Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
Adherex Technologies Inc.
(Adherex), together with its wholly owned subsidiaries Oxiquant, Inc. (Oxiquant) and Adherex, Inc., both Delaware corporations, and Cadherin Biomedical Inc. (CBI), a Canadian corporation, collectively referred to
herein as the Company, is a development stage biopharmaceutical company with a portfolio of product candidates under development for use in the treatment of cancer.
2.
|
Significant Accounting Policies
|
Basis of presentation
Effective January 1, 2007, the Company changed its primary basis of accounting to United States (U.S.) generally accepted accounting
principles (U.S. GAAP). We made this change to comply with U.S. securities law as a result of the loss of the Companys foreign private issuer status with the Securities and Exchange Commission (SEC). The consolidated
financial statements have been prepared in U.S. dollars. The consolidated financial statements include the accounts of Adherex and of all its wholly-owned subsidiaries and all material inter-company transactions and balances have been eliminated
upon consolidation.
The preparation of these consolidated financial statements also conform in all material respects with generally accepted accounting
principles in Canada (Canadian GAAP) except as described in Note 16 in the consolidated financial statements.
Share consolidation
On July 20, 2005, the Company announced that the Board of Directors had approved a share consolidation of the Companys common stock at a
ratio of one-for-five. The share consolidation had previously been approved by the Companys shareholders at the Annual and Special Meeting held on April 29, 2005. The number of shares of Adherex common stock, stock options and warrants
issued and outstanding and the basic and diluted weighted-average shares outstanding as well as per share data and per stock option data have been adjusted for all periods presented to reflect the one-for-five share consolidation.
Use of estimates
The preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions that impact the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and the
reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents and
Investments
Cash equivalents consist of highly liquid investments with original maturities at the date of purchase of three months or less. Short-term
investments mature in less than one year from the balance sheet date.
The Company classifies its cash equivalents and investments as
available-for-sale. Such investments are recorded at fair value, determined based on quoted market prices, and unrealized gains and losses, which are considered to be temporary, are recorded as other comprehensive income (loss) in a
separate component of stockholders equity until realized. The cost of securities sold is based on the specific identification method.
The Company
places its cash, cash equivalents, and investments with financial institutions with high credit quality investments in accordance with its investment policy designed to protect the principal investment. Therefore, the Company believes that its
exposure due to concentration of credit risk is minimal and has not experienced credit losses on investments in these instruments to date.
F-9
Adherex Technologies Inc.
(a development stage company)
Notes to the Consolidated Financial Statements
(continued)
U.S. dollars and shares in thousands, except per share information
Cash pledged as collateral
The Company has pledged cash as collateral on corporate credit accounts in the form of interest-bearing term deposits.
Capital assets
Capital assets are initially recorded at cost and are then amortized using the declining balance method at the following
annual rates:
|
|
|
|
Furniture, fixtures and office equipment
|
|
20
|
%
|
Computer equipment
|
|
30
|
%
|
Computer software
|
|
100
|
%
|
Laboratory equipment
|
|
20
|
%
|
Leasehold improvements are amortized on a straight-line basis over the lease term.
Deferred leasehold inducements
Leasehold inducements consist of
periods of reduced rent and other capital inducements provided by the lessor. The leasehold inducements relating to the reduced rent periods are deferred and allocated over the term of the lease. The Company received lease inducements in the form of
leasehold improvements and rent-free periods.
Impairment of long-lived assets
The Company tests the recoverability of long-lived assets whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The Company records an impairment loss in the period when
it is determined that the carrying amount of the asset may not be recoverable. The impairment loss is calculated as the amount by which the carrying amount of the assets exceeds the discounted cash flows from the asset.
Convertible notes
The Company splits convertible notes into their
debt and detachable warrant components based on the relative fair value of each component.
Common stock and warrants
Common stock is recorded as the net proceeds received on issuance after deducting all share issue costs and the value of investor warrants. Warrants are recorded at fair
value and are deducted from the proceeds of common stock and recorded on the consolidated statements of shareholders equity as additional paid-in capital.
At December 31, 2007 and 2006, the Company had warrants to purchase common stock that were denominated in both U.S. and Canadian dollars, which results in the Company having warrants outstanding that are denominated outside its U.S.
dollar functional currency.
The SEC and the Financial Accounting Standards Board (FASB) have issued recent interpretations that suggest
warrants with exercise prices denominated in a different currency from the entitys functional currency cannot be classified as equity. As a result, these instruments would be treated as derivatives and recorded as liabilities which are carried
at their fair value, with period to period changes in the fair value recorded as a gain or loss in the statement of operations.
In November 2007, the
Emerging Issues Task Force (EITF) issued EITF No. 07-5, Issue Summary No.1 Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entitys Own Stock. The Issue Summary discusses the merits of
various accounting treatments related to this issue but does not provide any definitive guidance. The EITF considers Issue 07-5 an open issue subject to further discussion at future meetings.
F-10
Adherex Technologies Inc.
(a development stage company)
Notes to the Consolidated Financial Statements
(continued)
U.S. dollars and shares in thousands, except per share information
If the Company had recorded such instruments as derivatives, it would have reported a loss of approximately $50 and
$1,860 for the fiscal year ended December 31, 2007 and 2006, respectively and a gain of $7,592 for the fiscal year ended December 31, 2005. The Company calculated the amounts using the Black-Scholes option pricing model and used the
following assumptions: volatility rate of 80%, 70% and 70% for fiscal years ended December 31, 2007, 2006 and 2005, respectively; the actual exercise price of each instrument at December 31, 2007, 2006 and 2005; the stock price at
December 31, 2007, 2006 and 2005 and the Canadian risk free interest rate for the remaining life of the related warrants; and a 0% dividend rate for all fiscal years.
Revenue recognition
The Company recognizes revenue from multiple element arrangements under development and license
agreement, which include license payments, milestones and royalties. Revenue arrangements with multiple deliverables are accounted for in accordance with EITF No. 00-21, Revenue Arrangements with Multiple Deliverables and Staff
Accounting Bulletin No. 101 Revenue Recognition in Financial Statements and are divided into separate units of accounting if certain criteria are met. The consideration the Company receives is allocated among the separate units of
accounting based on their respective fair values, and the applicable revenue recognition criteria are considered separately for each of the separate units.
Non-refundable up-front payments received in conjunction with the development and license agreement, including license fees and milestones, are deferred and recognized on a straight-line basis over the relevant periods.
The Company records royalty revenue in accordance with the contract terms once it can be reliably measured and the collection is reasonably assured.
Research and development costs and investment tax credits
Research
costs, including employee compensation, laboratory fees, lab supplies, and research and testing performed under contract by third parties, are expensed as incurred. Development costs, including drug substance costs, clinical study expenses and
regulatory expenses are expensed as incurred.
Investment tax credits, which are earned as a result of qualifying research and development expenditures,
are recognized when the expenditures are made and their realization is reasonably assured. They are applied to reduce related capital costs and research and development expenses in the year recognized.
Income taxes
The Company accounts for income taxes under the asset
and liability method that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. The Company provides a
valuation allowance to reduce its deferred tax assets when it is more likely than not that such assets will not be realized.
In July 2006, the Financial
Accounting Standards Board issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes an Interpretation of SFAS No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement of a tax
position taken or expected to be taken in an enterprises tax return. The Company adopted FIN 48, as required, effective January 1, 2007. The adoption of FIN 48 did not have any impact on the Companys consolidated financial
position or results of operations.
F-11
Adherex Technologies Inc.
(a development stage company)
Notes to the Consolidated Financial Statements
(continued)
U.S. dollars and shares in thousands, except per share information
Foreign currency translation
All of the Companys foreign operations are integrated. Financial statements of integrated foreign operations are translated as follows:
Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates prevailing at the balance sheet date. Non-monetary items and any related amortization of such items
are translated at the rates of exchange in effect when the assets were acquired or the obligations incurred. Expenses denominated in foreign currencies are translated at the relevant exchange rates prevailing during the year. Exchange gains and
losses are included in net loss for the year
.
Stock-Based compensation plan
Effective January 1, 2006, the Company adopted the fair value recognition requirements of Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-based
Payment (SFAS No. 123(R)), using the modified prospective transition method and therefore has not restated results for prior periods. The Company recognizes these compensation costs net of an estimated forfeiture rate on a
straight-line basis over the requisite service period of the award, which is generally three years.
Loss per share
Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per
share is computed using the same method, except the weighted average number shares of common stock outstanding include, convertible debentures, stock options and warrants, if dilutive.
Recent Accounting Pronouncements
In June 2007, the Emerging Issues Task Force (EITF) issued EITF
No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities (EITF 07-3), which provides guidance for up-front payments related to goods and
services of research and development costs. EITF 07-3 is effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact of EITF 07-3 on its financial statements but does not anticipate a material
impact.
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilitiesincluding an amendment of FASB Statement No. 115 (SFAS 159), which is effective for fiscal years beginning after November 15, 2007. SFAS 159 permits companies to choose to
measure many financial instruments and certain other items at fair value on a per instrument basis, with changes in fair value recognized in earnings each reporting period. This will enable some companies to reduce volatility in reported earnings
caused by measuring related assets and liabilities differently. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar
types of assets and liabilities. The Company is currently evaluating the impact, if any, that adopting SFAS 159 will have on its results of operations and its financial condition.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 establishes a framework for measuring fair value, and expands disclosures about fair
value measurements. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within that fiscal year. On February 12, 2008, the FASB approved the Financial Staff
Position (FSP) No. SFAS 157-2, Effective Date of FASB Statement No. 157 (FSP FAS 157-2), which delays the effective date of SFAS 157 to fiscal years beginning after November 15, 2008,
and interim periods within those fiscal years for non-financial assets and non-financial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The
Company is currently evaluating the impact, if any, that adopting SFAS 157 will have on its results of operations and its financial condition.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)), which applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. SFAS 141(R) establishes principles and requirements for how the acquirer: i) recognizes and measures in its financial
statements the
F-12
Adherex Technologies Inc.
(a development stage company)
Notes to the Consolidated Financial Statements
(continued)
U.S. dollars and shares in thousands, except per share information
identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; ii) recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain purchase; and iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The
Company does not expect the adoption of SFAS 141 (R) to have an effect on its results of operations and its financial condition unless it enters into a business combination after January 1, 2009.
The components of our capital assets are presented
below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
Cost
|
|
|
Accumulated
Amortization
|
Furniture, fixtures and office equipment
|
|
$
|
92
|
|
|
$
|
54
|
|
$
|
92
|
|
|
$
|
44
|
Computer equipment
|
|
|
151
|
|
|
|
95
|
|
|
131
|
|
|
|
75
|
Computer software
|
|
|
146
|
|
|
|
134
|
|
|
124
|
|
|
|
124
|
Laboratory equipment
|
|
|
622
|
|
|
|
446
|
|
|
591
|
|
|
|
405
|
Leasehold improvements
|
|
|
4
|
|
|
|
1
|
|
|
4
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,015
|
|
|
$
|
730
|
|
|
942
|
|
|
$
|
649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
(730
|
)
|
|
|
|
|
|
(649
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
$
|
285
|
|
|
|
|
|
$
|
293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for capital assets was $81 and $86 for the years ended December 31,
2007 and 2006, respectively.
On August 31, 2005, the Company entered
into agreements to lease a new office and laboratory facility (Maplewood Facility) and sublease the Companys existing facility (Englert Facility) on similar terms as in the original lease. As an incentive to enter into
the Maplewood Facility lease, the Company received free rent and capital inducements. The Company only paid half rent for the Maplewood Facility over the first 24 months of the 84-month lease term and received additional inducements in the form of
furniture, equipment and leasehold improvements with a fair market value of approximately $544. As part of the sublease of the Englert Facility, the Company provided furniture, equipment and leasehold improvements with a net book value of $156 and
an approximate fair market value of $75. In addition, the Company has written-off the $68 liability related to leasehold improvements at the Englert Facility and included this amount in the deferred rent inducement as the Companys sublessee is
now contractually obligated to make those payments; however, should the sublessee default on such payments, Adherex would then become liable for the remaining amount.
The Company records rent expense by charging the total rental payments plus the value of the capital inducements received against earnings on a straight-line basis over the 84-month term of the lease, which expires on
August 31, 2012.
Authorized capital stock
The Companys authorized capital stock consists of an unlimited number of shares of no par common stock.
Equity financings
On June 5, 2001, the Company completed an IPO
issuing 1,333 shares of common stock at a price of CAD$7.50 per share. Net proceeds of this offering credited to common stock amounted to $5,727 after deducting the underwriting fee of $501 and expenses of $354. As additional compensation in
connection with the offering, the Company granted the underwriters
F-13
Adherex Technologies Inc.
(a development stage company)
Notes to the Consolidated Financial Statements
(continued)
U.S. dollars and shares in thousands, except per share information
non-assignable support options representing ten percent of the offered shares. Each support option entitled the holder to purchase one share of common
stock on or before June 5, 2003 at CAD$7.50. The Company also granted the underwriters an option (Over-allotment Option) to purchase up to 200 shares of common stock at the offering price for a period ending 30 days from the close
of the offering. On July 5, 2001, the Over-allotment Option expired unexercised.
On December 19, 2003, the Company completed a private placement
of equity securities totaling $16,095, comprised of (i) $15,050 for 11,522 units, at a price of CAD$1.75 per unit, comprised of an aggregate of 11,522 shares of common stock and warrants to acquire 5,761 shares of common stock of Adherex with
an exercise price of CAD$2.15 per share which expire December 19, 2008, and (ii) $1,045 for 800 Series 1 Preferred Shares and warrants to purchase 400 Series 1 Preferred Shares of 2037357 Ontario Inc. The $5,777 estimated fair value of the
warrants has been allocated to additional paid-in capital and the balance of $8,053 has been credited to common stock. The non-redeemable Series 1 Preferred Shares of 2037357 Ontario Inc. (Preferred Shares) were exchangeable into 800
shares of common stock of Adherex. Upon such an exchange, all of the then outstanding warrants to purchase the Preferred Shares would be exchanged for an equal number of warrants to purchase Adherex common stock, which would have an exercise price
of CAD$2.15 per share and expire on December 19, 2008. The $1,045 was to be spent on specific research and development projects in Ontario, Canada as designated by Adherex. Adherex could compel the exchange of the Preferred Shares into common
stock and warrants for common stock of Adherex at any time after January 3, 2005. The Company also issued broker warrants to purchase 1,226 shares of common stock exercisable at a price of CAD$2.15 per share.
2037357 Ontario Inc. has been accounted for in accordance with the substance of the transaction. The $1,045 has been recorded as non-redeemable Preferred Shares and the
amounts expended were recorded as expenses in the relevant periods. On June 14, 2004, the preferred shares and warrants were exchanged for 800 shares of Adherex common stock and warrants to purchase 400 shares of Adherex common stock which
expire on December 19, 2008. In June 2004, 2037357 Ontario Inc. became a wholly owned subsidiary of the Company and was amalgamated with Adherex Technologies Inc. The investment has been split between the estimated fair value of the warrants of
$363, which has been included in additional paid-in capital, and the remainder of $660, which has been recorded in common stock.
On May 20, 2004, the
Company completed equity financings with total gross proceeds of $9,029 less $555 of issuance costs. The Company issued 4,669 units at a purchase price of CAD$2.65 per unit with each unit consisting of one share of common stock and one-half of a
common stock purchase warrant. Each whole warrant entitles the holder to acquire one additional share of common stock at an exercise price of CAD$3.50 and expired May 19, 2007. The $2,118 value of the warrants has been allocated to additional
paid-in capital and the balance of $6,356 has been credited to common stock.
On July 20, 2005, the Company completed a private placement of equity
securities for gross proceeds of $8,510 for 6,079 units at a price of $1.40 per unit, providing net proceeds of $8,134 after deducting broker fees and other expenses of $376. Each unit consisted of one common share and 0.30 of a common share
purchase warrant. The private placement comprised an aggregate of 6,079 shares of common stock, along with 1,824 investor warrants and 57 broker warrants to acquire additional shares of Adherex common stock. Each whole investor warrant entitles the
holder to acquire one additional share of common stock of Adherex at an exercise price of $1.75 per share for a period of three years and each whole broker warrant entitled the holder to acquire one share of Adherex common stock at an exercise price
of $1.75. The warrants, with a value of $1,074 based on the Black-Scholes option pricing model, have been allocated to additional paid-in capital and the remaining balance of $7,060 has been credited to common stock.
On May 8, 2006, the Company completed a private placement of equity securities for gross proceeds of $6,512 for 7,753 units at a price of $0.84 per unit providing
net proceeds of $6,040 after deducting broker fees and certain other expenses. Each unit consisted of one common share and 0.30 of a common share purchase warrant. The private placement comprised an aggregate of 7,753 shares of common stock, along
with 2,326 investor warrants and 465 broker warrants to acquire additional shares of Adherex common stock. Each whole investor warrant entitles the holder to acquire one additional share of Adherex common stock at an exercise price of $0.97 per
share for a period of four years. Each whole broker warrant entitles the holder to acquire one share of Adherex common stock at an exercise price of $0.97 per share for a period of two years. The warrants, with a value of $822 based on the
Black-Scholes option pricing model, have been allocated to additional paid-in capital and the remaining balance of $5,218 has been credited to common stock.
On February 21, 2007, the Company completed the sale of equity securities providing gross proceeds of $25,000 for 75,759 units at a price of $0.33 per unit providing net proceeds of $23,221 after deducting broker fees and other
expenses. Each unit consisted of one common share and one-half of a common share purchase warrant. The offering
F-14
Adherex Technologies Inc.
(a development stage company)
Notes to the Consolidated Financial Statements
(continued)
U.S. dollars and shares in thousands, except per share information
comprised an aggregate of 75,759 shares of common stock, 37,879 investor warrants and 6,618 broker warrants to acquire additional shares of Adherex common
stock. Each whole investor warrant entitles the holder to acquire one additional share of Adherex common stock at an exercise price of $0.40 per share for a period of three years. Each whole broker warrant entitles the holder to acquire one
additional unit at an exercise price of $0.33 per unit for a period of two years. The warrants, with a value of $6,503 based on the Black-Scholes option pricing model, have been allocated to additional paid-in-capital and the remaining balance of
$16,718 has been included in common stock.
During the second quarter of fiscal 2007, the Company received gross proceeds of $694 related to the exercise
of warrants and issued 2,086 shares of common stock and 1,000 additional investor warrants, which entitle the holder to acquire one additional share of Adherex common stock at an exercise price of $0.40 per share and which expire on
February 21, 2010. The warrants exercised during the period included 86 investor warrants with an exercise price of $0.40 per share and 2,000 broker warrants with an exercise price of $0.33 per unit. The warrants, with a value of $131 based on
the Black-Scholes option pricing model, have been allocated to additional paid-in capital and the remaining balance of $563 has been included in common stock.
Special warrants
From May 2000 through November 2000, the Company issued special warrants. Each special warrant was sold for CAD$25.00 and
entitled the holder thereof to acquire, for no additional consideration, four shares of common stock of the Company. The special warrants also included a price protection adjustment determined by dividing CAD$32.50 by the initial public offering
(IPO) price of CAD$7.50.
During the year ended June 30, 2000, 16 of 126 special warrants were issued, with the balance of 110 issued in
the year ended June 30, 2001. Upon completion of the IPO, on June 5, 2001, these special warrants were converted to 547 shares of common stock, which included 42 shares of common stock issued under the price protection adjustment.
Special A warrants
During October 2000, the Company
issued Series A special warrants. Each Series A special warrant was sold at CAD$6.25 and entitled the holder to acquire, for no additional consideration, one share of common stock of the Company. The Series A special warrants also included a price
protection adjustment determined by dividing CAD$8.125 by the IPO price.
Upon completion of the IPO on June 5, 2001, these Series A special warrants
were converted to 1,248 shares of common stock, which included 96 shares of common stock issued under the price protection adjustment.
In addition, each
Series A special warrant included a share purchase warrant entitling the holder to purchase an additional share of common stock at the IPO price, which was also subject to the price protection adjustment, so that 1,248 additional common stock could
have been sold at the IPO price. These share purchase warrants expired unexercised on September 3, 2001.
Equity rights
On September 28, 1999, University Medical Discoveries Inc. (UMDI) invested $171 for equity of the Company. The form of this equity was to be the same as
the first class of securities to raise greater than $683 subsequent to the date of the investment. The date of conversion was dependent on certain milestones being met under a specific research project. On August 24, 2000, the Company and UMDI
agreed to convert UMDIs $171 investment into 62 shares of common stock of the Company.
Triathlon settlement
During fiscal 2000, other advances totaling $175 were settled by the issuance to Triathlon Limited of 280 shares of common stock of the Company. The number of shares
issued was determined with reference to the fair value at the time the advances were made.
F-15
Adherex Technologies Inc.
(a development stage company)
Notes to the Consolidated Financial Statements
(continued)
U.S. dollars and shares in thousands, except per share information
Shire BioChem Inc. agreement
On August 17, 2000, the Company entered into a subscription agreement and a license agreement with Shire BioChem Inc. (BioChem). Under the subscription agreement, BioChem purchased 80 shares of common
stock of the Company for $341. Pursuant to a price protection clause in the agreement, an additional eight shares of common stock were issued on completion of the Companys IPO on June 5, 2001.
Acquisitions
On November 20, 2002, the Company issued 8,032
shares of commons stock to acquire all of the issued and outstanding securities of Oxiquant, a holding company which held certain intellectual property rights, including rights to sodium thiosulfate.
In connection with the acquisition of the intellectual property of Oxiquant in November 2002, the Company issued 461 warrants with an exercise price of CAD$3.585 that
expired on May 20, 2007 and 170 introduction warrants with an exercise price of CAD$2.05 that expired on November 20, 2007. These warrants expired unexercised.
As a prerequisite of the Oxiquant transaction, Adherex licensed all of its cadherin-related intellectual property for non-cancer applications and transferred $158 in cash to Cadherin Biomedical Inc. or CBI, a
wholly-owned subsidiary of Adherex at the time, in return for Class A Preferred Shares of CBI. These CBI Class A Preferred Shares were then distributed to all of the Adherex shareholders of record by way of special dividend, effecting a
spin out of CBI and the non-cancer assets from Adherex.
In order to effect such a distribution under Section 42 of the Canada Business
Corporations Act (CBCA), the Company was legally required to reduce its stated capital so that the aggregate amount of its liabilities and stated capital did not exceed the realizable value of Adherexs assets. Management determined
that the stated capital needed to be reduced by $9,489, in order to comply with the requirements of Section 42 of the CBCA. The Company decreased common stock and increased additional paid-in capital by $9,489.
In February 2004, the Company and CBI became involved in litigation. On December 3, 2004, the Company and CBI settled the litigation and the Company agreed to
acquire all of the issued and outstanding shares of CBI and reacquire the non-cancer rights to the cadherin-based intellectual property. As part of the agreement, the Company issued 644 common shares valued at $1,252, net of transaction costs.
Convertible note warrants
On June 23, 2003, the
Company issued senior secured convertible notes with a face value totaling $2,219. These notes were convertible into common stock and warrants to acquire common stock of the Company upon completion of an equity fund raising round. Investors also
received warrants to purchase an aggregate of 345 shares of common stock of the Company with an exercise price of CAD$2.75 per share that expired on June 23, 2007. The notes bore interest at an annual rate of eight percent compounded
semi-annually, and matured one year from issue but were renewable for one additional year at the option of the Company. In connection with this issuance, the Company issued broker warrants to purchase 101 shares of common stock exercisable at a
price of CAD$2.35 per share which expired on June 23, 2005 unexercised. As an inducement to consent to the issuance of the December 2003 convertible notes, the exercise price of these warrants was changed from CAD$2.75 per share to CAD$2.05 per
share on December 3, 2003.
On December 3, 2003, the Company issued additional senior secured convertible notes with a face value totaling
CAD$1,458. These notes were convertible into common stock and warrants to acquire common stock of the Company upon completion of an equity fund raising round. Also, investors received warrants for 271 shares of common stock exercisable at a price of
CAD$2.15 per share which expire on December 3, 2007. The notes bore interest at an annual rate of eight percent compounded semi-annually, and matured one year from issue but were renewable for one additional year at the option of the
Company. The Company also issued broker warrants to purchase 94 shares of common stock exercisable at a price of CAD$2.15 per share which expired on December 3, 2005.
On December 19, 2003, the Company completed an equity financing resulting in the conversion of the June and the December notes into 2,813 shares of common stock with a carrying value of $1,785 credited to common
stock. In
F-16
Adherex Technologies Inc.
(a development stage company)
Notes to the Consolidated Financial Statements
(continued)
U.S. dollars and shares in thousands, except per share information
addition, the Company issued 1,407 warrants to purchase common stock with an exercise price of CAD$2.15 per share which expire on December 19, 2008.
Warrants to Purchase Common Stock
At
December 31, 2007, the Company had 7,567 investor warrants to purchase common stock outstanding priced in Canadian dollars with an exercise price of CAD $2.15 that expire on December 19, 2008.
At December 31, 2007, the Company had the following warrants to purchase common stock outstanding priced in U.S. dollars with a weighted average exercise price of
$0.47 and a weighted average remaining life of 1.98 years:
|
|
|
|
|
|
|
|
Warrant Description
|
|
Number
Outstanding at
December 31,
2007
|
|
Exercise Price
In U.S. Dollars
|
|
Expiration Date
|
Agent warrants
|
|
465
|
|
$
|
0.97
|
|
May 7, 2008
|
Investor warrants
|
|
1,824
|
|
$
|
1.75
|
|
July 20, 2008
|
Broker warrants
|
|
4,818
|
|
$
|
0.33
|
|
February 21, 2009
|
Investor warrants
|
|
38,794
|
|
$
|
0.40
|
|
February 21, 2010
|
Investor warrants
|
|
2,326
|
|
$
|
0.97
|
|
May 7, 2010
|
|
|
|
|
|
|
|
|
|
|
48,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
The Compensation Committee of the Board of Directors administers the Companys stock option plan. The Compensation Committee designates eligible participants to be included under the plan and approves the number of options to be
granted from time to time under the plan. A maximum of 20,000 options, not including the 700 options issued to the Chief Executive Officer and specifically approved by the shareholders, are authorized for issuance under the plan. The option exercise
price for all options issued under the plan is based on the fair value of the underlying shares on the date of grant. All options vest within three years or less and are exercisable for a period of seven years from the date of grant. The stock
option plan, as amended, allows the issuance of Canadian and U.S. dollar grants. A summary of the stock option transactions, for both the Canadian and U.S. dollar grants, through the year ended December 31, 2007 is below.
F-17
Adherex Technologies Inc.
(a development stage company)
Notes to the Consolidated Financial Statements
(continued)
U.S. dollars and shares in thousands, except per share information
The following options granted under the stock option plan are exercisable in Canadian dollars:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Exercise Price in Canadian Dollars
|
|
|
Range
|
|
Weighted- average
|
Outstanding at December 31, 2004
|
|
3,763
|
|
|
$
|
1.64 - 7.50
|
|
$
|
2.40
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(15
|
)
|
|
|
1.64 - 1.70
|
|
|
1.66
|
Cancelled
|
|
(84
|
)
|
|
|
1.64 - 6.25
|
|
|
2.93
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
3,664
|
|
|
|
1.64 - 7.50
|
|
|
2.39
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
(262
|
)
|
|
|
1.64 - 6.25
|
|
|
2.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
3,402
|
|
|
|
1.6375 - 7.50
|
|
|
2.42
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
(463
|
)
|
|
|
1.64 - 7.50
|
|
|
3.93
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
2,939
|
|
|
$
|
1.6500 - 3.25
|
|
$
|
2.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of
Exercise
Price
in Canadian
Dollars
|
|
Number
Outstanding at
December 31,
2007
|
|
Weighted- average
Exercise Price
in Canadian
Dollars
|
|
Weighted-average
Remaining
Contractual Life
(years)
|
|
Number
Outstanding at
December 31,
2007
|
|
Weighted-average
Exercise Price
|
|
Weighted-average
Remaining
Contractual Life
(years)
|
$1.50 - $2.00
|
|
1,228
|
|
$
|
1.72
|
|
2.19
|
|
1,228
|
|
$
|
1.72
|
|
|
$2.01 - $2.50
|
|
1,024
|
|
|
2.25
|
|
2.99
|
|
1,024
|
|
|
2.25
|
|
|
$2.51 - $3.00
|
|
549
|
|
|
2.81
|
|
3.33
|
|
549
|
|
|
2.81
|
|
|
$3.01 - $3.50
|
|
138
|
|
|
3.25
|
|
3.17
|
|
138
|
|
|
3.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,939
|
|
$
|
2.18
|
|
2.73
|
|
2,939
|
|
$
|
2.18
|
|
2.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following options granted under the stock option plan are exercisable in U.S. dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price in U.S. Dollars
|
|
|
Number of
Options
|
|
|
Range
|
|
Weighted- average
|
Outstanding at December 31, 2004
|
|
|
|
|
|
|
|
|
|
Granted
|
|
1,603
|
|
|
$
|
0.88 - 1.35
|
|
$
|
1.14
|
Exercised
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
(20
|
)
|
|
|
1.20
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
1,583
|
|
|
|
0.88 - 1.35
|
|
|
1.14
|
Granted
|
|
375
|
|
|
|
0.34 - 0.36
|
|
|
0.35
|
Exercised
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
(80
|
)
|
|
|
0.88 - 1.20
|
|
|
0.97
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
1,878
|
|
|
|
0.34 - 1.35
|
|
|
0.99
|
Granted
|
|
11,109
|
|
|
|
0.28 - 0.63
|
|
|
0.51
|
Exercised
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
(263
|
)
|
|
|
0.34 - 1.20
|
|
|
0.55
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
12,724
|
|
|
$
|
0.28 - 1.35
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
F-18
Adherex Technologies Inc.
(a development stage company)
Notes to the Consolidated Financial Statements
(continued)
U.S. dollars and shares in thousands, except per share information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of
Exercise
Price in U.S.
Dollars
|
|
Number
Outstanding
at
December 31,
2007
|
|
Weighted-average
Exercise Price
|
|
Weighted-average
Remaining
Contractual Life
(years)
|
|
Number
Outstanding at
December 31,
2007
|
|
Weighted-average
Exercise Price
|
|
Weighted-average
Remaining
Contractual Life
(years)
|
$0.28 - $0.50
|
|
4,023
|
|
$
|
0.29
|
|
6.30
|
|
1,146
|
|
$
|
0.29
|
|
|
$0.51 - $1.00
|
|
7,487
|
|
|
0.63
|
|
6.29
|
|
2,438
|
|
|
0.65
|
|
|
$1.01 - $1.25
|
|
1,134
|
|
|
1.19
|
|
4.38
|
|
985
|
|
|
1.19
|
|
|
$1.26 - $1.50
|
|
80
|
|
|
1.35
|
|
4.50
|
|
60
|
|
|
1.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,724
|
|
$
|
0.58
|
|
6.11
|
|
4,629
|
|
$
|
0.68
|
|
5.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense for the fiscal year ended December 31, 2007, 2006 and 2005 was $2,322, 590 and
$276, respectively. The weighted average fair value per share of options granted during the fiscal year ended December 31, 2007, 2006 and 2005 was $0.43, $0.35 and $1.13, respectively. There was no intrinsic value in stock options outstanding
at December 31, 2007.
The fair value of options granted in fiscal year ended December 31, 2007, 2006 and 2005 were estimated on the date the
options were granted based on the Black-Scholes option-pricing model, using the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2007
|
|
|
Year Ended
December 31,
2006
|
|
|
Year Ended
December 31,
2005
|
|
Expected dividend
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Risk-free interest rate
|
|
4.58
|
%
|
|
4.60
|
%
|
|
3.82
|
%
|
Expected volatility
|
|
77.7
|
%
|
|
84.0
|
%
|
|
70.0
|
%
|
Expected life
|
|
7 years
|
|
|
7 years
|
|
|
7 years
|
|
The Company uses the historical volatility and adjusts for available relevant market information pertaining to the
Companys share price. As of December 31, 2007, the Company had unrecognized fair value relating to unvested stock options totaling approximately $2,050 which is expected to be recognized over a weighted average period of 1.4 years.
On February 27, 2008, the Company issued 3,200 stock options to Company executives with an exercise price of $0.38 which all vested on
February 28, 2008.
6.
|
Research and Development
|
Investment tax credits earned as a result
of qualifying research and development expenditures and government grants have been applied to reduce research and development expenses as follows:
F-19
Adherex Technologies Inc.
(a development stage company)
Notes to the Consolidated Financial Statements
(continued)
U.S. dollars and shares in thousands, except per share information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2007
|
|
Year Ended
December 31,
2006
|
|
Year Ended
December 31,
2005
|
|
Cumulative
From
September 3,
1996
to
December 31,
2007
|
|
Research and development
|
|
$
|
10,912
|
|
$
|
14,003
|
|
$
|
11,678
|
|
$
|
54,240
|
|
Investment tax credits
|
|
|
|
|
|
|
|
|
|
|
|
(1,632
|
)
|
National Research Council grants
|
|
|
|
|
|
|
|
|
|
|
|
(197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,912
|
|
$
|
14,003
|
|
$
|
11,678
|
|
$
|
52,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys claim for any Scientific Research and Experimental Development (SR&ED)
deductions and related investment tax credits for income tax purposes are based upon managements interpretation of the applicable legislation in the Canadian Income Tax Act. These amounts are subject to review and acceptance by the Canada
Revenue Agency prior to collection.
7.
|
Capital and Operating Lease Commitments
|
The Company has entered
into operating lease agreements for the office and laboratory facilities located in the United States. As of December 31, 2007, the minimum cash payments per the lease agreements are as follows:
|
|
|
|
Year Ending
|
|
Amount
|
December 31, 2008
|
|
$
|
463
|
December 31, 2009
|
|
|
477
|
December 31, 2010
|
|
|
463
|
December 31, 2011
|
|
|
395
|
December 31, 2012 and thereafter
|
|
|
268
|
|
|
|
|
Total minimum rent payments
|
|
$
|
2,066
|
|
|
|
|
The table above includes a lease agreement for the Englert Facility which has been subleased to a third party
until March 31, 2008. Under the terms of the operating lease for the office facilities, the Company financed $80 of leasehold improvements through the buildings owner. The amount is being financed over the term of the lease which expires
in September 2010 and bears an annual interest rate of six percent. This obligation was assumed by the sublessee when the Company subleased the facility to a third party; however, should the sublessee default, the Company would become liable.
Rental payments on operating leases and interest on capital lease payments are summarized in the table below:
|
|
|
|
|
|
|
Year Ending
|
|
Rent
Amount
|
|
Interest
|
December 31, 2007
|
|
$
|
327
|
|
$
|
|
December 31, 2006
|
|
|
264
|
|
|
|
December 31, 2005
|
|
|
184
|
|
|
4
|
8.
|
Commitments and Contingencies
|
McGill Agreement
On February 26, 2001, the Company entered into a general collaboration agreement with McGill that grants the Company a 27-year exclusive, worldwide license to
develop, use and market certain cell adhesion technology and compounds. The license agreement provides for the Company to pay future royalties of two percent of gross revenues from the use of the technology and compounds. The agreement also
provides for the Company to make payments as follows:
|
|
|
CAD$100 if the Company has not filed an investigational new drug (IND) application, or similar application with Canadian, US, European or a recognized
agency, relating to the licensed product prior
|
F-20
Adherex Technologies Inc.
(a development stage company)
Notes to the Consolidated Financial Statements
(continued)
U.S. dollars and shares in thousands, except per share information
|
to September 23, 2002. On August 1, 2002, McGill acknowledged that work completed on the clinical development of ADH-1 was sufficient to meet the
requirements of the September 23, 2002 milestone and thus no payment was required.
|
|
|
|
CAD$100 if the Company has not commenced Phase II clinical trials in a recognized jurisdiction on any licensed product prior to September 23, 2004. On
September 20, 2004, McGill acknowledged that the Company had met obligations with respect to the September 23, 2004 milestone and thus no payment was required.
|
|
|
|
CAD$200 if the Company has not commenced Phase III clinical trials in a recognized jurisdiction on any licensed product prior to September 23, 2006, which was
paid in fiscal year 2007.
|
In addition, the Company is required to fund mutually agreed upon research at McGill over a period of ten
years totaling CAD$3,300. Annual funding commenced in 2001 with a total payment of CAD$200 and increases annually by 10 percent through to the tenth year of the agreement when annual funding reaches CAD$500. The additional research commitment
can be deferred in any year if it exceeds five percent of the Companys cash and cash equivalents. As of December 31, 2007, there have been no deferrals. The Company receives certain intellectual property rights resulting from this
research.
Oregon Health & Science University agreement
The Company has an exclusive license agreement with Oregon Health & Science University (OHSU) for exclusive worldwide license rights to intellectual property directed to thiol-based compounds,
including STS and their use in oncology. OHSU will receive certain milestone payments, a 2.5 percent royalty on net sales for licensed products and a 15 percent royalty on any consideration received from sublicensing of the licensed
technology. Milestone payment fees payable to OHSU include: $50 upon completion of Phase I clinical trials; $200 upon completion of Phase II clinical trials; $500 upon completion of Phase III clinical trials; and $250 upon first commercial sale for
any licensed product. To date, no milestone payments have been paid.
Employment matters
Under the terms of an agreement dated February 19, 2003, the prior Chief Executive Officer of the Company was terminated by mutual agreement. Pursuant to that
agreement, the Company agreed to pay a total of $350. The initial payment of $150 was made during the quarter ended March 31, 2003 and was recorded as a General and Administration expense. Additionally, he received $50 per year for four years
paid in semi-monthly installments. During fiscal 2007, the Company made the final payment under the agreement and therefore no liability exists at December 31, 2007.
GlaxoSmithKline
On July 14, 2005, the Company entered into a development and license agreement with GSK. The
agreement included the in-license by Adherex of GSKs oncology product, eniluracil, and an option for GSK to license ADH-1. As part of the transaction, GSK invested $3,000 in the Companys common stock. On October 11, 2006, the GSK
option to license ADH-1 expired unexercised. Under the terms of the agreement relating to eniluracil, Adherex received an exclusive license to develop eniluracil for all indications and GSK retained options to buy-back and assume development of the
compound at various points in time. On March 1, 2007, the GSK agreement was amended and the Company purchased all of GSKs remaining buy-back options for a fee of $1,000. The Company is now required to pay GSK development and sales
milestones and double-digit royalties. Specifically, if the Company files a NDA with the FDA, the Company may be required to pay development milestones of $5,000 to GSK. Depending upon whether the NDA is approved by the FDA and whether eniluracil
becomes a commercial success, the Company may be required to pay up to an additional $70,000 in development and sales milestones for the initially approved indication, plus double digit royalties based on annual net sales. If the Company pursues
other indications, it may be required to pay up to an additional $15,000 to GSK per FDA-approved indication.
F-21
Adherex Technologies Inc.
(a development stage company)
Notes to the Consolidated Financial Statements
(continued)
U.S. dollars and shares in thousands, except per share information
The Company operates in several tax jurisdictions.
Its income is subject to varying rates of tax and losses incurred in one jurisdiction cannot be used to offset income taxes payable in another. A reconciliation of the combined Canadian federal and provincial income tax rate with the Companys
effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2007
|
|
|
Year Ended
December 31,
2006
|
|
|
Year Ended
December 31,
2005
|
|
Domestic loss
|
|
$
|
(9,104
|
)
|
|
$
|
(10,931
|
)
|
|
$
|
(7,834
|
)
|
Foreign loss
|
|
|
(4,253
|
)
|
|
|
(5,509
|
)
|
|
|
(6,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(13,357
|
)
|
|
|
(16,440
|
)
|
|
|
(13,871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected statutory rate (recovery)
|
|
|
32.02
|
%
|
|
|
32.01
|
%
|
|
|
36.12
|
%
|
Expected provision for (recovery of) income tax
|
|
|
(4,277
|
)
|
|
|
(5,262
|
)
|
|
|
(5,010
|
)
|
Permanent differences
|
|
|
746
|
|
|
|
194
|
|
|
|
35
|
|
Change in valuation allowance
|
|
|
3,813
|
|
|
|
3,247
|
|
|
|
5,129
|
|
Non-refundable investment tax credits
|
|
|
(22
|
)
|
|
|
(50
|
)
|
|
|
(35
|
)
|
Share issue costs and effect of change of carryforwards
|
|
|
(352
|
)
|
|
|
(48
|
)
|
|
|
(51
|
)
|
Effect of foreign exchange rate differences
|
|
|
(637
|
)
|
|
|
705
|
|
|
|
(68
|
)
|
Effect of change in future enacted tax rates
|
|
|
916
|
|
|
|
804
|
|
|
|
|
|
Effect of tax rate changes and other
|
|
|
(187
|
)
|
|
|
410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Canadian statutory income tax rate of 32.02 percent is comprised of federal income tax at approximately
22.12 percent and provincial income tax at approximately 9.9 percent.
The primary temporary differences which gave rise to future income taxes
(recovery) at December 31, 2007, December 31, 2006 and December 31, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
|
December 31,
2006
|
|
|
December 31,
2005
|
|
Future tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
SR&ED expenditures
|
|
$
|
1,931
|
|
|
$
|
2,209
|
|
|
$
|
2,390
|
|
Income tax loss carryforwards
|
|
|
19,243
|
|
|
|
16,300
|
|
|
|
12,060
|
|
Non-refundable investment tax credits
|
|
|
1,090
|
|
|
|
1,029
|
|
|
|
998
|
|
Share issue costs
|
|
|
425
|
|
|
|
150
|
|
|
|
311
|
|
Reserves
|
|
|
|
|
|
|
|
|
|
|
518
|
|
Accrued expenses
|
|
|
153
|
|
|
|
|
|
|
|
|
|
Fixed and intangible assets
|
|
|
1,058
|
|
|
|
942
|
|
|
|
1,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,900
|
|
|
|
20,630
|
|
|
|
17,383
|
|
Less: valuation allowance
|
|
|
(23,900
|
)
|
|
|
(20,630
|
)
|
|
|
(17,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net future tax assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There are no current income taxes owed, nor are any income taxes expected to be owed in the near term.
At December 31, 2007, the Company has unclaimed Scientific Research and Experimental Development (SR&ED) expenditures, income tax loss carry
forwards and investments tax credits. The unclaimed amounts and their expiry dates are as listed below:
F-22
Adherex Technologies Inc.
(a development stage company)
Notes to the Consolidated Financial Statements
(continued)
U.S. dollars and shares in thousands, except per share information
|
|
|
|
|
|
|
|
|
Federal
|
|
Province/
State
|
SR&ED expenditures (no expiry)
|
|
$
|
7,169
|
|
$
|
7,189
|
Income tax loss carryforwards (expiry date):
|
|
|
|
|
|
|
2008
|
|
|
592
|
|
|
|
2009
|
|
|
3,418
|
|
|
5,566
|
2010
|
|
|
4,089
|
|
|
5,700
|
2014
|
|
|
5,800
|
|
|
6,535
|
2015
|
|
|
6,239
|
|
|
6,976
|
2021
|
|
|
26
|
|
|
|
2022
|
|
|
233
|
|
|
|
2023
|
|
|
1,588
|
|
|
1,455
|
2024
|
|
|
4,849
|
|
|
4,768
|
2025
|
|
|
10,820
|
|
|
10,793
|
2026
|
|
|
13,637
|
|
|
13,572
|
2027
|
|
|
8,916
|
|
|
8,916
|
Investment tax credits (expiry date):
|
|
|
|
|
|
|
2008
|
|
|
7
|
|
|
|
2009
|
|
|
89
|
|
|
|
2010
|
|
|
51
|
|
|
|
2011
|
|
|
510
|
|
|
|
2012
|
|
|
371
|
|
|
|
2013
|
|
|
166
|
|
|
|
2014
|
|
|
133
|
|
|
|
2015
|
|
|
52
|
|
|
|
2026
|
|
|
80
|
|
|
|
2027
|
|
|
22
|
|
|
|
The Company adopted FIN 48 effective January 1, 2007. Upon adoption of FIN 48 and through December 31,
2007, the Company had no unrecognized tax benefits. As of the date of adoption, there were no tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within twelve
months from the date of adoption of FIN 48 or from December 31, 2007. Accordingly, none have been recorded.
As of December 31, 2007, the Company
is subject to federal and state income tax in the United States and federal and provincial tax in Canada. The open statute years available for examination by U.S. taxing authorities are 2004 through 2007; the open statute years available for
examination by Canadian taxing authorities are 2003 through 2007. However, since the Company is in a loss carryforward position in both jurisdictions, the Company is generally subject to U.S. and Canadian federal and state or provincial income tax
examinations by tax authorities for all years for which a loss carryforward is utilized in subsequent periods. Thus, upon adoption of FIN 48, the Companys U.S. and Canadian open tax years extend back to 2001 and 1999, respectively.
In the event that the Company concludes that there are unrecognized tax benefits to record and that it is subject to interest and/or penalties arising from uncertain
tax positions, the Company will record interest and penalties as a component of other income and expense. No amounts of interest or penalties were recognized in the Companys consolidated financial statements upon adoption of FIN 48 or as of
December 31, 2007 and for the year ended December 31, 2007.
F-23
Adherex Technologies Inc.
(a development stage company)
Notes to the Consolidated Financial Statements
(continued)
U.S. dollars and shares in thousands, except per share information
The outstanding number and type of securities
that could potentially dilute basic earnings per share in the future and which were not included in the computation of diluted earnings per share, because to do so would have reduced the loss per share (anti-dilutive) for the years presented, are as
follows:
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
December 31,
2006
|
|
December 31,
2005
|
Stock options
|
|
15,663
|
|
5,280
|
|
5,246
|
Convertible note warrants
|
|
|
|
615
|
|
615
|
Acquisition warrants
|
|
|
|
461
|
|
461
|
Broker warrants
|
|
6,283
|
|
692
|
|
227
|
Investor warrants
|
|
49,511
|
|
14,052
|
|
11,726
|
|
|
|
|
|
|
|
Totals
|
|
71,457
|
|
21,100
|
|
18,275
|
|
|
|
|
|
|
|
The Company operates in one business segment,
which is the development of pharmaceutical products based on its licensed and proprietary technologies, with substantially all of its capital assets and operations, which were previously located in Canada, now located in the United States in
Research Triangle Park, North Carolina.
12.
|
Research and Development Projects
|
The Company is in the
development stage and conducts research and development in the areas of anti-cancer and chemoprotection:
Anti-Cancer:
|
|
|
ADH-1 is a molecularly-targeted anti-cancer compound in clinical development that selectively targets N-cadherin, a protein present on certain tumor cells and the
established blood vessels that supply the tumors.
|
|
|
|
Eniluracil is a compound in clinical development that was previously under development by GSK for oncology indications. Eniluracil is a DPD inhibitor being
developed to enhance the therapeutic value and effectiveness of an approved anti-cancer compound called 5-fluorouracil, or 5-FU.
|
Chemoprotectants and Chemoenhancers:
|
|
|
STS is a compound in clinical development that has been shown to protect against the disabling loss of hearing in patients being treated with platinum-based
anti-cancer agents.
|
F-24
Adherex Technologies Inc.
(a development stage company)
Notes to the Consolidated Financial Statements
(continued)
U.S. dollars and shares in thousands, except per share information
The following summarizes our research and development expenses, net of any investment tax credits or grants, through
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2007
|
|
Year Ended
December 31,
2006
|
|
Year Ended
December 31,
2005
|
|
Cumulative
From
September 3,
1996 to
December 31,
2007
|
ADH-1
|
|
$
|
5,087
|
|
$
|
9,792
|
|
$
|
7,743
|
|
$
|
33,844
|
Eniluracil
|
|
|
5,004
|
|
|
2,910
|
|
|
2,395
|
|
|
10,821
|
Other anti-cancer
|
|
|
158
|
|
|
249
|
|
|
351
|
|
|
2,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total anti-cancer
|
|
|
10,249
|
|
|
12,951
|
|
|
10,489
|
|
|
47,012
|
STS
|
|
|
560
|
|
|
292
|
|
|
443
|
|
|
2,668
|
Other chemoprotectants and enhancers
|
|
|
|
|
|
|
|
|
16
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total chemoprotectants and enhancers
|
|
|
560
|
|
|
292
|
|
|
459
|
|
|
2,708
|
Other discovery projects
|
|
|
103
|
|
|
760
|
|
|
730
|
|
|
2,553
|
Transdermal drug delivery
|
|
|
|
|
|
|
|
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development program expense
|
|
$
|
10,912
|
|
$
|
14,003
|
|
$
|
11,678
|
|
$
|
52,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On March 1, 2007, the Company purchased all of GSKs remaining buy-back options for a fee of $1,000. The
Company has made no upfront cash payments for research and development projects and is not obligated to repay research and development amounts to any third parties.
13.
|
Financial Instruments
|
Financial instruments recognized on the
balance sheets at December 31, 2007 and December 31, 2006 consist of cash and cash equivalents, cash pledged as collateral, accounts receivable, accounts payable and other current liabilities. The Company does not hold or issue financial
instruments for trading purposes and does not hold any derivative financial instruments.
The Companys investment policy is to manage investments to
achieve, in the order of importance, the financial objectives of preservation of principal, liquidity and return on investment. Investments are made in U.S. or Canadian obligations and bank securities, commercial paper of U.S. or Canadian industrial
companies, utilities, financial institutions and consumer loan companies, and securities of foreign banks provided the obligations are guaranteed or carry ratings appropriate to the policy. Securities must have a minimum Dun & Bradstreet
rating of A for bonds or R1 low for commercial paper.
The policy risks are primarily the opportunity cost of the conservative nature of the allowable
investments. As the main purpose of the Company is research and development, the Company has chosen to avoid investments of a trade or speculative nature.
F-25
Adherex Technologies Inc.
(a development stage company)
Notes to the Consolidated Financial Statements
(continued)
U.S. dollars and shares in thousands, except per share information
14.
|
Changes in Operating Assets and Liabilities
|
The following table
details the changes in operating assets and liabilities as per the Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2007
|
|
|
Year Ended
December 31,
2006
|
|
|
Year Ended
December 31,
2005
|
|
Accounts receivable
|
|
$
|
11
|
|
|
$
|
(17
|
)
|
|
$
|
2
|
|
Investment tax credits receivable
|
|
|
(93
|
)
|
|
|
58
|
|
|
|
123
|
|
Prepaid expenses
|
|
|
(89
|
)
|
|
|
31
|
|
|
|
(48
|
)
|
Other current assets
|
|
|
4
|
|
|
|
19
|
|
|
|
41
|
|
Accounts payable and accrued liabilities
|
|
|
(2,293
|
)
|
|
|
2,032
|
|
|
|
884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net changes in operating assets and liabilities
|
|
$
|
(2,460
|
)
|
|
$
|
2,123
|
|
|
$
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
Canadian Accounting Principles
|
The consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States in U.S. dollars. These principles differ, as they affect the Company, at December 31, 2007 and December 31, 2006 and for the
fiscal years ended December 31, 2007, December 31, 2006, and December 31, 2005 in the following material respects from Canadian generally accepted accounting principles. There are no differences in reported cash flow for the
periods presented.
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets - Canadian GAAP:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
|
December 31,
2006
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
16,561
|
|
|
$
|
5,895
|
|
Other assets
|
|
|
363
|
|
|
|
440
|
|
Capital assets
|
|
|
285
|
|
|
|
293
|
|
Acquired intellectual property rights
|
|
|
9,028
|
|
|
|
9,956
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
26,237
|
|
|
$
|
16,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
2,402
|
|
|
$
|
4,695
|
|
Other long-term liabilities
|
|
|
|
|
|
|
40
|
|
Deferred lease inducement
|
|
|
659
|
|
|
|
625
|
|
Future income taxes
|
|
|
2,474
|
|
|
|
3,639
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
5,535
|
|
|
|
8,999
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
64,891
|
|
|
|
46,486
|
|
Contributed surplus
|
|
|
34,583
|
|
|
|
26,751
|
|
Cumulative translation adjustment
|
|
|
5,850
|
|
|
|
5,850
|
|
Deficit accumulated during development stage
|
|
|
(84,622
|
)
|
|
|
(71,502
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
20,702
|
|
|
|
7,585
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
26,237
|
|
|
$
|
16,584
|
|
|
|
|
|
|
|
|
|
|
F-26
Adherex Technologies Inc.
(a development stage company)
Notes to the Consolidated Financial Statements
(continued)
U.S. dollars and shares in thousands, except per share information
Consolidated Statements of Operations Canadian GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2007
|
|
|
Year Ended
December 31,
2006
|
|
|
Year Ended
December 31,
2005
|
|
Net loss in accordance with U.S. GAAP
|
|
$
|
(13,357
|
)
|
|
$
|
(16,440
|
)
|
|
$
|
(13,871
|
)
|
Adjustments to reconcile to Canadian GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired intellectual property rights amortization (2)
|
|
|
(1,808
|
)
|
|
|
(2,177
|
)
|
|
|
(2,723
|
)
|
Loss on impairment of intellectual property (2)
|
|
|
|
|
|
|
(2,021
|
)
|
|
|
(3,539
|
)
|
Future income taxes (2)
|
|
|
1,165
|
|
|
|
1,535
|
|
|
|
2,290
|
|
License fee paid (2)
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
License fee amortization (2)
|
|
|
(120
|
)
|
|
|
|
|
|
|
|
|
Stock-based compensation (3)
|
|
|
|
|
|
|
|
|
|
|
(1,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and comprehensive loss in accordance with Canadian GAAP
|
|
$
|
(13,120
|
)
|
|
$
|
(19,103
|
)
|
|
$
|
(19,245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share of common stock, basic and diluted
|
|
$
|
(0.11
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares of common stock outstanding, basic and diluted
|
|
|
116,571
|
|
|
|
47,663
|
|
|
|
39,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to the Consolidated Financial StatementsCanadian GAAP:
1.
|
Summary of significant accounting policies
|
Current accounting
pronouncements
On January 1, 2007, the Company adopted the following standards: The Canadian Institute of Chartered Accountants (CICA)
Sections 3855 Financial InstrumentsRecognition and Measurements; 3865 Hedges; and 1530 Comprehensive Income. These sections require certain financial instruments and hedge positions to be recorded at their
fair value. They also introduce the concept of comprehensive income and accumulated other comprehensive income.
CICA Section 3855 Financial
InstrumentsRecognition and Measurements establishes standards for recognizing and measuring financial assets, financial liabilities and non-financial derivatives. All financial instruments must be classified into defined categories. This
classification determines how each instrument is measured and how gains and losses are recognized. In addition, the recommendations define derivatives and embedded derivatives which meet certain criteria.
CICA Section 3865 Hedges replaces AcG-13, Hedging Relationships and the guidance formerly in CICA Section 1650, Foreign Currency
Translation. The recommendations of this section are optional and are only required if the entity is applying hedge accounting. This section establishes standards for the accounting treatment of qualifying hedge relationships and the necessary
disclosures. For fair value hedges, the periodic change in value is recognized in income, where the changes in values of the hedged items are also recorded. For a cash flow hedge, the change in value of the effective portion is recognized in
other comprehensive income.
CICA Section 1530, Comprehensive Income, introduces a statement of comprehensive income in the
full set of interim and annual financial statements. Comprehensive income will present certain gains and losses outside net income. The adoption of these standards was on a prospective basis with no retroactive restatement of prior periods and had
no material impact on the consolidated financial statements. As at December 31, 2007, the Companys accumulated other comprehensive income balance was $5,820.
F-27
Adherex Technologies Inc.
(a development stage company)
Notes to the Consolidated Financial Statements
(continued)
U.S. dollars and shares in thousands, except per share information
Future accounting pronouncements
The CICA issued the following new recommendations which apply to fiscal years beginning on or after October 1, 2007. The Company expects these new standards relating to presentation and disclosure will have no
impact on the financial results of the Company:
Financial Instruments Disclosures, Section 3862, describes the required disclosures related to
the significance of financial instruments on the entitys financial position and performance and the nature and extent of risks arising from financial instruments to which the entity is exposed and how the entity manages those risks. This
section complements the principles of recognition, measurement and presentation of financial instruments of Section 3855, Financial Instruments Recognition and Measurement.
Financial Instruments Presentation, Section 3863, establishes standards for presentation of financial instruments and non-financial derivatives. It complements the standards of Section 3861, Financial
Instruments Disclosure and presentation.
Capital Disclosures, Section 1535, establishes the standards for disclosing information about the
entitys capital and how it is managed to enable users of financial statements to evaluate the entitys objectives, policies and procedures for managing capital.
General Standards on Financial Presentation, Section 1400, has been amended to assess and disclose an entitys ability to continue as a going concern. The change is effective for interim and annual financial
statements beginning on or after January 1, 2008.
Goodwill and Intangible Assets, Section 3064, which will replace Section 3062, Goodwill
and Intangible Assets, establishes revised standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The new standard also provides guidance for the treatment of start-up costs and requires that the
costs be expensed as incurred. The new standard applies to annual and interim financial statements relating to fiscal years beginning on or after October 31, 2008. Management is currently assessing the impact of these new standards on the
Companys consolidated financial statements.
2.
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Acquired intellectual property rights
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Under U.S. GAAP, the cost of
acquired technology is charged to expense as in-process research and development (IPRD) when acquired if the feasibility of such technology has not been established and no future alternative use exists. Canadian GAAP requires the
capitalization and amortization of the costs of acquired technology. This difference decreases the net loss from operations under Canadian GAAP in the year the IPRD is acquired and reduces the net loss under Canadian GAAP in subsequent periods
because there is no amortization expense.
Under Canadian GAAP, a future tax liability is also recorded upon acquisition of the technology to reflect the
tax effect of the difference between the carrying amount of the technology in the financial statements and the tax basis of these assets, which is nil. As the intellectual property is amortized, the future tax liability is also reduced to reflect
the change in this temporary difference between the tax and accounting values of the assets. Under U.S. GAAP, because the technology is expensed immediately as IPRD, there is no difference between the tax basis and the financial statement carrying
value of the assets and therefore no future tax liability exists.
On November 20, 2002 Adherex acquired certain intellectual property through the
acquisition of Oxiquant, a holding company with no active business. The intellectual property was valued at CAD$31,162 reflecting net liabilities assumed of CAD$401 and provision for future income tax liability of CAD$11,390, resulting in a total
consideration of CAD$19,371. The assets consisted primarily of three product candidates including; mesna, N-Acetylcysteine (NAC) and Sodium Thiosulfate (STS). The acquired intellectual property was deemed to have a ten year
useful life, amortized on a straight-line basis.
At December 31, 2005, the Company determined the carrying value of the intellectual property
relating to mesna, which had a book value of $3,539, and a related future income tax benefit of $1,294, was fully impaired and written off based on the Companys lack of any further developmental plans. This decision was based on the addition
of eniluracil to the Companys product portfolio, along with the financial resources additionally devoted to the development of
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Adherex Technologies Inc.
(a development stage company)
Notes to the Consolidated Financial Statements
(continued)
U.S. dollars and shares in thousands, except per share information
ADH-1. The loss on impairment is calculated as the amount by which the carrying amount of the asset exceeds its discounted cash flows.
At December 31, 2006, the Company determined the carrying value of the intellectual property relating to NAC, which had a book value of $2,021, and a related future
income tax benefit of $739, was fully impaired and written off because the Company has no plans for further development of NAC and will allocate its resources to ADH-1, eniluracil and STS. The loss on impairment is calculated as the amount by which
the carrying amount of the asset exceeds its undiscounted cash flows.
On March 1, 2007, the Company purchased all of GSKs remaining options to
buy back eniluracil under our development and license agreement for a cash fee of $1,000. Under U.S. GAAP, the cost of the license fee paid to GSK was charged to expense as the feasibility of such technology had not been established and no future
alternative use existed. Canadian GAAP requires the capitalization and amortization of the costs of such license fees. The license fee is being amortized over the estimated life of seven years on a straight-line basis.
During the year ended December 31, 2007, the Company reduced the future tax liability by $660 which was the amortization expense for the intellectual property. In
addition, at December 31, 2007, the Company reduced the future tax liability by $505 to adjust for lower tax rates projected over the remaining estimated life of the intellectual property.
3.
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Stock-based compensation
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Canadian GAAP required the fair value of
employee and director stock options to be expensed in the statement of operations commencing for fiscal years beginning after January 1, 2004, under CICA Section 3870 Stock-Based Compensation and Other Stock-Based Payments
(
CICA
3870). For the fiscal year ended December 31, 2006, the Company adopted FASB Statement No. 123 (Revised 2004), Accounting for Stock-Based Compensation which requires companies to record the fair value of employee
and director stock options as expense in the statement of operations. As a result, there are no differences between Canadian and U.S. GAAP for the fiscal year ended December 31, 2007 or December 31, 2006.
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