EXHIBIT 99.3
Consolidated Financial Statements
(Expressed in Canadian dollars)
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Years ended June 30, 2004, 2003 and 2002
[LOGO]
KPMG
KPMG LLP Telephone (416) 228-7000
CHARTERED ACCOUNTANTS Fax (416) 228-7123
Yonge Corporate Centre Internet www.kpmg.ca
4100 Yonge Street Suite 200
Toronto ON M2P 2H3
Canada
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of YM Biosciences Inc. (a
development stage company) as at June 30, 2004 and 2003 and the consolidated
statements of operations and deficit and cash flows for each of the years in the
three-year period ended June 30, 2004 and for the period from August 17, 1994 to
June 30, 2004. 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 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 June 30, 2004 and
2003 and the results of its operations and its cash flows for each of the years
in the three-year period ended June 30, 2004 and for the period from August 17,
1994 to June 30, 2004 in accordance with Canadian generally accepted accounting
principles.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
August 18, 2004, except
as to note 11 which is
as of October 1, 2004
KPMG LLP, a Canadian limited liability
partnership is the Canadian member firm of
KPMG International, a Swiss cooperative.
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Consolidated Balance Sheets
June 30, 2004 and 2003
(Amounts in Canadian dollars, unless otherwise noted)
====================================================================================
2004 2003
- -----------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (note 1(b)) $ 5,493,907 $ 7,675,466
Short-term deposits (note 1(c)) 14,893,951 -
Marketable securities (note 2) 19,715 783,622
Accounts receivable and prepaid expenses 463,838 168,187
-------------------------------------------------------------------------------
20,871,411 8,627,275
Capital assets (note 3) 11,381 22,567
- ------------------------------------------------------------------------------------
$ 20,882,792 $ 8,649,842
====================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 993,272 $ 101,506
Accrued liabilities 170,439 221,077
-------------------------------------------------------------------------------
1,163,711 322,583
Shareholders' equity:
Share capital (note 5) 59,841,914 44,729,104
Share purchase warrants (note 5) 3,627,239 -
Contributed surplus (note 5) 29,816 9,965
Deficit accumulated during the development stage (43,779,888) (36,411,810)
-------------------------------------------------------------------------------
19,719,081 8,327,259
Commitments (note 7)
Subsequent events (note 11)
- ------------------------------------------------------------------------------------
$ 20,882,792 $ 8,649,842
====================================================================================
See accompanying notes to consolidated financial statements.
1
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Consolidated Statements of Operations and
Deficit Accumulated During the Development Stage
(Amounts in Canadian dollars, unless otherwise noted)
===========================================================================================================
From
inception on
August 17, 1994
Years ended June 30, to June 30,
2004 2003 2002 2004
- -----------------------------------------------------------------------------------------------------------
Interest income $ 347,187 $ 273,232 $ 154,112 $ 2,788,418
Expenses:
General and administrative 3,130,324 1,877,509 1,864,289 14,293,992
Licensing and product
development 5,066,569 3,965,385 4,729,216 30,876,387
- ----------------------------------------------------------------------------------------------------------
8,196,893 5,842,894 6,593,505 45,170,379
- ----------------------------------------------------------------------------------------------------------
Loss before the undernoted (7,849,706) (5,569,662) (6,439,393) (42,381,961)
Gain on sale of marketable securities 638,332 -- -- 638,332
Unrealized loss on marketable securities -- (1,812,158) -- (1,812,158)
- ----------------------------------------------------------------------------------------------------------
Loss before income taxes (7,211,374) (7,381,820) (6,439,393) (43,555,787)
Income taxes -- -- 7,300 7,300
- ----------------------------------------------------------------------------------------------------------
Loss for the period (7,211,374) (7,381,820) (6,446,693) (43,563,087)
Deficit, beginning of period (36,411,810) (28,969,893) (22,523,200) --
Cost of purchasing shares for
cancellation in excess of book
value (note 5) (156,704) (60,097) -- (216,801)
- -----------------------------------------------------------------------------------------------------------
Deficit, end of period $(43,779,888) $(36,411,810) $(28,969,893) $(43,779,888)
===========================================================================================================
Basic and diluted loss per
common share $ (0.34) $ (0.56) $ (0.50)
===========================================================================================================
Weighted average number of
common shares outstanding 21,353,479 13,218,177 12,991,039
===========================================================================================================
See accompanying notes to consolidated financial statements.
2
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Consolidated Statements of Cash Flows
(Amounts in Canadian dollars, unless otherwise noted)
- -------------------------------------------------------------------------------------------------------------------
From
inception on
August 17, 1994
Years ended June 30, to June 30,
2004 2003 2002 2004
- -------------------------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Loss for the period $ (7,211,374) $ (7,381,820) $ (6,446,693) $(43,563,087)
Items not involving cash:
Depreciation 14,910 59,640 48,061 258,947
Unrealized loss on
marketable securities -- 1,812,158 -- 1,812,158
Gain on sale of
marketable securities (638,332) -- -- (638,332)
Stock-based compensation 19,851 9,965 -- 29,816
Change in non-cash operating working capital:
Accounts receivable
and prepaid expenses (295,651) 21,927 (9,508) (463,838)
Accounts payable and
accrued liabilities 841,128 (51,803) (163,825) 1,163,711
- -------------------------------------------------------------------------------------------------------------------
(7,269,468) (5,529,933) (6,571,965) (41,400,625)
Financing activities:
Issuance of common shares
on exercise of options 1,544,375 -- -- 1,544,375
Issuance of common shares
on exercise of warrants 222,348 -- -- 222,348
Redemption of preferred shares -- (80,372) -- (2,630,372)
Repurchase of common shares (230,379) (19,390) -- (249,769)
Net proceeds from issuance of
shares and special warrants 17,047,001 -- 11,739,407 61,769,990
- -------------------------------------------------------------------------------------------------------------------
18,583,345 (99,762) 11,739,407 60,656,572
Investing activities:
Short-term deposits, net (14,893,951) -- -- (14,893,951)
Proceeds on sale of
marketable securities 1,402,239 -- -- 1,402,239
Restricted cash -- 600,000 (600,000) --
Additions to capital assets (3,724) (2,361) (2,808) (270,328)
- -------------------------------------------------------------------------------------------------------------------
(13,495,436) 597,639 (602,808) (13,762,040)
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents (2,181,559) (5,032,056) 4,564,634 5,493,907
Cash and cash equivalents,
beginning of period 7,675,466 12,707,522 8,142,888 --
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 5,493,907 $ 7,675,466 $ 12,707,522 $ 5,493,907
===================================================================================================================
See accompanying notes to consolidated financial statements.
3
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
The Company was incorporated on August 17, 1994 under the laws of the Province
of Ontario. The Company continued under the laws of the Province of Nova Scotia
on December 11, 2001. The Company is a development stage company. Its long-term
viability is dependent on the success of its regulatory submissions and
licensing and marketing activities, its ability to obtain additional financing
and to earn a sufficient market share once its licensed products are in
commercial production. The Company has entered into licensing agreements with
certain biotechnology, pharmaceutical and medical institutes. The licenses grant
exclusive rights for certain territories for certain products or families of
products developed and rights of first refusal on additional territories,
additional products or extensions to existing products.
1. SIGNIFICANT ACCOUNTING POLICIES:
The accompanying financial statements are prepared in accordance with
accounting principles generally accepted in Canada. Significant accounting
policies are summarized below:
(a) Basis of presentation:
These consolidated financial statements include the accounts of the
Company, its subsidiaries, CBQYM Inc. (Ontario and Barbados), and
its proportionate share of the revenue, expenses, assets and
liabilities of the 80%-owned incorporated joint ventures, CIMYM Inc.
(Ontario and Barbados).
The Company has made a provision of $4,870,939 as of June 30, 2004
(2003 - $5,240,642), which is equal to the amount by which the
funding provided to the joint ventures by way of preferred shares
and loans exceeds the Company's proportionate share of expenses
incurred. Provision for the advances has been made in the accounts
consistent with the classification of the expenditures being funded,
such that the Company has consolidated all of the underlying results
of operations of the joint ventures. The provisions may not be
required in the future if recovery from the joint ventures appears
certain.
During the year, the Company increased its ownership in CBQYM Inc.
from 80% to 100% for nominal consideration. The Company intends to
wind up CBQYM Inc. subsequent to year end. As such, the assets of
this company have been valued on a liquidation value basis. No gain
or loss on winding up this company is expected by management.
4
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(b) Cash and cash equivalents:
Cash and cash equivalents are recorded at cost. Cash equivalents
consist of highly liquid, held-to-maturity deposits, with terms
extending to 90 days from the date of acquisition.
(c) Short-term deposits:
Short-term deposits are recorded at cost and consist of highly
liquid, held-to-maturity deposits, with terms extending beyond 90
days from the date of acquisition.
(d) Marketable securities:
Marketable securities are recorded at the lower of cost and market
value. Market values of shares and warrants held are determined
based on their quoted market prices. Losses arising from changes in
the market value are included in net earnings or loss for the year.
(e) Capital assets:
Capital assets are stated at cost less accumulated depreciation.
Depreciation is provided to amortize the cost of capital assets over
their estimated useful lives using the straight-line method over the
following periods:
- --------------------------------------------------------------------------------
Computer equipment 3 years
Furniture and equipment 5 years
Leasehold improvements Term of lease
- --------------------------------------------------------------------------------
(f) Development costs:
To date, all development costs have been expensed. Development costs
include costs associated with product development activities,
including salaries of scientific and technical staff and payments to
third parties for development activities. Development costs that
meet specific stringent criteria related to technical, market and
financial feasibility are capitalized. To date, none of the
development costs has met such criteria. The Company has made no
expenditures for scientific research.
5
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(g) Government assistance:
Government assistance, including investment tax credits received
relating to development costs, is reflected as a reduction of the
development costs when there is reasonable assurance that the
assistance will be realized.
(h) Income taxes:
The Company uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, future tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Future tax assets and liabilities are
measured using enacted or substantively enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
future tax assets and liabilities of a change in tax rates is
recognized in income in the year that includes the date of enactment
or substantive enactment.
In assessing the realizability of future income tax assets,
management considers whether it is more likely than not that some
portion or all of the future income tax assets will be realized. The
ultimate realization of future income tax assets is dependent upon
the generation of future taxable income during the period in which
the temporary differences are deductible. Management considers the
scheduled reversals of future income tax liabilities, the character
of the future income tax asset and tax planning strategies in making
this assessment. To the extent that management believes that the
realization of future income tax assets does not meet the more
likely than not realization criteria, a valuation allowance is
recorded against the future income tax assets.
6
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(i) Stock-based compensation:
The Company has a stock option plan for directors, officers,
employees and service providers, as described in note 6. All stock
options issued under the plan have an exercise price equal to the
fair market value of the underlying shares on the date of the grant.
The Company applies the intrinsic value-based method of accounting
to its stock option plan. No compensation expense is recorded on the
grant of options to directors, officers and employees under the
plan. Consideration paid by directors, officers and employees on the
exercise of stock options is recorded as share capital. Options
issued to service providers of the Company are valued using the
Black-Scholes fair value option pricing model. The value of these
options is expensed during the period in which the service is
rendered and is recorded as contributed surplus.
(j) Measurement uncertainty:
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenue and expenses during the year. Actual results could differ
from those estimates.
2. MARKETABLE SECURITIES:
On September 25, 2002, as set out in note 5, the Company issued Class B
preferred shares in exchange for 1,100,000 ordinary shares and 220,000
warrants of New Opportunities Investment Trust ("NOIT") as part of the
NOIT initial prospectus offering. The cost of the NOIT investment of
$2,595,780 was determined with reference to the market value of the
Company's Class B preferred shares at that time. Since the date of the
original listing of the NOIT shares and warrants on the London Stock
Exchange to June 30, 2003, the value of these shares and warrants declined
by $1,812,158 with such amount being reflected as a loss in the 2003
consolidated statements of operations. On January 9, 2004, the Company
completed a transaction, whereby it sold 1,100,000 ordinary shares of NOIT
at their market value of (pound)0.55 (approximately $1.29) per share,
resulting in a net gain of $638,332. As at June 30, 2004, the marketable
securities consist of 220,000 share purchase warrants in NOIT that have a
market value of $69,491 (2003 - $783,622).
7
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
3. CAPITAL ASSETS:
--------------------------------------------------------------------------
Accumulated Net book
June 30, 2004 Cost depreciation value
--------------------------------------------------------------------------
Computer equipment $132,022 $123,394 $ 8,628
Furniture and equipment 75,042 72,289 2,753
Leasehold improvements 45,205 45,205 --
--------------------------------------------------------------------------
$252,269 $240,888 $11,381
==========================================================================
--------------------------------------------------------------------------
Accumulated Net book
June 30, 2003 Cost depreciation value
--------------------------------------------------------------------------
Computer equipment $130,457 $112,902 $ 17,555
Furniture and equipment 72,883 67,871 5,012
Leasehold improvements 45,205 45,205 --
--------------------------------------------------------------------------
$248,545 $225,978 $ 22,567
==========================================================================
4. INVESTMENT IN JOINT VENTURES:
The consolidated financial statements include the Company's share of the
revenue and expenses of incorporated joint ventures, and makes provision
for all advances made to the joint ventures that do not eliminate on
consolidation. This accounting effectively results in 100% of the joint
ventures revenues and expenses being included in the consolidated
financial statements as follows:
=========================================================================================
From
inception on
August 17,
1994 to
Years ended June 30, June 30,
2004 2003 2002 2004
-----------------------------------------------------------------------------------------
General and administrative
expenses $ 2,413,500 $ 1,857,887 $ 2,027,777 $10,806,727
Licensing and product
development cost 946,453 1,774,823 2,846,255 18,756,437
-----------------------------------------------------------------------------------------
Loss for the period $ 3,359,953 $ 3,632,710 $ 4,874,032 $29,563,164
=========================================================================================
8
5. WARRANTS, SHARE CAPITAL AND CONTRIBUTED SURPLUS:
Special warrants:
On December 15, 2003, the Company completed the sale of 10,895,658 special
warrants by way of private placement. Each special warrant sold for $1.75
and entitled the holder to receive one common share and one-half of a
share purchase warrant to purchase one additional common share. As part of
the consideration for arranging the private placement, the Company also
issued 1,089,566 special agent warrants entitling agents to receive a
share purchase warrant to purchase one additional common share. On
February 17, 2004, pursuant to a prospectus filed with the Ontario
Securities Commission, the special warrants were automatically exercised
and the Company issued 10,895,658 common shares and 5,447,829 share
purchase warrants which are exchangeable with $2.50 for one common share
for five years and 1,089,566 share purchase warrants to agents which are
exchangeable with $1.75 for one common share for five years. Total
proceeds amounted to $19,067,402, less issuance costs of $2,990,115. The
share purchase warrants were recorded at fair value of $3,725,820 using
the Black-Scholes fair value option pricing model.
Authorized:
500,000,000 Class A preferred shares
500,000,000 Class B preferred shares, Series 1
500,000,000 Class A non-voting common shares
500,000,000 common shares
Issued:
==========================================================================
Number of
shares Amount
--------------------------------------------------------------------------
Class B preferred shares, Series 1:
Balance, June 30, 2002 3,750,000 $ 11,514,407
Issued from treasury (NOIT) 759,000 2,595,780
Shares repurchased for cancellation (46,200) (29,329)
Conversion to common shares (4,462,800) (14,080,858)
--------------------------------------------------------------------------
Balance, June 30, 2004 and 2003 -- $ --
==========================================================================
9
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
5. WARRANTS, SHARE CAPITAL AND CONTRIBUTED SURPLUS (CONTINUED):
================================================================================
Number of
shares Amount
--------------------------------------------------------------------------------
Common shares:
Issued on incorporation, August 17, 1994 7 $ 1
Issued to founding shareholders during fiscal 19 4,204,250 224,457
Issued on private placement, August 1996 125,009 10,000
Issued on exercise of special warrants, June 199 4,484,613 13,167,901
Issued on private placement, August 1997 272,250 1,139,366
Issued on private placement, March/April 2000 3,813,840 15,366,701
Issued on exercise of stock options, May 2000 23,125 75,156
Issued pursuant to licensing agreement,
November 2000 50,000 450,000
--------------------------------------------------------------------------------
Balance, June 30, 2001 12,973,094 30,433,582
Issued pursuant to a licensing agreement 25,000 225,000
--------------------------------------------------------------------------------
Balance, June 30, 2002 12,998,094 30,658,582
Conversion of preferred shares, June 12, 2003 4,462,800 14,080,858
Shares purchased for cancellation (19,000) (10,336)
--------------------------------------------------------------------------------
Balance, June 30, 2003 17,441,894 44,729,104
Shares repurchased for cancellation (169,900) (73,675)
Issued on the exercise of special warrants,
February 2004 10,895,658 13,321,181
Issued on exercise of stock options 23,000 44,375
Issued on exercise of warrants 118,939 320,929
Issued on exercise of compensation options 375,000 1,500,000
--------------------------------------------------------------------------------
Balance, June 30, 2004 28,684,591 $ 59,841,914
================================================================================
On September 25, 2002, the Company completed a share purchase transaction,
whereby the Company issued 759,000 Class B preferred shares, Series 1 at
their market value of (pound)1.45 (approximately $3.42) per share in
consideration for 1,100,000 ordinary shares and 220,000 warrants of NOIT
under NOIT's U.K. prospectus offering.
During the year ended June 30, 2003, the Company purchased for
cancellation 46,200 Class B preferred shares, Series 1 and 19,000 common
shares under a normal course issuer bid, at a total cost of $99,762. The
excess of $60,097 over the book value of the shares was charged to
deficit.
10
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
5. WARRANTS, SHARE CAPITAL AND CONTRIBUTED SURPLUS (CONTINUED):
On June 12, 2003, the Class B preferred shares, Series 1 automatically
converted into common shares on a one-for-one basis.
During the year ended June 30, 2004, the Company purchased for
cancellation 169,900 common shares under a normal course issuer bid, at a
total cost of $230,379. The excess of $156,704 over the book value of the
shares was charged to deficit.
Share purchase warrants:
The Company has issued warrants for the purchase of common shares. Each
warrant entitles the holder to purchase one common share of the Company
for a specified price for a specific period of time. No value was ascribed
to the warrants issued prior to June 30, 2002. Warrants issued after that
date have been valued on a relative basis using the Black-Scholes fair
value option pricing model. The following table contains information
regarding the warrants to acquire common shares outstanding as of June 30,
2004. As of June 30, 2004, all outstanding warrants were exercisable.
===============================================================================
Weighted
average
Number of exercise
shares price Amount
-------------------------------------------------------------------------------
Outstanding, June 30, 2002 and
June 30, 2003 3,020,669 $4.50 $ --
Issued February 2004 on exercise of
special warrants at relative fair value 5,447,829 2.50 2,756,106
Issued February 2004 on exercise of
special agent warrants at fair value 1,089,566 1.75 969,714
Exercised (118,939) 1.87 (98,581)
Expired (2,613,725) 4.50 --
-------------------------------------------------------------------------------
Outstanding, June 30, 2004 6,825,400 2.53 $ 3,627,239
===============================================================================
11
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
5. WARRANTS, SHARE CAPITAL AND CONTRIBUTED SURPLUS (CONTINUED):
As at June 30, 2004:
==========================================================================
Weighted
average
remaining
Range of Number contractual
exercise price outstanding life (years)
--------------------------------------------------------------------------
$1.75 989,566 4.46
$2.50 5,428,890 4.46
$4.00 125,000 2.00
$4.50 244,444 1.25
$9.00 37,500 0.25
==========================================================================
6. STOCK OPTIONS:
The Company has granted stock options pursuant to a stock option plan.
Under the plan, options to purchase common shares may be granted to
directors, officers, employees and service providers of the Company. Of
the 2,523,252 options outstanding at June 30, 2004, 143,382 were granted
to vest immediately and the remainder were granted to vest over time. The
option exercise prices range from $1.50 to $4.50.
On April 1, 2004, the Company issued 2,500 stock options in exchange for
investor relations services rendered. The fair value of these options
using the Black-Scholes fair value option pricing model of $3,601 was
expensed and recorded as contributed surplus.
On January 24, 2003, the Company issued 10,000 stock options in exchange
for investor relations services rendered. The fair value of these options
using the Black-Scholes fair value option pricing model of $9,965 was
expensed and recorded as contributed surplus.
On October 1, 2003, the Company issued 25,000 stock options in exchange
for investor relations services rendered. The fair value of these options
using the Black-Scholes fair value option pricing model of $16,250 was
expensed and recorded as contributed surplus.
12
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
6. STOCK OPTIONS (CONTINUED):
The following tables outline the impact and assumptions used if the
compensation cost for the Company's stock options issued to directors,
officers and employees was determined under the fair value-based method.
The Company has applied the pro forma disclosure provisions to awards
granted on or after July 1, 2002. The pro forma effect of awards granted
prior to July 1, 2002 has not been included.
================================================================================
2004 2003
--------------------------------------------------------------------------------
Loss for the year, as reported $(7,211,374) $(7,381,820)
Pro forma loss for the year (7,691,898) (7,440,675)
Pro forma loss per common share - basic and diluted (0.36) (0.56)
================================================================================
The fair value of each option granted was estimated on the date of grant
using the Black-Scholes fair value option pricing model with the following
assumptions:
==================================================================================
Issue date 2004 2003
----------------------------------------------------------------------------------
Number of options of issued 825,620 597,500
Risk-free interest rate 3.2% - 4.43% 2.75% - 4.11%
Volatility factor 86% - 120% 120%
Contractual life of options 5 - 10 years 5 - 10 years
Vesting period (months) 12 - 40 Immediately - 24
Weighted average fair value of options granted $ 1.17 $ 1.28
==================================================================================
13
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
6. STOCK OPTIONS (CONTINUED):
The following tables reflect the activity under the stock option plan for
the years ended June 30, 2004 and 2003 and the share options outstanding
at June 30, 2004:
=============================================================================================
2004 2003
---------------------------------------------------------------------------------------------
Weighted Weighted
average average
exercise exercise
Number price Number price
---------------------------------------------------------------------------------------------
Outstanding, beginning of year 1,727,132 $ 3.34 1,209,632 $ 4.04
Granted 825,620 1.64 597,500 1.70
Cancelled/forfeited (6,500) 2.94 (80,000) 4.19
Exercised (23,000) 1.93 -- --
---------------------------------------------------------------------------------------------
Outstanding, end of year 2,523,252 2.80 1,727,132 3.34
=============================================================================================
Exercisable, end of year 1,604,151 $ 3.40 1,092,170 $ 3.90
=============================================================================================
As at June 30, 2004:
==============================================================================================
Options outstanding Options exercisable
----------------------------------------- ---------------------------
Weighted
average Weighted Weighted
remaining average average
Range of Number contractual exercise Number exercise
exercise price outstanding life (years) price exercisable price
----------------------------------------------------------------------------------------------
$ 1.50 25,000 0.2 $ 1.50 25,000 $ 1.50
$ 1.75 1,080,620 8.0 1.75 316,698 1.75
$ 2.00 60,000 8.8 2.00 21,000 2.00
$ 2.10 50,000 9.8 2.10 16,667 2.10
$ 2.50 167,500 7.7 2.50 74,050 2.50
$ 3.25 425,300 3.0 3.25 425,300 3.25
$ 4.00 12,500 3.4 4.00 12,500 4.00
$ 4.50 702,332 5.5 4.50 712,936 4.50
----------------------------------------------------------------------------------------------
$1.50 - $4.50 2,523,252 6.4 2.80 1,604,151 3.40
==============================================================================================
14
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
6. STOCK OPTIONS (CONTINUED):
As at June 30, 2003:
===========================================================================================
Options outstanding Options exercisable
------------------------------------------ --------------------------
Weighted
average Weighted Weighted
remaining average average
Range of Number contractual exercise Number exercise
exercise price outstanding life (years) price exercisable price
-------------------------------------------------------------------------------------------
$1.75 351,500 9.8 $ 1.75 17,575 $ 1.75
$2.00 60,000 9.8 2.00 3,000 2.00
$2.50 176,000 9.2 2.50 32,050 2.50
$3.25 425,300 4.1 3.25 425,300 3.25
$4.00 10,000 4.5 4.00 7,500 4.00
$4.50 704,332 6.5 4.50 606,745 4.50
-------------------------------------------------------------------------------------------
$1.75 - $4.50 1,727,132 7.0 3.34 1,092,170 3.90
===========================================================================================
7. COMMITMENTS:
As part of the license agreements for certain products, the Company has
committed to make certain product development payments. These payments are
obligations of the Company so long as the Company continues to support the
development of certain products.
The Company committed to product development payments of $100,000 per year
and to consulting services payments of $50,000 per year to the University
of Manitoba and The Manitoba Cancer Treatment and Research Foundation for
a three-year period ended November 2003. Payment of obligations under
these contracts has now been completed.
The Company has entered into a clinical research services contract dated
March 2004 for management services relating to a clinical trial involving
up to 700 patients and 67 sites. The contract is expected to be completed
by December 31, 2006; however, this is subject to change. The Company can
terminate this contract by providing 30 days' notice and a penalty of 10%
of any remaining commitment.
15
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
7. COMMITMENTS (CONTINUED):
The Company leases premises under a five-year lease that expires in
January 2008. Under the terms of the lease, the Company can terminate the
lease at any time with six months notice plus a penalty of two months
rent. Annual minimum payments under this operating lease for the next four
years from June 30, 2004 are as follows:
==========================================================================
2005 $ 58,632
2006 60,287
2007 58,636
2008 35,560
--------------------------------------------------------------------------
$ 213,115
==========================================================================
8. INCOME TAXES:
The Company and its joint venturers have non-capital losses for income tax
purposes available for application against future taxable income in Canada
and Barbados. The losses expire as follows:
==========================================================================
Canada Barbados
--------------------------------------------------------------------------
2005 $ 217,000 $ --
2006 125,000 930,000
2007 285,000 2,229,000
2008 642,000 2,079,000
2009 1,687,000 3,500,000
2010 2,102,000 5,019,000
2011 5,927,000 3,802,000
2012 -- 2,600,000
2013 -- 1,704,000
--------------------------------------------------------------------------
$ 10,985,000 $ 21,863,000
==========================================================================
The Company has a pool of scientific research and experimental development
expenditures available to reduce future taxable income of $2,113,000 at
June 30, 2004 (2003 - $1,439,000). The pool has no expiry date.
16
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
8. INCOME TAXES (CONTINUED):
The Company earned $397,825 of investment tax credits during the year
(2003 - $110,115; 2002 - $65,612), of which $94,425 is included in
accounts receivable at June 30, 2004 (2003 - nil). The Company has
investment tax credit carryforwards of $1,365,000 at June 30, 2004 (2003 -
$1,160,000) available to reduce future taxes payable. These investment tax
credits expire as follows:
==========================================================================
2011 $ 259,000
2012 424,000
2013 371,000
2014 311,000
--------------------------------------------------------------------------
$ 1,365,000
==========================================================================
No future tax benefit resulting from the non-capital losses, the pool of
scientific research and experimental development expenditures or the
investment tax credit carryforwards has been reflected in the consolidated
financial statements as a full valuation of $5,711,000 has been taken at
June 30, 2004 (2003 - $2,988,000; 2002 - $1,933,000).
9. CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES:
The Company's consolidated financial statements are prepared in accordance
with generally accepted accounting principles ("GAAP") in Canada, which
differ in certain respects from those applied in the United States. The
following items present the impact of material differences between
Canadian GAAP and United States GAAP on the Company's consolidated
financial statements.
(a) Development stage enterprise:
United States GAAP requires certain additional disclosures for
development stage enterprises. These require cumulative amounts from
the enterprise's inception be presented. For ease of presentation,
these disclosures have been disclosed in the consolidated statements
of operations and deficit and cash flows and note 5 to these
consolidated financial statements as appropriate.
17
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
9. CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES (CONTINUED):
(b) Statement of income (loss) and comprehensive income (loss):
The following table reconciles loss for the period as reported in
the consolidated statements of operations and deficit reported under
Canadian GAAP to what would have been reported had the statements
been prepared in accordance with United States GAAP.
==================================================================================
2004 2003 2002
----------------------------------------------------------------------------------
Loss for the period based on
Canadian GAAP $ (7,211,374) $ (7,381,820) $ (6,446,693)
Unrealized gain on
marketable securities 49,776 - -
----------------------------------------------------------------------------------
Loss for the period and
comprehensive loss
based on United States GAAP $ (7,161,598) $ (7,381,820) $ (6,446,693)
==================================================================================
Basic and diluted loss per share $ (0.34) $ (0.56) $ (0.50)
==================================================================================
Weighted average number of
common shares outstanding 21,353,479 13,218,177 12,991,039
==================================================================================
18
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
9. CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES (CONTINUED):
Canadian GAAP requires that marketable securities be recorded at the lower
of cost and market value and does not permit the written-down value to be
adjusted upward for subsequent recoveries of market value. The marketable
securities held by the Company are classified as trading securities in
accordance with FASB Statement 115, Accounting for Certain Investments in
Debt and Equity Securities. Under United States GAAP, these securities are
measured at market value each period end and any unrealized holding gains
and losses are reported in the consolidated statements of operations and
deficit. During the year ended 2003, the Company recognized a charge of
$1,812,158 for an other than temporary decline in market value and,
accordingly, there was no difference in the carrying amount of the
marketable securities under United States GAAP and Canadian GAAP. During
the year ended June 30, 2004, the unrealized increase in market value of
securities held was $49,776. As such, this amount has been recognized as
an unrealized gain for United States GAAP purposes with a corresponding
increase in investments and shareholders' equity under United States GAAP.
Loss per common share has been calculated using the weighted average
number of common shares outstanding during the period. The potential
effect of share options and share purchase warrants is not dilutive to the
loss per common share.
19
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
9. CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES (CONTINUED):
(c) Consolidated statement of changes in shareholders' equity:
United States GAAP requires the inclusion of a consolidated
statement of changes in shareholders' equity for each year a
statement of income is presented. Shareholders' equity under United
States GAAP is as follows:
=======================================================================================================
Deficit
accumulated Accumulated
during the other
Warrants and development Contributed comprehensive
share capital stage surplus income Total
-------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 $ 30,433,582 $(22,523,200) $ -- $ -- $ 7,910,382
Issued pursuant to a
licensing agreement 225,000 -- -- -- 225,000
Issued by public offering 11,514,407 -- -- -- 11,514,407
Loss for the year -- (6,446,693) -- -- (6,446,693)
-------------------------------------------------------------------------------------------------------
Balance, June 30, 2002 42,172,989 (28,969,893) -- -- 13,203,096
Issued from treasury 2,595,780 -- -- -- 2,595,780
Shares repurchased
for cancellation (39,665) (60,097) -- -- (99,762)
Stock-based compensation -- -- 9,965 -- 9,965
Loss for the year -- (7,381,820) -- -- (7,381,820)
-------------------------------------------------------------------------------------------------------
Balance, June 30, 2003 44,729,104 (36,411,810) 9,965 -- 8,327,259
Special warrants issue 17,047,001 -- -- -- 17,047,001
Issued on stock options 44,375 -- -- -- 44,375
Issued on warrants 222,348 -- -- -- 222,348
Issued on compensation
options 1,500,000 -- -- -- 1,500,000
Shares repurchased
for cancellation (73,675) (156,704) -- -- (230,379)
Stock-based compensation -- -- 19,851 19,851
Loss for the year -- (7,161,598) -- -- (7,161,598)
-------------------------------------------------------------------------------------------------------
Total shareholders' equity
under U.S. GAAP,
June 30, 2004 63,469,153 (43,730,112) 29,816 -- 19,768,857
Unrealized gain on
marketable securities
(9(b)) -- (49,776) -- -- (49,776)
-------------------------------------------------------------------------------------------------------
Total shareholders' equity
under Canadian GAAP,
June 30, 2004 $ 63,469,153 $(43,779,888) $ 29,816 $ -- $ 19,719,081
=======================================================================================================
20
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
9. CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES (CONTINUED):
United States GAAP requires the disclosures of a consolidated
statement of comprehensive income. Comprehensive income generally
encompasses all changes in shareholders' equity, except those
arising from transactions with shareholders. There have been no
material transactions that would have been included in comprehensive
income had the statements been prepared in accordance with United
States GAAP, except as disclosed for loss for the period under
United States GAAP.
(d) Investment in joint ventures:
The Company's investments in joint ventures have been accounted for
under Canadian GAAP using the proportionate consolidation method.
Under United States GAAP, these investments have been analyzed to
determine whether any are variable interest entities ("VIEs") under
FASB Interpretation No. 46 (Revised), Consolidation of Variable
Interest Entities ("FIN 46R"). The Company determined that each of
its investments in joint ventures is a VIE and the Company is the
primary beneficiary since inception of the entities. As set out in
note 1(a), under Canadian GAAP, the Company proportionately
consolidates the joint ventures and makes provision for any advances
to the joint ventures that do not eliminate on consolidation such
that the Company has recorded 100% of the results of operations and
cash flows of these entities since their inception. Accordingly,
there is no effect on the Company's financial condition or results
of operations as a result of these entities being VIEs and of the
Company retroactively adopting FIN 46R at March 31, 2004.
21
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
9. CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES (CONTINUED):
(e) Pro forma stock option disclosure:
The following table outlines the pro forma impact of options granted
that have not been recognized as an expense. The compensation cost
for these options is determined under the fair value method for
awards granted on or after July 1, 1995:
============================================================================
2004 2003 2002
============================================================================
Options granted 798,120 587,500 90,000
============================================================================
Weighted average fair value of
options granted $ 1.17 $ 1.28 $ 1.33
============================================================================
Loss for the period, as reported $(7,161,598) $(7,381,820) $(6,446,693)
============================================================================
Pro forma loss for the period $(7,768,490) $(7,680,304) $(6,751,059)
============================================================================
Pro forma basic and diluted loss
per share $ (0.36) $ (0.58) $ (0.52)
============================================================================
The fair value of each option granted was estimated on the date of
grant using the Black-Scholes fair value option pricing model with
the assumptions set out in note 5 for the period from July 1, 2002
to June 30, 2004 and the following assumptions for grants made
during the period preceding June 30, 2002:
==========================================================================
Risk-free interest rate 4.11% - 5.66%
Dividend yield --
Volatility facto 50% - 120%
Expected life of options 5 - 10 years
Vesting period (months) Immediately to 40 months
==========================================================================
22
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
9. CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES (CONTINUED):
(f) Investment tax credits:
Canadian GAAP requires that investment tax credits relating to
development costs be accounted for as a reduction of development
costs. United States GAAP requires such amounts to be accounted for
as a reduction of income tax expense. There is no impact on the loss
for the period as a result of this GAAP difference. Investment tax
credits earned are as follows:
====================================================================
From
inception on
August 17,
1994 to
Years ended June 30, June 30,
2004 2003 2002 2004
--------------------------------------------------------------------
$ 397,825 $ 110,115 $ 65,612 $ 1,761,721
====================================================================
(g) Income taxes:
Canadian GAAP requires that future income taxes are calculated using
enacted income tax rates, or where they exist, substantively enacted
income tax rates. United States GAAP does not permit the use of
substantively enacted rates. As a full valuation allowance has been
recorded against all future tax assets, the future tax assets and
valuation allowances are also different as a result of
Canadian/United States GAAP loss differences.
The future tax assets and related valuation allowances as would have
been calculated using United States GAAP are approximately
$5,698,000, $2,988,000 and $1,933,000, respectively, for the years
ended June 30, 2004, 2003 and 2002.
23
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
9. CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES (CONTINUED):
(h) Recent accounting pronouncements:
(i) Consolidation of variable interest entities:
In June 2003, The Canadian Institute of Chartered Accountants
("CICA") issued Accounting Guideline 15, Consolidation of
Variable Interest Entities ("AcG-15"). The Guideline is
harmonized with FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46") and provides guidance
for applying the principles in Section 1590, Subsidiaries, to
those entities (defined as VIEs and more commonly referred to
as special purpose entities), in which either there is
insufficient equity to permit the entity to finance its
activities without additional subordinated financial support
from other parties or the equity investors lack one or more
specified essential characteristics of a controlling financial
interest (i.e., voting control, an obligation to absorb
expected losses or the right to receive expected residual
returns). AcG-15 requires consolidation of VIEs by the primary
beneficiary. The primary beneficiary is defined as the party
which has exposure to the majority of the VIEs' expected
losses and/or expected residual returns. AcG-15 will be
effective for all annual and interim periods beginning on or
after November 1, 2004.
In December 2003, FASB Interpretation No. 46 (Revised),
Consolidation of Variable Interest Entities, superseded FIN 46
and is effective for the end of the first reporting period
ending on or after March 15, 2004.
The Company has adopted FIN 46R for United States GAAP
purposes retroactively since the date of inception of the
joint ventures. Upon adoption of the standard, the Company has
determined that each of its investments in joint ventures
should be consolidated from the date when the Company first
became involved with the entities (note 9(d)).
24
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
9. CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES (CONTINUED):
(ii) Stock-based compensation:
In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-based Compensation - Transition and Disclosure, an amendment
to FASB SFAS No. 123, Accounting for Stock-based Compensation, to
provide alternative methods of transition for the change to the fair
value method of accounting for stock-based employee compensation.
The Company has not yet chosen the method of transition. In
addition, this Statement amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results.
The CICA has amended Handbook Section 3870, Stock-based Compensation
and Other Stock-based Payments, to require entities to account for
employee stock options using the fair value-based method, for years
beginning on or after January 1, 2004. As such, the Company will
implement the revised standard effective July 1, 2004.
10. FINANCIAL INSTRUMENTS:
The fair values of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate their carrying values
because of the short-term nature of these instruments.
11. SUBSEQUENT EVENTS:
On September 30, 2004, the Corporation completed a bought deal public
offering of 6,601,588 units at a price of $3.15 per unit for total gross
proceeds of $20,795,002 (net $18,611,860). Each unit consists of one
common share and one-half of one common share purchase warrant. Each whole
purchase warrant entitles the holder thereof to purchase one additional
common share of YM BioSciences Inc. at a price of $3.75 at any time for up
to 36 months following the closing.
25
YM BIOSCIENCES INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements (continued)
(Amounts in Canadian dollars, unless otherwise noted)
Years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
11. SUBSEQUENT EVENTS (CONTINUED):
On September 28, 2004, the American Stock Exchange approved the Company's
listing application. On September 29, 2004, the Company's Registration
Statement on Form 20-F in respect of the Company's common shares was
declared effective by the Securities Exchange Commission. On October 1,
2004, the Company's common shares commenced trading on the American Stock
Exchange.
26