets exceeds their fair value. The adoption of
this accounting standard as of January 1, 2003 had no material impact on the
Company's financial position, results of operations or cash flows.
3. INVENTORY
During 2003, the Company wrote off inventory in the amount of $1,676 which
mainly relates to perishable materials related to the production of HEMOLINK
[note 1].
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
2003 2002
ACCUMULATED Accumulated
COST AMORTIZATION Cost amortization
$ $ $ $
------ ------------ ------- ------------
Land 2,782 -- 2,782 --
Building and building services equipment 17,193 1,362 17,154 676
Technical equipment [ii], [v] 73,484 9,705 76,292 8,910
Furniture and fixtures 2,538 1,352 2,526 959
Computer equipment [iv] 1,930 1,656 2,051 1,473
Leasehold improvements [ii] 155 126 8,322 8,202
------ ------------ ------- ------------
98,082 14,201 109,127 20,220
Less accumulated amortization [i] 14,201 20,220
------ ------------ ------- ------------
NET BOOK VALUE 83,881 88,907
====== ============ ======= ============
[i] Amortization of property, plant and equipment for the year ended
December 31, 2003 was $2,276 [2002-$2,450; 2001-$2,303].
[ii] Technical equipment is still undergoing construction to prepare for
ProMetic production. The carrying value of the assets considered to be
unavailable for use is approximately $62,000.
[iii] On December 1, 2003, the Company cancelled the lease on its pilot
facility for nil expense. The Company also sold equipment from its
pilot facility, with a net book value of nil, for proceeds of
$1,100/note 13]. Cost and accumulated amortization of the pilot
facility sold were $8,168.
[iv] During the year, the Company sold fully-amortized computers for minimal
value, with cost and accumulated amortization of $127.
[v] During the year, the Company wrote off costs of $4,654 for impaired
equipment related to the commercial production of HEMOLINK [note 1].
24 Annual Report 2003
5. PATENTS AND TRADEMARKS
Patents and trademarks consist of the following:
2003 2002
$ $
----- -----
Patent and trademark costs 2,108 2,782
Less accumulated amortization 740 606
----- -----
NET BOOK VALUE 1,368 2,176
===== =====
Amortization of patents and trademarks for the year ended December 31, 2003 was
$134 [2002 - $115; 2001 - $74], During the year the Company wrote off costs
determined to have no future benefit in the amount of $846.
6. LICENSE TECHNOLOGY
On December 3, 2003, the Company entered into a binding memorandum of
understanding [the "ProMetic MOU"] with ProMetic, a wholly owned subsidiary of
ProMetic Life Sciences Inc., that will involve Hemosol licensing the plasma
separation technology [the "Cascade"] developed by ProMetic and its strategic
partner, the American National Red Cross. Hemosol will use this technology to
manufacture products for sale into the North American market. Commercial sales
of therapeutic products manufactured by the Cascade will require the advance
approval of the applicable regulatory agency in each jurisdiction where sales
are contemplated. As consideration for entering into the binding ProMetic MOU,
Hemosol issued 2,000,000 common shares to ProMetic recorded at $1.26 per share.
This represents the average closing market price per share from December 1 to
December 5, 2003, inclusive. The Company has also agreed to pay ProMetic
milestone payments with a maximum aggregate value of approximately $15,500 plus
an additional 1,000,000 common shares. These milestone payments will be due and
payable by Hemosol to ProMetic following the execution of a definitive license
agreement, and upon the achievement of four separate predetermined technical and
regulatory milestones as follows:
PAYMENT
MILESTONES $ MILLION
------------------ ------------------------------------
Signature of Definitive License Agreement $1.5
1 million common shares of Hemosol
Process Definition of the Cascade at Pilot-Scale [30L Plasma Batch Size and targeted yields $4.0
to be defined as part of the License]
First Investigational New Drug for Clinical Trial Supply by Hemosol for $2.5
investigational product
Production of Conformance Lots for First Commercial Product in Hemosol Facility $2.5
Licensure of First Product $5.0
In addition to the license fee, the ProMetic MOU also provides that Hemosol will
pay ProMetic royalty fees of 8% of net sales of products produced using the
Cascade to resellers and a royalty of 5% of net sales of products produced using
the Cascade to end-users, both on a worldwide basis.
2003 Annual Report 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEFERRED CHARGES
Deferred charges consist of the following:
2002 2003
$ $
----- -----
Deferred debt issue costs 7,545 7,545
Deferred share issue costs 339 --
Less accumulated amortization 5,858 849
----- -----
NET BOOK VALUE 2,026 6,696
===== =====
Deferred debt issue costs represent costs related to the establishment of the
Company's $20 million credit facility [note 10[a]] in 2002. The non-cash portion
of these costs related to warrants issued during 2002 [note 8[a]] amounting to
$7,080. Amortization of deferred debt issue costs for the year ended December
31, 2003 was $5,009 [2002 - $1,587: 2001 - $360]
Deferred debt issue costs in 2001 relate to the establishment of the Company's
$35 million senior credit facility and $12.5 million subordinate credit
facility. Total deferred debt issue costs of $6,453 were written off during 2002
as a result of the cancellation of these facilities.
Deferred share issue costs represent costs related to the issuance of common
shares and warrants that closed on January 22, 2004 [note 8]. These costs are
not subject to amortization and will be charged against the gross proceeds of
the related issuance of common shares.
8. SHARE CAPITAL
[a] COMMON SHARES
Authorized
Unlimited special shares, issuable in series
51,786 Series D special shares, voting, ranking equally with common shares
Unlimited common shares
The changes in common shares are as follows:
2003 2002 2001
------------------------- ----------------------- ----------------------
# $ # $ # $
---------- ---------- ---------- ---------- ---------- -------
[restated - note 2] [restated - note 2]
BALANCE, BEGINNING OF YEAR 46,103,784 303,463 40,993,861 282,644 32,269,901 178,459
Issued for cash -- -- 4,900,000 20,694 8,050,000 99,785
Issued as share issue costs 159,250 -- -- --
Issued to acquire license technology [note 6] 2,000,000 2,520
Employee options exercised for cash -- -- 46,523 80 296,860 1,435
Issue of common shares under
employee share purchase plan for cash -- -- 4,150 45 33,400 264
Non-employee warrants and
options exercised for cash -- -- -- -- 343,700 2,701
---------- ---------- ---------- ---------- ---------- -------
Balance, end of year 48,103,784 305,983 46,103,784 303,463 40,993,861 282,644
========== ========== ========== ========== ========== =======
26 Annual Report 2003
On March 1, 2001, the Company issued 7,000,000 common shares at a purchase price
per common share of $13.50 for gross proceeds of $94,500, less share issue costs
of $8,890. In addition, the Company granted 1,050,000 over-allotment options
entitling the underwriters to purchase one common share at a price of $13.50
during the period ended March 31, 2001. During 2001, all 1,050,000
over-allotment options were exercised for gross proceeds of $14,175.
On April 18, 2002, the Company issued 4,900,000 common shares and 2,450,000
common share purchase warrants for gross proceeds of $22,050 less share issue
costs of $1,356. In addition, 159,250 common shares were issued as payment for
$718 of share issue costs. Each warrant entitles the holder to purchase one
common share at a price of $5.50 per common share at any time until their expiry
date on April 18, 2003. The warrants are subject to redemption by the Company at
nominal consideration commencing six months after closing if the common share
price is greater than $8.00 for 20 consecutive trading days. During 2003, all
2,450,000 common share purchase warrants expired unexercised.
On December 3, 2003, the Company entered into the ProMetic MOU and as
consideration, Hemosol issued 2,000,000 common shares to ProMetic. The common
shares have been recorded at $1.26 per share [note 6] which amounts to a total
consideration of $2,520.
[b] NON- EMPLOYEE WARRANTS AND OPTIONS
The changes in non-employee warrants and options are as follows:
2003 2002 2001
-------------------------------------------------------------------------
# $ # $ # $
-------------------------------------------------------------------------
[RESTATED NOTE 2] [RESTATED- NOTE 2]
BALANCE, BEGINNING OF YEAR 8,977,500 10,300 727,222 3,034 1,111 872 2,900
Issued 7,841,800 5,342 8,557,500 7,890 20,000 134
Exercised -- -- -- -- (343,700) --
Cancelled -- -- (85,000) (624) -- --
Expired (2,450,000) -- (222,222) -- (60,950) --
========== ====== ========= ====== ======= =====
BALANCE, END OF YEAR 14,369,300 15,642 8,977,500 10,300 727,222 3,034
========== ====== ========= ====== ======= =====
During 2002, the Company granted 2,500 options [2001 - 20,000] with a fair value
determined using the Black-Scholes option pricing model of nil [2001 - $134] to
external consultants for services performed. These options have an expiry date
of 10 years from issuance and vest over a three-year period. The fair value of
these options is included in net loss for the year. To date, none of these
options have been exercised.
On April 22, 2002, the Company entered into an amending agreement ["Amended
Facility"] with the National Bank of Canada and the Bank of Nova Scotia under
which the parties made amendments to the original $35 million senior credit
facility [note 10[b]]. In connection with the finalization of the Amended
Facility, the Company cancelled 85,000 common share purchase warrants at an
exercise price of $18.00 per share previously issued on November 10, 2000 in
connection with the original facility, and subsequently issued 105,000 new
common share purchase warrants at an exercise price of $6.31 per share which are
exercisable at any time until their expiry date on April 22, 2007. The
difference in fair value between the new and cancelled options determined using
the Black-Scholes option pricing model of approximately $186 is included in net
loss for the year ended December 31, 2002. To date, none of these warrants have
been exercised.
2003 Annual Report 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On November 22, 2002, the Company issued 6,000,000 common share purchase
warrants at an exercise price of $1.00 per share in connection with the
finalization of the $20 million credit facility [note 10[a]]. These warrants
have been recorded at an estimated fair value of $7,080 using the Black-Scholes
option pricing model and are exercisable, in whole or in part, on or prior to
the later of: November 22, 2005: and, if the guarantee is extended beyond the
initial term, twelve months following the date upon which the credit facility is
repaid in full. The repayment date of the credit facility is October 1, 2004. To
date, none of these warrants have been exercised.
On November 28, 2003, the Company issued 7,200,000 series A special warrants and
641,800 series B special warrants for total gross proceeds of $5,881, less share
issue costs of $539. Of these proceeds, $448 representing net proceeds from the
series B special warrants were received into escrow and subsequently paid to the
Company on January 23, 2004, after shareholder approval was obtained.
On January 22, 2004, shareholder approval was obtained and both series of
warrants were exercised, with no additional consideration, for 7,841,800 common
shares and 3,920,890 common share purchase warrants [note 18[a]].
[c] EMPLOYEE STOCK PURCHASE PLAN
During 1999, the Company implemented an employee stock purchase plan [the
"ESPP"] to enable non-management employees to purchase shares in the Company at
90% of the then current stock price as defined in the ESPP. The ESPP also
provides non-interest bearing loans to designated employees to be used to
subscribe for common shares. Loans are repayable over a maximum three-year
period. Employees shall have one year from the date on which they are notified
of eligibility to participate in the ESPP. In June 2002, the ESPP was suspended
and subsequently terminated.
During the year ended December 31, 2003, no common shares [2002 - 4,150; 2001 -
33,400] were issued to employees under the ESPP for nil gross proceeds [2002 -
$45; 2001 - $264]. Upon suspension of the ESPP, all outstanding loans were
forgiven, and the underlying securities collateralizing the loans being
approximately 27,000 common shares were sold by the Company. The difference
between the carrying value of the loans and the fair market value of the shares
to be sold was $205 which was written off during 2002.
[d] EMPLOYEE STOCK OPTION PLAN
The Company has granted options to purchase common shares of the Company to
certain of its directors, executive officers and key employees. The purpose of
the stock option plan is to attract, encourage and increase the incentive for
continued service of the Company's directors, officers and key employees.
The options expire 10 years from the date of issuance. Options granted prior to
December 7, 2000 vest over a four-year period and options granted on or
subsequent to December 7, 2000 vest over a three-year period. The exercise price
of the warrants is the market price of the common shares on the date immediately
preceding the date of the grant. The aggregate number of common shares
authorized for issuance under the stock option plan is 3,031,712.
During 2003, no options [2002 - 46,523; 2001 - 296,860] were exercised for cash
consideration [2002 - $80; 2001 - $1,435].
In October 2003, the Company's Board of Directors approved the grant of an
aggregate of 2,766,225 options to certain of the Company's executives, which
options [a] may be exercised to purchase common shares at an exercise price of
$0.90 per share, [b] shall fully vest on October 29, 2004 subject to the Company
attaining certain prescribed targets and [c] shall otherwise be subject to the
terms and conditions of the Company's stock option plan. In addition, in
December 2003, the Company's Board of Directors approved the grant of an
aggregate of up to 775,000 options to the Company's directors and non-executive
employees, which options may be exercised to purchase common shares at an
exercise price of $1.60 per share and shall be subject to the terms and
conditions [including vesting] of the Company's stock option plan. All of these
options were approved subject to shareholder and regulatory approval. For these
options the date of grant will be recorded at the time shareholder and
regulatory approvals are obtained.
28 Annual Report 2003
A summary of the status of the Company's employee stock option plan as at
December 31, 2003, 2002 and 2001, and changes during the years ended on those
dates, is presented below:
2003 2002 2001
WEIGHTED Weighted Weighted
AVERAGE average average
EXERCISE exercise exercise
SHARES PRICE Shares price Shares price
# $ # $ # $
- ------------------------------------------------------------------------------------------------------------------
OUTSTANDING, BEGINNING OF YEAR 2,482,245 7.20 2,112,922 9.05 1,812,665 8.81
Granted 27,613 2.15 715,750 2.70 793,700 8.24
Exercised -- -- (46,523) 1.73 (296,860) 4.83
Forfeited (928,106) 7.48 (299,904) 10.32 (196,583) 9.85
--------- ---- --------- ---- --------- ----
OUTSTANDING, END OF YEAR 1,581,752 6.95 2,482,245 7.20 2,112,922 9.05
========= ==== ========= ==== ========= ====
OPTIONS EXERCISABLE, END OF YEAR 1,042,012 7.48 957,063 8.45 757,653 7.74
========= ==== ========= ==== ========= ====
The following table summarizes information relating to the employee stock
options as at December 31, 2003:
OUTSTANDING EXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE EXERCISE
PRICES CONTRACTUAL LIFE PRICE PRICE
$ # [YEARS] $ # $
- ---------------------------------------------------------------------------------------------------------------------------
2.00 to 3.00 539,433 7.08 2.24 301,693 2.22
3.01 to 4.50 91,180 7.22 4.15 41,150 4.12
4.51 to 6.75 486,797 5.91 5.75 357,048 5.74
6.76 to 10.00 73,000 4.71 7.39 47,649 7.46
10.01 to 15.00 63,040 7.10 12.53 41,370 12.50
15.01 to 22.60 328,302 6.72 16.07 253,102 15.94
- -------------- --------- ---- ----- --------- -----
2.00 to 22.60 1,581,752 6.55 6.95 1,042,012 7.48
- -------------- --------- ---- ----- --------- -----
The Company does not recognize compensation expense for stock options granted to
employees prior to January 1, 2003. The table below presents pro forma net loss
and basic and diluted loss per common shares as if stock options granted to
employees had been determined based on the fair value method. The table includes
all stock options granted by the Company prior to January 1, 2003.
2003 Annual Report 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2003 2002 2001
$ $ $
-------- -------- --------
Net loss as reported (34,942) (54,834) (38,577)
Estimated stock-based compensation costs (2,055) (1,615) (2,644)
------- ------- -------
PRO FORMA NET LOSS (36,997) (56,449) (41,221)
======= ======= =======
PRO FORMA BASIC AND DILUTED LOSS PER COMMON SHARE (0.79) (1.27) (1.06)
======= ======= =======
WEIGHTED AVERAGE FAIR VALUE OF STOCK
OPTIONS GRANTED DURING THE YEAR 1.59 1.78 7.77
======= ======= =======
The fair values of all options granted during the following years were estimated
using the Black-Scholes option pricing model with the following weighted average
assumptions:
2003 2002 2001
---- ---- ----
Expected option life [years] 5 5 5
Volatility 1.080 0.714 0.659
Risk-free interest rate 3.6% 3.2% 4%
Dividend yield -- -- --
------ ----- ----
The Black-Scholes model, used by the Company to calculate option values, as well
as other accepted option valuation models, were developed to estimate fair value
of freely tradable, fully transferable options without vesting restrictions,
which significantly differ from the Company's stock option awards. These models
also require four highly subjective assumptions, including future stock price
volatility and expected time until exercise, which greatly affect the calculated
values.
9. INCOME TAXES
The provision for income taxes differs from those that would be obtained by
applying the statutory rates as a result of the following:
2003 2002 2001
$ $ $
------- ------- -------
Loss before income taxes 34,786 54,776 38,351
Statutory rates 36.62% 38.62% 42.72%
======= ======= =======
Expected income tax recovery (12,739) (21,154) (16,376)
Permanent differences 29 28 28
Large Corporations Tax 156 211 226
Portion of future tax assets
not recognized 13,332 21,067 16,348
Other (622) -- --
------- ------- -------
PROVISION FOR INCOME TAXES 156 211 226
======= ======= =======
30 Annual Report 2003
Significant components of the Company's future tax assets and liabilities as at
December 31 are as follows:
2003 2002
$ $
-------- -------
Future tax assets
Non-capital losses 18,400 8,118
Investment tax credits 23,261 24,733
Scientific research and experimental development expenses 74,000 55,745
Share issue costs 4,231 2,712
Federal property, plant and equipment and patents and trademarks 2,800 427
-------- -------
122,692 91,735
Valuation allowance (119,645) (91,735)
-------- -------
3,047 --
Future tax liabilities -- --
-------- -------
Property, plant and equipment and patents and trademarks (3,047) --
-------- -------
NET FUTURE TAX ASSETS -- --
======== =======
The provision for income taxes recorded during fiscal 2003 of $156 [2002 - $211:
2001 - $226] relates to Large Corporations Tax and U.S. Federal income tax
payable.
The Company has available research and development expenditures for income tax
purposes, which may be carried forward indefinitely to reduce future years'
taxable income. The potential income tax benefits associated with these
expenditures have not been recorded in the accounts. The total of such
expenditures accumulated to December 31, 2003 is approximately $205,000 [2002 -
$185,000: 2001 - $150,000].
At December 31, 2003, the Company has accumulated tax losses for federal and
provincial purposes in Canada. The Company also has unclaimed Canadian
scientific research investment tax credits. The losses and investment tax
credits can be used to offset future years' Canadian taxable income. See
subsequent event note 18 [b]. The tax losses and investment tax credits expire
as follows:
Investment
Federal Ontario tax credits
$ $ $
------- ------- -----------
2004 -- 2,016 1,820
2005 2,446 5,911 1,908
2006 3,695 9,018 1,743
2007 -- 4,522 2,151
2008 9,933 9,933 2,118
2009 3,035 23,240 3,077
2010 12,209 27,645 5,122
2011 -- -- 5,332
2012 -- -- 8,045
2013 -- -- 1,606
======= ======= ===========
2003 Annual Report 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SHORT-TERM DEBT
[a] $20 MILLION CREDIT FACILITY
On October 25, 2002, the Company entered into a credit facility agreement [the
"Facility"] with the Bank of Nova Scotia in the amount of $20 million. The
initial term of the Facility is 18 months, extendible to 30 months from the date
of the agreement. The Facility is guaranteed by MDS [the "Guarantee"], a related
party, and is collateralized by a fixed and floating charge over all the assets
of the Company. Under the Guarantee, MDS is subrogated to and takes an
assignment of the rights and remedies of the Bank of Nova Scotia under the
Facility. Borrowings under the Facility will bear interest at a rate of prime
plus 1 % per annum, or a bankers' acceptance fee of 2% per annum, with interest
payable monthly. In December 2003, the Guarantee was extended to October 21,
2004 and the expiry date of the Facility was extended from May 25, 2004 to
October 1, 2004.
In consideration for providing the Guarantee, 6,000,000 warrants were issued to
MDS during the year ended December 31, 2002. Subject to shareholder and
regulatory approval, an additional 4,000,000 warrants may be issued to MDS on or
after May 25, 2004, but by August 25, 2004. Should all 4,000,000 additional
warrants be issued prior to August 25, 2004, the term of the Guarantee shall be
automatically extended from October 21, 2004 to June 20, 2005 and the Facility
expiry date will be extended from October 1, 2004 to May 25, 2005. In the event
that such 4,000,000 additional warrants are not issued to MDS by August 25, 2004
and the term of the Guarantee is not extended beyond October 21, 2004, the
Company shall have no further obligation to issue any additional warrants.
On January 22, 2004 a special meeting of the shareholders of the Company was
held at which the shareholders adopted a resolution authorizing the Company to
issue, subject to regulatory approval, the additional 4,000,000 warrants. As
part of the transaction announced on February 12, 2004 [note 18[b]], subject to
shareholder approval and completion of the transaction, 500,000 of the unvested
warrants issued in 2002 will be cancelled and 2,000,000 warrants of the
additional 4,000,000 will no longer be required to be issued. The remaining
warrants' exercise price will be reduced to $0.96 each. All other terms remain
unchanged.
The terms of the warrants are as follows:
NUMBER EXERCISE PRICE
# VESTING DATES $ EXPIRY DATES
- -----------------------------------------------------------------------------------------------------------
5,000,000 November 22,2002 1.00 On the later of:
[i] November 22, 2005; and
[ii] If the Facility is not repaid by
February 22, 2004, then the earlier
of twelve months following the date
upon which the Facility is repaid
in full, and November 22,2007.
1,000,000 333,333 February 22,2004 1.00 On the earlier of:
333,333 March 22, 2004 [i] The third anniversary date of the
333,334 April 22, 2004 vesting date; and
[ii] If the Facility is not repaid by
February 22, 2004, then the earlier
of twelve months following the date
upon which the Facility is repaid
in full, and November 22,2007.
4,000,000 Evenly over the twelve month 1.00 On the earlier of:
period from May 22, 2004 [i] The third anniversary date of the
to April 22, 2005 [subject to vesting date; and
regulatory approval] [ii] November 22, 2007.
The Company has recorded deferred charges related to the first 6,000,000
warrants at their fair value of $7,080 [note 7], to be amortized over the
initial term of the Facility. Should the term of the Facility be extended, the
remaining 4,000,000 warrants will be fair valued and recorded in expense as they
are issued. The fair values of the warrants were estimated using the
Black-Scholes option pricing model with the following assumptions: expected
option life of 3 years, expected volatility of 1.004, risk free interest rate of
3%, and expected dividend yield of nil.
32 Annual Report 2003
[b] $35 MILLION SENIOR CREDIT FACILITY
On April 22, 2002, the Company entered into the Amended Facility with the
National Bank of Canada and the Bank of Nova Scotia under which the parties made
amendments to the original $35 million senior credit facility. The Facility
replaced the Amended Facility. As a result, in connection with the finalization
of the Facility, the Company notified the National Bank of Canada and the Bank
of Nova Scotia that it will terminate all of its obligations under the Amended
Facility. During 2002, the Company wrote off deferred charges related to this
Amended Facility in the amount of $3,381, of which $685 related to the valuation
of warrants at the time of amendment. The remaining $2,696 related to cash debt
issue costs.
[c] $12.5 MILLION SUBORDINATE CREDIT FACILITY
During 2002, the Company terminated all of its obligations under the subordinate
credit facility. On June 30, 2002, the Company wrote off deferred debt issue
costs related to the termination of the Company's subordinate credit facility in
the amount of $3,072, of which $2,100 related to the valuation of warrants at
the time of amendment. The remaining $972 related to cash debt issue costs.
11. DEBENTURES PAYABLE
In December 2002, Hemosol Research Corporation, a wholly-owned subsidiary of the
Company, entered into a joint venture with a third party. A new company, 1555195
Ontario Inc., was incorporated and the third party deposited $10,000 cash in
escrow in 1555195 Ontario Inc. in exchange for debentures. The Company's
proportionate share of the cash and debentures has been included in the
consolidated financial statements for the year ended December 31, 2002. On April
14, 2003, 1555195 Ontario Inc. repaid the $10,000 debentures plus interest
expense of $80. All obligations under the debentures were terminated. 155195
Ontario Inc. does not hold any other assets or liabilities.
12. LICENCE AGREEMENTS
The Company has entered into a licence agreement with the Canadian Department of
National Defence dated July 30, 1986, as amended and restated March 1, 1999,
pursuant to which it was granted exclusive world-wide licences to certain
inventions and processes related to HEMOLINK. The agreement expires upon the
latter of [i] the expiry of the patent rights licensed thereunder and [ii] the
expiry of any patents obtained by the Company related to the patent rights
licensed by the Canadian Department of National Defence.
Under this agreement, the Company would be required to pay royalties at rates
based upon the net selling price of any products which may be produced which
embody these licensed technologies, as well as a percentage of any consideration
received for sub-licensing such technologies.
This agreement also commits, and the Company is paying, a minimum annual royalty
at the greater of $10 or 20% of royalties due in the immediately preceding year.
The Company has the right to commute future royalties in consideration of the
payment of the greater of $4,000 or five times the previous year's annual
royalties.
13. MISCELLANEOUS INCOME
Miscellaneous income includes: [i] net proceeds received from an insurance
policy in July 2003 in the amount of $1,739: [ii] the sale of equipment for net
proceeds of $1,100 and [iii] other amounts of $32.
2003 Annual Report 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. LEASE COMMITMENTS
The future minimum annual lease payments under operating lease agreements for
equipment in aggregate for the years ending December 31 are approximately as
follows:
$
---
2004 218
2005 175
2006 93
2007 76
2008 13
Thereafter --
---
575
===
15. RESEARCH AND DEVELOPMENT PROJECT
Hemosol has a diverse pipeline of new product candidates, several of which are
now undergoing pre-clinical evaluation. These product candidates have been
developed using technologies that are based upon the expertise of Hemosol's
scientists in protein bioconjugation and cell expansion. HEMOLINK is one example
of protein bioconjugation in which human hemoglobin, a protein, has been
stabilized and polymerized using o-raffinose, a cross-linker. Other types of
hemoglobin conjugates in development include conjugates of hydroxyethyl starch,
anti-oxidants, and therapeutic drugs.
As a means of establishing its own source of human hemoglobin, Hemosol has been
conducting discovery research in expanding human blood-forming stem cells
through cell culture. These efforts have led to methods to induce an established
cell line to produce high levels of human hemoglobin, as well as the development
of a T cell therapy for the treatment of cancer. The identification of factors
affecting blood cell growth and development are the direct result of Hemosol's
activities in stem cell research.
Research and development costs cumulative from July 11, 1985 though December 31,
2003 related to HEMOLINK amounted to $182,215.
16. CONSOLIDATED STATEMENTS OF CASH FLOWS
The net change in non-cash working capital balances related to operations
consists of the following:
2003 2002 2001
$ $ $
------ ------ ------
Amounts receivable and other assets 342 2,079 (1,189)
Inventory (73) (1,146) (1,096)
Accounts payable and accrued liabilities (5,398) 2,885 99
------ ------ ------
(5,129) 3,818 (2,186)
====== ====== ======
NON-CASH TRANSACTIONS
The Company entered into the following non-cash activities:
[i] On October 25, 2002, the Company incurred $7,080 of deferred debt
issue costs through the issuance of 6,000,000 common share
purchase warrants [notes 7 and 8[a]].
[ii] On April 18, 2002, the Company issued 159,250 common shares
valued at $718 as payment of underwriters' fees [note 8[a]].
34 Annual Report 2003
[iii] At December 31, 2002, property, plant and equipment obligations
included in accounts payable and accrued liabilities totaled
$6,457 [nil in 2003].
[iv] On December 16, 2003, the company issued 2,000,000 common shares
valued at $2,520 as consideration for entering into the binding
ProMetic MOU [note 8[a]].
17. FINANCIAL INSTRUMENTS
FAIR VALUES
Fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
At December 31, 2003 and 2002, the estimated fair values of cash and cash
equivalents, amounts receivable, accounts payable and accrued liabilities and
short-term debt approximate their carrying values due to the short-term maturity
periods of these instruments.
FOREIGN CURRENCY RATE RISK
The Company is exposed to foreign currency fluctuations to the extent that
purchases are denominated in foreign currencies.
The Company has the following percentage of their assets and liabilities
denominated in foreign currencies:
2003 2002
% %
---- ----
Cash and cash equivalents 4 32
Accounts payable and accrued liabilities 6 28
==== ===
These amounts are mainly denominated in U.S. dollars.
The Company is exposed to foreign exchange rate risks with respect to these
amounts. The Company currently does not use financial instruments to hedge these
risks.
18. SUBSEQUENT EVENTS
[a] SHARE ISSUANCE
On January 22, 2004, all 7,200,000 series A special warrants and 641,800 series
B special warrants were exercised for no additional consideration, after
receiving shareholder approval, for 7,841,800 common shares and 3,920,890 common
share purchase warrants. In addition, the Company issued 392,090 broker options
as payment for share issue costs. The broker options entitle the option holders
to purchase, in aggregate, 392,090 common shares and 196,045 common share
purchase warrants at an exercise price of $0.75, exercisable at any time prior
to the earlier of: [i] November 28, 2006: and [ii] 30 days following the date on
which the Company notifies the option holders that the volume-weighted average
price of a common share on the Toronto Stock Exchange ["TSX"] for 20 consecutive
trading days is greater than or equal to $2.25.
Each of the common share purchase warrants entitles the holder to purchase one
common share at a price of $0.90 per common share, at any time prior to the
earlier of: [i] November 28, 2006; and [ii] 30 days following the date on which
the Company notifies the warrant holders that the volume-weighted average price
of a common share on the TSX for 20 consecutive trading days is greater than or
equal to $2.25. As of March 10, 2004, 199,999 common share purchase warrants
have been exercised.
[b] UTILIZATION OF TAX ASSETS
On February 12, 2004, the Company announced that it has entered into an
agreement with MDS, a related party, regarding a proposed reorganization of
Hemosol's business that will allow Hemosol's business to benefit from a
significant portion of its existing and unutilized income tax losses and other
tax assets through a transaction that will result in the Hemosol business
receiving $16 million of cash.
2003 Annual Report 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The transaction will be effected under a statutory Plan of Arrangement [the
"Arrangement"] that will be subject to approval by the Superior Court of Justice
of Ontario and the shareholders and warrantholders of Hemosol, as well as
certain regulatory approvals. It is expected that a special meeting of the
Company's shareholders and warrantholders to consider and vote on the
Arrangement will be held as soon as possible and no later than April 30, 2004.
The Arrangement must be approved by two-thirds of the votes cast by the
shareholders and warrantholders voting at the shareholders' meeting and by the
majority of the votes cast by shareholders and warrantholders, excluding MDS,
voting at the meeting.
As part of the transaction, Hemosol shareholders will exchange each common share
of Hemosol Inc. for one common share of Hemosol Corp., which will be the
successor to substantially all of Hemosol's current business, and one Class A
common share of Hemosol [to be renamed LPBP Inc. ("Labco")] which will acquire
an indirect interest in the diagnostics business currently carried on by MDS.
Following the transaction, Hemosol Corp. will be held by existing Hemosol
shareholders on the same pro-rata basis as Hemosol Inc. was held prior to the
transaction. MDS currently holds approximately 12% of the outstanding shares of
Hemosol. Newly formed Hemosol Corp. will own a 93% equity interest in a new
partnership that will carry on Hemosol's current and future business, with the
remaining 7% being owned by Labco. MDS will hold 99.56% of the equity of Labco
and existing Hemosol shareholders will hold the remaining 0.44% through the
Class A common shares to be issued [representing not less than 52.5% of the
voting securities of Labco]. It is a condition of closing that Hemosol Corp. be
listed on the TSX and NASDAQ.
As part of the proposed reorganization of Hemosol's business, all of its
existing unutilized tax assets will remain with Hemosol. However assets
transferred to the new partnership controlled by Hemosol Corp. as part of the
reorganization will be ascribed a value for the tax election and will be
available as deductions of undepreciated capital assets. The Company estimates
this value will be approximately $70 million.
Also as part of the transaction, Hemosol will decrease the total number of
warrants issued, or to be issued to MDS as consideration for the previously
disclosed guarantee by MDS of Hemosol's Facility, from an aggregate of
10,000,000 warrants to a total of 7,500,000 warrants [which will become Hemosol
Corp. warrants], as described in note 10.
19. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The Company prepares its consolidated financial statements in accordance with
Canadian generally accepted accounting principles ["Canadian GAAP"], which
differ in certain material respects from those applicable in the United States
["U.S. GAAP"].
The material differences as they apply to the Company's consolidated financial
statements are as follows:
[a] BALANCE SHEET ADJUSTMENTS:
2003 2002
$ $
-------- ---------
PATENTS AND TRADEMARKS
Balance under Canadian GAAP 1,368 2,176
Adjustment for patents and trademarks [i] (1,368) (2,176)
-------- --------
BALANCE UNDER U.S. GAAP -- --
======== ========
LICENSE TECHNOLOGY
Balance under Canadian GAAP 2,520 --
Adjustment for license technology [ii] (2,520) --
-------- --------
BALANCE UNDER U.S. GAAP -- --
======== ========
DEFICIT
Balance under Canadian GAAP (253,177) (218,235)
Adjustment for patents and trademark [i] (1,368) (2,176)
Adjustment for patents and trademarks [ii] (2,520) --
-------- --------
BALANCE UNDER U.S. GAAP (257,065) (220,411)
======== ========
36 Annual Report 2003
[i] Patents and trademarks
Under Canadian GAAP, patent and trademark costs are carried at
cost less accumulated amortization and are amortized on a
straight-line basis over their estimated economic life, Under
U.S. GAAP, these costs are generally expensed as incurred.
[ii] License technology
Under U.S. GAAP, acquired research and development having no
alternative future use must be written off at the time of
acquisition. The adjustment represents the value of the
license technology capitalized under Canadian GAAP.
[iii] Jointly controlled enterprise
For the 2002 consolidated financial statements, the investment
in 1555195 Ontario Inc. is proportionately consolidated under
Canadian GAAP. This investment is accounted for using the
equity method under U.S. GAAP. The Company relies on an
accommodation available under certain conditions which permits
the Company to omit disclosure of the differences in
classification that arise. The joint venture in 1555195
Ontario Inc. qualifies for this accommodation on the basis
that it is an operating entity, the significant financial and
operating policies of which are, by contractual arrangement,
jointly controlled by all parties having an equity interest in
the entity.
[b] THE COMPONENTS OF STOCKHOLDERS' EQUITY UNDER U.S. GAAP ARE AS
FOLLOWS:
2003 2002
$ $
- ----------------------------------------------------------------------
Share capital 321,625 313,763
Contributed surplus 8,535 8,535
Deficit accumulated during the development stage (257,065) (220,411)
- ----------------------------------------------------------------------
73,095 101,887
======================================================================
[c] RECONCILIATION OF NET LOSS UNDER CANADIAN AND U. S. GAAP:
2003 2002 2001
$ $ $
- ---------------------------------------------------------------------------------------
Net loss for the year, under Canadian GAAP (34,942) (54,834) (38,577)
Adjustment for patents and trademarks [note 19[a][i]] 808 (212) (944)
Adjustment for license technology (2,520) -- --
- ---------------------------------------------------------------------------------------
NET LOSS AND COMPREHENSIVE LOSS, UNDER U.S. GAAP (36,654) (55,046) (39,521)
=======================================================================================
NET LOSS PER SHARE, UNDER U.S. GAAP $ (0.78) $ (1.24) $ (1.01)
=======================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, UNDER U.S.GAAP[000'S] 46,837 44,514 39,168
=======================================================================================
2003 Annual Report 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[d] CASH FLOW ADJUSTMENTS:
2003 2002 2001
$ $ $
- -------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Balance under Canadian GAAP (26,655) (40,359) (37,934)
Adjustment for patents and trademarks [note 19[a][i]] (172) (327) (568)
Adjustment for employee stock purchase loans [i] -- (382) 43
- -------------------------------------------------------------------------------------
BALANCE UNDER U.S. GAAP (26,827) (41,068) (38,459)
=====================================================================================
INVESTING ACTIVITIES
Balance under Canadian GAAP (7,433) 35,026 (106,035)
Adjustment for patents and trademarks [note 19[a][i]] 172 327 568
- -------------------------------------------------------------------------------------
BALANCE UNDER U.S. GAAP (7,261) 35,353 (105,467)
=====================================================================================
FINANCING ACTIVITIES
Balance under Canadian GAAP 24,555 20,179 104,685
Adjustment for employee stock purchase loans [i] -- 382 (43)
- -------------------------------------------------------------------------------------
BALANCE UNDER U.S. GAAP 24,555 20,561 104,642
=====================================================================================
[i] Employee stock purchase plan
Under Canadian GAAP loans provided to employees for the
purchase of shares may be either recorded as amounts
receivable or deducted from share capital, depending on
certain criteria. Under U.S. GAAP such loans must be deducted
from share capital.
[e] STOCK-BASED COMPENSATION:
On January 1, 2003, the Company prospectively adopted the recommendations of
Statement of Financial Accounting Standard [SFAS"] No, 123, "Accounting for
Stock-based Compensation". Under the new policy, stock options awarded to
employees on or after January 1, 2003 are accounted for using the fair value
method. For stock options awarded to employees prior to January 1, 2003, pro
forma disclosure of net loss and net loss per share is provided below, as If
these awards were accounted for using the fair value method:
2003 2002 2001
$ $ $
- ------------------------------------------------------------------------
Net loss under U.S. GAAP (36,654) (55,046) (39,521)
Estimated stock-based compensation costs (2,055) (1,615) (2,644)
------- ------- -------
PRO FORMA NET LOSS FOR THE YEAR (38,709) (56,661) (42,165)
========================================================================
PRO FORMA NET LOSS PER SHARE (0.83) (1.27) (1.08)
========================================================================
38 Annual Report 2003
[f] DEVELOPMENT STAGE ENTERPRISE:
Under U.S. GAAP specifically SFAS No. 7, "Accounting and Reporting of a
Development Stage Enterprise", the following additional disclosures are
required:
[i] Consolidated statement of loss and deficit:
CUMULATIVE FROM JULY 11,1985 THROUGH DECEMBER 31,2003
$
- ---------------------------------------------------
REVENUE 7,285
- ---------------------------------------------------
EXPENSES
Research and development 199,539
Administration and support services 46,932
Marketing and business development 16,778
Write-off property, plant and equipment 4,654
Foreign exchange gain (373)
- ---------------------------------------------------
267,350
- ---------------------------------------------------
Loss from operations 260,065
Interest income (15,904)
Interest expense 688
Amortization of deferred charges 6,956
Write-off of deferred charges 6,453
Miscellaneous income (2,871)
- ---------------------------------------------------
Loss before income taxes 255,387
Provision for income taxes 620
- ---------------------------------------------------
NET LOSS FOR THE PERIOD 256,007
Deficit, beginning of period --
Dividends 933
Share redemption premium 125
- ---------------------------------------------------
DEFICIT, END OF PERIOD 257,065
===================================================
[ii] Consolidated statement of cash flows:
CUMULATIVE FROM JULY 11,1985 THROUGH DECEMBER 31,2003
$
- -----------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (211,626)
- -----------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (110,424)
- -----------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 330,106
- -----------------------------------------------------------------------
Effect of exchange rates on cash and cash equivalents 69
- -----------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS DURING THE PERIOD 8,125
=======================================================================
2003 Annual Report 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[iii] Common shares and non-employee warrants and options:
The following represents the Company's cumulative statement of shareholders'
capital determined in accordance with U.S. GAA from inception:
COMMON SHARES SERIES A SPECIAL SHARES
- ---------------------------------------------------------------------------------------------------------
# $ # $
- ---------------------------------------------------------------------------------------------------------
BALANCE, JULY 11, 1985 -- -- -- --
Issued for cash during the period July 11,
1985 to December 31, 1990, net 2,410,537 7 2,000,000 2,000
- ----------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1991 2,410,537 7 2,000,000 2,000
Issued for cash 2,217,450 2,257 -- --
Exchange of Series C special shares for common shares 910,000 3,060 -- --
Shares redeemed (50,520) -- -- --
- ----------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1992 5,487,467 5,324 2,000,000 2,000
Issued for cash 2,382,750 17,832 -- --
Shares redeemed -- -- (2,000,000) (2,000)
- ----------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1993 7,870,217 23,156 -- --
Issued for cash 3,181,500 32,735 -- --
Employee options exercised for cash 3,609 6 -- --
Shares redeemed (24,057) -- -- --
- ----------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1994 11,031,269 55,897 -- --
Employee options exercised for cash 28,868 49 -- --
- ----------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1995 11,060,137 55,946 -- --
Issued for cash -- -- -- --
Employee options exercised for cash 7,218 12 -- --
- ----------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1 , 1996 11,067,355 55,958 -- --
Issued for cash 2,500,000 12,098 -- --
Employee options exercised for cash 10,000 17 -- --
- ----------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1997 13,577,355 68,073 -- --
Conversion of series D special shares 1,048,214 5,739 -- --
- ----------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1998 14,625,569 73,812 -- --
Issued for cash 2,437,594 7,059 -- --
- ----------------------------------------------------------------------------------------------------
40 Annual Report 2003
NON-EMPLOYEE WARRANTS
SERIES C SPECIAL SHARES SERIES D SPECIAL SHARES AND OPTIONS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
# $ # $ # $ $
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JULY 11, 1985 -- -- -- -- -- -- --
Issued for cash during the period July 11,
1985 to December 31, 1990, net 910,000 2,002 -- -- -- -- 4,009
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1991 910,000 2,002 -- -- -- -- 4,009
Issued for cash -- -- -- -- -- -- 2,257
Exchange of Series C special shares for
common shares (910,000) (2,002) -- -- -- -- 1,058
Shares redeemed -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1992 -- -- -- -- -- -- 7,324
Issued for cash -- -- -- -- -- -- 17,832
Shares redeemed -- -- -- -- -- -- (2,000)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1993 -- -- -- -- -- -- 23,156
Issued for cash -- -- -- -- -- -- 32,735
Employee options exercised for cash -- -- -- -- -- -- 6
Shares redeemed -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1994 -- -- -- -- -- -- 55,897
Employee options exercised for cash -- -- -- -- -- -- 49
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1995 -- -- -- -- -- -- 55,946
Issued for cash -- -- 1,048,214 5,739 -- -- 5,739
Employee options exercised for cash -- -- -- -- -- -- 12
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1 , 1996 -- -- 1,048,214 5,739 -- -- 61,697
Issued for cash -- -- -- -- -- -- 12,098
Employee options exercised for cash -- -- -- -- -- -- 17
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1997 -- -- 1,048,214 5,739 -- -- 73,812
Conversion of series D special shares -- -- (1,048,214) (5,739) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1998 -- -- -- -- -- -- 73,812
Issued for cash -- -- -- -- -- -- 7,059
- ----------------------------------------------------------------------------------------------------------------------------------
2003 Annual Report 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMON SHARES SERIES A SPECIAL SHARES
- ------------------------------------------------------------------------------------------------------------------------
# $ # $
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1999 17,063,163 80,871 -- --
Issued for cash 7,616,328 25,683 -- --
Employee options exercised for cash 25,160 52 -- --
Issue of common shares under employee share purchase plan for cash 24,350 107 -- --
Non-employee warrants and options exercised for cash 40,300 129 -- --
Issued for services -- -- -- --
Shares returned and cancelled (100,000) -- -- --
- --------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2000 24,669,301 106,842 -- --
Issued for cash 7,072,333 69,636 -- --
Employee options exercised for cash 283,817 874 -- --
Issue of common shares under employee share purchase plan for cash 32,450 429 -- --
Non-employee warrants and options exercised for cash 212,000 678 -- --
Issued for services -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2001 32,269,901 178,459 -- --
Issued for cash 8,050,000 99,785 -- --
Employee options exercised for cash 296,860 1,435 -- --
Issue of common shares under employee share purchase plan for cash 33,400 264 -- --
Non-employee warrants and options exercised for cash 343,700 2,701 -- --
Issued for services -- -- -- --
Expired -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2002 40,993,861 282,644 -- --
Issued for cash 5,059,250 20,694 -- --
Employee options exercised for cash 46,523 80 -- --
Issue of common shares under employee share purchase plan for cash 4,150 45 -- --
Issued for services -- -- -- --
Expired -- -- -- --
Cancelled -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 46,103,784 303,463 -- --
Issued to acquire license technology 2,000,000 2,520 -- --
Issued as Series A special warrants -- -- -- --
Issued as Series B special warrants -- -- -- --
Expired -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 48,103,784 305,983 -- --
====================================================================================================================
20. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS
The comparative consolidated financial statements have been reclassified from
statements previously presented to conform to the presentation of the 2003
consolidated financial statements.
42 Annual Report 2003
SERIES C SERIES D
SPECIAL SPECIAL NON-EMPLOYEE WARRANTS
SHARES SHARES AND OPTIONS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
# $ # $ # $ $
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1999 -- -- -- -- -- -- 80,871
Issued for cash -- -- -- -- -- -- 25,683
Employee options exercised for cash -- -- -- -- -- -- 52
Issue of common shares under employee share purchase plan for cash -- -- -- -- -- -- 107
Non-employee warrants and options exercised for cash -- -- -- -- (40,300) -- 129
Issued for services -- -- -- -- 320,000 -- --
Shares returned and cancelled -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2000 -- -- -- -- 279,700 -- 106,842
Issued for cash -- -- -- -- -- -- 69,636
Employee options exercised for cash -- -- -- -- -- -- 874
Issue of common shares under employee share purchase plan for cash -- -- -- -- -- -- 429
Non-employee warrants and options exercised for cash -- -- -- -- (212,000) -- 678
Issued for services -- -- -- -- 1,044,172 2,900 2,900
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2001 -- -- -- -- 1,111,872 2,900 181,359
Issued for cash -- -- -- -- -- -- 99,785
Employee options exercised for cash -- -- -- -- -- -- 1,435
Issue of common shares under employee share purchase plan for cash -- -- -- -- -- -- 264
Non-employee warrants and options exercised for cash -- -- -- -- (343,700) -- 2,701
Issued for services -- -- -- -- 20,000 134 134
Expired -- -- -- -- (60,950) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2002 -- -- -- -- 727,222 3,034 285,678
Issued for cash -- -- -- -- -- -- 20,694
Employee options exercised for cash -- -- -- -- -- -- 80
Issue of common shares under employee share purchase plan for cash -- -- -- -- -- -- 45
Issued for services -- -- -- -- 8,557,500 7,890 7,890
Expired -- -- -- -- (222,222) -- --
Cancelled -- -- -- -- (85,000) (624) (624)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 -- -- -- -- 8,977,500 10,300 313,763
Issued to acquire license technology -- -- -- -- -- -- 2,520
Issued as Series A special warrants -- -- -- -- 7,200,000 4,895 4,895
Issued as Series B special warrants -- -- -- -- 641,800 447 447
Expired -- -- -- -- (2,450,000) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 -- -- -- -- 14,369,300 15,642 321,625
==================================================================================================================================
2003 Annual Report 43