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| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| Neurochem - Common Shares (MM) | NASDAQ:NRMX | NASDAQ | Common Stock |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 2.00 | 0 | 01:00:00 |
| SIGNATURES: | ||||||||
| NEUROCHEM INC. | ||||
| March 14, 2008 | ||||
| By: | /s/ David Skinner | |||
| David Skinner, Vice-President | ||||
| General Counsel and Corporate Secretary | ||||
1
2
3
| Disease indication | Product candidate | Stage of development | ||
|
AA amyloidosis
|
eprodisate (KIACTA TM ) | Clinical development | ||
|
|
||||
|
Type II Diabetes as well as
certain features of metabolic
syndrome
|
NC-503 | Phase II clinical trial | ||
|
|
||||
|
Alzheimer’s Disease
|
prodrug | Pre-clinical development |
4
5
6
| Years ended December 31 | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| (audited) | (audited) | (audited) | ||||||||||
| $ | $ | $ | ||||||||||
|
Revenues:
|
||||||||||||
|
Collaboration agreement
|
1,119 | 2,106 | 2,793 | |||||||||
|
Reimbursable costs
|
396 | 712 | 872 | |||||||||
|
|
1,515 | 2,818 | 3,665 | |||||||||
|
|
||||||||||||
|
Expenses:
|
||||||||||||
|
Research and development (R&D)
|
55,732 | 51,688 | 41,676 | |||||||||
|
Research tax credits and grants
|
(2,161 | ) | (1,899 | ) | (3,626 | ) | ||||||
|
Other R&D charges
|
— | 1,127 | — | |||||||||
|
|
53,571 | 50,916 | 38,050 | |||||||||
|
|
||||||||||||
|
General and administrative
|
10,581 | 11,522 | 18,333 | |||||||||
|
Arbitral award
|
— | 1,835 | — | |||||||||
|
Reimbursable costs
|
396 | 712 | 872 | |||||||||
|
Stock-based compensation
|
4,275 | 3,569 | 3,958 | |||||||||
|
Depreciation, amortization and
patent cost write-off
|
1,698 | 1,556 | 2,632 | |||||||||
|
|
70,521 | 70,110 | 63,845 | |||||||||
|
Loss before undernoted items
|
(69,006 | ) | (67,292 | ) | (60,180 | ) | ||||||
|
|
||||||||||||
|
Interest income
|
3,341 | 2,077 | 1,718 | |||||||||
|
Interest and bank charges
|
(202 | ) | (133 | ) | (381 | ) | ||||||
|
Accretion expense
|
(15,751 | ) | (550 | ) | — | |||||||
|
Change in fair value embedded
derivatives
|
(870 | ) | — | — | ||||||||
|
Change in fair value of third-party
asset-backed commercial paper
|
(1,184 | ) | — | — | ||||||||
|
Foreign exchange gain (loss)
|
1,130 | (280 | ) | 154 | ||||||||
|
Other income
|
1,274 | 1,348 | 772 | |||||||||
|
Share of loss in a company subject
to significant influence
|
(327 | ) | (2,440 | ) | (2,578 | ) | ||||||
|
Non-controlling interest
|
109 | 801 | 768 | |||||||||
|
|
(12,480 | ) | 823 | 453 | ||||||||
|
Net loss
|
(81,486 | ) | (66,469 | ) | (59,727 | ) | ||||||
|
Net loss per share: Basic and diluted
|
(1.85 | ) | (1.72 | ) | (1.70 | ) | ||||||
7
| December 31, | December 31, | December 31, | ||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| (audited) | (audited) | (audited) | ||||||||||
| $ | $ | $ | ||||||||||
|
Total assets
|
78,431 | 71,402 | 83,150 | |||||||||
|
Total long-term financial liabilities
|
36,700 | 34,285 | 178 | |||||||||
8
9
10
11
12
| Net loss per share | ||||||||||||
| Quarter | Revenue | Net loss | Basic and diluted | |||||||||
| $ | $ | $ | ||||||||||
|
Year ended December 31, 2007
|
||||||||||||
|
Fourth
|
270 | (16,097 | ) | (0.33 | ) | |||||||
|
Third
|
301 | (13,889 | ) | (0.29 | ) | |||||||
|
Second
|
443 | (30,484 | ) | (0.75 | ) | |||||||
|
First
|
501 | (21,016 | ) | (0.54 | ) | |||||||
|
|
||||||||||||
|
Year ended December 31, 2006
|
||||||||||||
|
Fourth
|
675 | (17,011 | ) | (0.44 | ) | |||||||
|
Third
|
694 | (16,509 | ) | (0.43 | ) | |||||||
|
Second
|
724 | (18,113 | ) | (0.47 | ) | |||||||
|
First
|
725 | (14,836 | ) | (0.39 | ) | |||||||
13
| Year ended | Year ended | Year ended | ||||||||||
| December 31, | December 31, | December 31, | ||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| $ | $ | $ | ||||||||||
|
Management services expense
|
2,343 | 2,164 | 1,981 | |||||||||
|
Sub-lease revenue
|
858 | 846 | 579 | |||||||||
14
15
16
17
| Payments Due by Period | ||||||||||||||||||||
| (in thousands of US dollars) | ||||||||||||||||||||
| Contractual | Less than 1 | More than 5 | ||||||||||||||||||
| obligations | Total | year | 1-3 years | 3-5 years | years | |||||||||||||||
|
Operating leases
|
42,724 | 2,916 | 5,966 | 6,298 | 27,544 | |||||||||||||||
|
|
||||||||||||||||||||
|
Clinical trial
agreements
|
3,732 | 3,716 | 16 | Nil | Nil | |||||||||||||||
|
|
||||||||||||||||||||
|
Management fees
|
2,317 | 2,317 | Nil | Nil | Nil | |||||||||||||||
|
Convertible
notes (1)
|
46,585 | Nil | Nil | 46,585 | Nil | |||||||||||||||
|
|
||||||||||||||||||||
|
Interest payments
on convertible
notes (1)
|
11,180 | 2,795 | 5,590 | 2,795 | Nil | |||||||||||||||
| (1) | Assumes redemption of convertible notes in November 2011. | |
| Refer to note 10 to the Consolidated Financial Statements for terms and conditions. |
18
19
20
21
22
23
24
25
26
|
[signed]
|
[signed] | |
|
|
||
|
Francesco Bellini, O.C.
|
Mariano Rodriguez, C.A., C.P.A. | |
|
Chairman, President and
|
Vice President, Finance and | |
|
Chief Executive Officer
|
Chief Financial Officer |
27
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Neurochem Inc.
We have audited the accompanying consolidated balance sheets of Neurochem Inc. (“the Company”) and
subsidiaries as of December 31, 2007 and 2006 and the related consolidated statements of
operations, comprehensive loss, shareholders’ equity and cash flows for each of the years in the
three-year period ended December 31, 2007, and for the period from inception (June 17, 1993) to
December 31, 2007. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. With
respect to the consolidated financial statements for the year ended December 31, 2007, we also
conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about 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. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company and subsidiaries as of December 31, 2007
and 2006 and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2007 and for the period from inception (June 17, 1993) to
December 31, 2007, in conformity with Canadian generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Company’s internal control over financial reporting as of December 31,
2007, based on the criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
February 13, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
[signed] KPMG LLP
Chartered Accountants
Montreal, Canada
February 13, 2008, except as to Note 21, which is as of February 20, 2008
Table of Contents
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Neurochem Inc.
We have audited Neurochem Inc.’s (“the Company”) internal control over financial reporting as of
December 31, 2007, based on the criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting
as presented in the section entitled “Internal Control over Financial Reporting” included in the
accompanying Management’s Discussion and Analysis. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2007, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
Table of Contents
We also have conducted our audits on the consolidated financial statements in accordance with
Canadian generally accepted auditing standards. With respect to the consolidated financial
statements for the year ended December 31, 2007, we also have conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Our report
dated February 13, 2008, except as to Note 21, which is as of February 20, 2008, expressed an
unqualified opinion on those consolidated financial statements.
[signed] KPMG LLP
Chartered Accountants
Montreal, Canada
February 13, 2008
Table of Contents
Consolidated Balance Sheets
December 31, 2007 and 2006
(in thousands of US dollars, unless otherwise noted)
(in accordance with Canadian GAAP)
December 31,
December 31,
December 31,
2007
2007
2006
(CDN$-
(US$)
(US$-
note 2 (b))
note 2 (a))
Assets
Current assets:
Cash and cash equivalents
$
10,833
$
10,963
$
12,158
Marketable securities
47,141
47,709
36,600
Restricted cash (note 6)
—
—
6,000
Sales taxes and other receivables
766
775
1,043
Research tax credits receivable
1,785
1,807
928
Prepaid expenses
1,335
1,351
2,489
61,860
62,605
59,218
Restricted cash (note 6)
5,399
5,464
549
Deferred financing fees (notes 4 (b) and 10)
—
—
1,535
Long-term prepaid expenses
361
365
789
Long-term investment (note 4 (a))
1
1
319
Property and equipment (note 7)
3,794
3,840
3,912
Patents (note 8)
6,083
6,156
5,080
$
77,498
$
78,431
$
71,402
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable
$
3,632
$
3,676
$
3,753
Accrued liabilities
8,988
9,096
9,834
Deferred revenue (note 5)
7,044
7,129
7,568
Deferred gain on sale of property (note 7)
1,323
1,339
1,222
20,987
21,240
22,377
Deferred gain on sale of property (note 7)
15,713
15,902
15,732
Long-term accrued liabilities (note 9)
1,264
1,279
635
Convertible notes (note 10)
35,000
35,421
33,650
72,964
73,842
72,394
Non-controlling interest
672
680
725
Shareholders’ equity:
Share capital (note 11)
270,017
273,269
203,751
Equity portion of convertible notes (note 10)
9,724
9,841
8,620
Additional paid-in capital
15,214
15,397
11,396
Warrants (note 10)
16,656
16,857
—
311,611
315,364
223,767
Deficit
(314,467
)
(318,254
)
(234,240
)
Accumulated other comprehensive income
6,718
6,799
8,756
(307,749
)
(311,455
)
(225,484
)
3,862
3,909
(1,717
)
Commitments and contingencies (note 14)
Subsequent events (note 21)
$
77,498
$
78,431
$
71,402
See accompanying notes to consolidated financial statements.
On behalf of the Board of Directors by:
[signed]
[signed]
Graeme K. Rutledge, Director
Colin Bier, Director
Table of Contents
Consolidated Statements of Operations
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
(in accordance with Canadian GAAP)
Cumulative
Year ended
Year ended
Year ended
since
December 31,
December 31,
December 31,
inception of
2007
2007
2006
2005
operations
(CDN$-
(US$)
(US$-
(US$-
(US$-
note 2 (b))
note 2(a))
note 2 (a))
note 2 (a))
Revenues:
Collaboration agreement
(note 5)
$
1,106
$
1,119
$
2,106
$
2,793
$
6,120
Reimbursable costs
391
396
712
872
2,131
Research contracts
—
—
—
—
6,038
License fees
—
—
—
—
733
1,497
1,515
2,818
3,665
15,022
Expenses:
Research and development
55,069
55,732
51,688
41,676
224,622
Research tax credits and grants
(2,135
)
(2,161
)
(1,899
)
(3,626
)
(21,253
)
Other research and development
charges
—
—
1,127
—
1,127
52,934
53,571
50,916
38,050
204,496
General and administrative
10,455
10,581
11,522
18,333
74,584
Arbitral award (note 12)
—
—
1,835
—
1,835
Reimbursable costs
391
396
712
872
2,131
Stock-based compensation
4,224
4,275
3,569
3,958
14,904
Special charges
—
—
—
—
1,288
Depreciation of property and
equipment
1,022
1,034
1,129
1,674
7,646
Amortization and patent cost
write-off
656
664
427
958
2,738
69,682
70,521
70,110
63,845
309,622
Loss before undernoted items
(68,185
)
(69,006
)
(67,292
)
(60,180
)
(294,600
)
Interest income
3,301
3,341
2,077
1,718
11,589
Interest and bank charges
(200
)
(202
)
(133
)
(381
)
(1,543
)
Accretion expense (note 10)
(15,564
)
(15,751
)
(550
)
—
(16,301
)
Change in fair value of embedded
derivatives
(860
)
(870
)
—
—
(870
)
Change in fair value of third party
asset-backed commercial
paper (note 6)
(1,170
)
(1,184
)
—
—
(1,184
)
Gain on technology transfer
—
—
—
—
2,306
Foreign exchange gain (loss)
1,117
1,130
(280
)
154
866
Other income
1,259
1,274
1,348
772
3,719
Share of loss in a company
subject to significant
influence (note 4 (a))
(323
)
(327
)
(2,440
)
(2,578
)
(5,346
)
Non-controlling interest (note 4 (a))
108
109
801
768
1,678
(12,332
)
(12,480
)
823
453
(5,086
)
Net loss before income taxes
(80,517
)
(81,486
)
(66,469
)
(59,727
)
(299,686
)
Income taxes:
Quebec credit for losses
—
—
—
—
464
Net loss
$
(80,517
)
$
(81,486
)
$
(66,469
)
$
(59,727
)
$
(299,222
)
Net loss per share (note 17):
Basic and diluted
$
(1.83
)
$
(1.85
)
$
(1.72
)
$
(1.70
)
See accompanying notes to consolidated financial statements.
Table of Contents
Consolidated Statements of Comprehensive Loss
Years ended December 31, 2007, 2006 and 2005
(in thousands of US dollars)
(in accordance with Canadian GAAP)
Year ended December 31,
2007
2006
2005
Net loss
$
(81,486
)
$
(66,469
)
$
(59,727
)
Foreign exchange adjustment
on change in functional currency (note 2 (a))
1,957
(1,397
)
(1,219
)
Comprehensive loss
$
(79,529
)
$
(67,866
)
$
(60,946
)
See accompanying notes to consolidated financial statements.
Table of Contents
Consolidated Statements of Shareholders’ Equity
Years ended December 31, 2007, 2006 and 2005
(in thousands of US dollars, unless otherwise noted)
(in accordance with Canadian GAAP)
Equity
Accumulated
portion of
Additional
other
Share capital
convertible
paid-in
comprehensive
Number
Dollars
notes
capital
Warrants
Deficit
income
Total
Balance, December 31,
2004
30,320,419
$
125,212
$
—
$
4,434
$
—
$
(101,438
)
$
6,140
$
34,348
Adjustment to reflect
change in accounting
policy for variable
interest entities
(note 4 (a))
—
—
—
—
—
(2,079
)
—
(2,079
)
Issued for cash from
public offering
(note 11 (b))
4,000,000
61,200
—
—
—
—
—
61,200
Share issue costs
(note 11 (b))
—
—
—
—
—
(4,107
)
—
(4,107
)
Exercise of warrants
(note 11 (b))
2,800,000
7,189
—
—
—
—
—
7,189
Exercise of stock options:
For cash
300,660
1,111
—
—
—
—
—
1,111
Ascribed value from
additional paid-in capital
—
428
—
(428
)
—
—
—
—
Stock-based compensation
(notes 11(d) and 13)
—
—
—
3,958
—
—
—
3,958
Change in foreign currency
translation adjustment
(note 2 (a))
—
—
—
—
—
—
1,219
1,219
Net loss
—
—
—
—
—
(59,727
)
—
(59,727
)
Balance, December 31,
2005
37,421,079
195,140
—
7,964
—
(167,351
)
7,359
43,112
Exercise of warrants
(note 11 (b))
1,200,000
8,095
—
—
—
—
—
8,095
Equity portion of
November 2006
convertible notes
(note 10 (a))
—
—
8,620
—
—
—
—
8,620
Share issue costs
(note 10 (a))
—
—
—
—
—
(420
)
—
(420
)
Exercise of stock options:
For cash
100,943
379
—
—
—
—
—
379
Ascribed value from
additional paid-in capital
—
137
—
(137
)
—
—
—
—
Stock-based compensation
(note 13)
—
—
—
3,569
—
—
—
3,569
Change in foreign currency
translation adjustment
(note 2 (a))
—
—
—
—
—
—
1,397
1,397
Net loss
—
—
—
—
—
(66,469
)
—
(66,469
)
Balance, December 31,
2006
38,722,022
203,751
8,620
11,396
—
(234,240
)
8,756
(1,717
)
Table of Contents
Consolidated Statements of Shareholders’ Equity, Continued
Years ended December 31, 2007, 2006 and 2005
(in thousands of US dollars, unless otherwise noted)
(in accordance with Canadian GAAP)
Equity
Accumulated
portion of
Additional
other
Share capital
convertible
paid-in
comprehensive
Number
Dollars
notes
capital
Warrants
Deficit
income
Total
Balance carried forward,
December 31,
2006
38,722,022
$
203,751
$
8,620
$
11,396
$
—
$
(234,240
)
$
8,756
$
(1,717
)
Adjustment to reflect change
in
accounting policy for
financial instruments
(note 4 (b))
—
—
—
—
—
(155
)
—
(155
)
Equity portion of May 2007
convertible notes
(note 10 (b))
—
—
11,152
—
—
—
—
11,152
Warrants issued in connection
with the May 2007
convertible notes
issuance (note 10 (b))
—
—
—
—
16,857
—
—
16,857
Share issue costs (note 10 (b))
—
—
—
—
—
(2,373
)
—
(2,373
)
Exercise of stock options:
For cash
60,803
371
—
—
—
—
—
371
Ascribed value from
additional paid-in capital
—
224
—
(224
)
—
—
—
—
Issued on conversion of
6% senior convertible
notes due in 2027
(note 10 (b))
5,619,321
30,513
(9,688
)
—
—
—
—
20,825
Issued on conversion of 5%
junior convertible notes
due in 2012 (note 10 (b))
4,444,449
38,410
(243
)
—
—
—
—
38,167
Stock-based compensation
(note 13)
—
—
—
4,225
—
—
—
4,225
Change in foreign currency
translation adjustment
(note 2 (a))
—
—
—
—
—
—
(1,957
)
(1,957
)
Net loss
—
—
—
—
—
(81,486
)
—
(81,486
)
Balance, December 31,
2007
48,846,595
$
273,269
$
9,841
$
15,397
$
16,857
$
(318,254
)
$
6,799
$
3,909
See accompanying notes to consolidated financial statements.
Table of Contents
Consolidated Statements of Cash Flows
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, unless otherwise noted)
(in accordance with Canadian GAAP)
Cumulative
Year ended
Year ended
Year ended
since
December 31,
December 31,
December 31,
inception of
2007
2007
2006
2005
operations
(CDN$-
(US$)
(US$-
(US$-
(US$-
note 2 (b))
note 2 (a))
note 2 (a))
note 2 (a))
Cash flows from operating activities:
Net loss
$
(80,517
)
$
(81,486
)
$
(66,469
)
$
(59,727
)
$
(299,222
)
Adjustments for:
Depreciation, amortization
and patent cost write-off
1,678
1,698
1,556
2,632
10,384
Unrealized foreign exchange
(gain) loss
(3,113
)
(3,151
)
1,384
1,450
1,299
Stock-based compensation
4,224
4,275
3,569
3,958
14,904
Share of loss in a company
subject to significant
influence
323
327
2,440
2,578
5,346
Non-controlling interest
(108
)
(109
)
(801
)
(768
)
(1,678
)
Accretion expense
15,564
15,751
550
—
16,301
Change in fair value of
embedded derivatives
860
870
—
—
870
Change in fair value of third
party asset-backed
commercial paper
1,170
1,184
—
—
1,184
Amortization of gain on
sale-leaseback
(1,282
)
(1,297
)
(1,256
)
(144
)
(2,698
)
Amortization of deferred
financing fees
—
—
47
—
47
Write-off of leasehold
improvements and other
property and equipment
—
—
—
—
914
Provision for lease exit
obligations
—
—
—
—
374
Gain on technology transfer
—
—
—
—
(2,306
)
Shares issued for services
—
—
—
—
30
Changes in operating assets
and liabilities:
Restricted cash
—
—
—
(6,519
)
(6,519
)
Amount receivable under
collaboration agreement
—
—
—
11,098
—
Sales taxes and other
receivables
343
347
(430
)
45
(526
)
Research tax credits
receivable
(552
)
(558
)
1,166
(871
)
(1,253
)
Prepaid expenses
1,358
1,374
238
470
(912
)
Long-term prepaid expenses
480
486
384
5
3
Deferred revenue
(1,106
)
(1,119
)
(2,106
)
(2,793
)
5,193
Accounts payable and
accrued liabilities
(5,372
)
(5,437
)
3,291
2,157
7,009
(66,050
)
(66,845
)
(56,437
)
(46,429
)
(251,256
)
Table of Contents
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December 31, 2007
(in thousands of US dollars, unless otherwise noted)
(in accordance with Canadian GAAP)
Cumulative
Year ended
Year ended
Year ended
since
December 31,
December 31,
December 31,
inception of
2007
2007
2006
2005
operations
(CDN$-
(US$)
(US$-
(US$-
(US$-
note 2 (b))
note 2 (a))
note 2 (a))
note 2 (a))
Cash flows from financing activities:
Proceeds from issue of share
capital
367
371
8,641
69,829
203,616
Share issue costs
—
—
(418
)
(4,090
)
(12,758
)
Proceeds from convertible notes
79,048
80,000
41,930
—
121,930
Financing fees
(5,653)
(5,721)
(1,624
)
—
(7,345
)
Proceeds from sale-leaseback
—
—
—
26,411
27,807
Repayment of obligations under
capital lease
—
—
—
(343
)
(2,214
)
Proceeds from long-term debt
—
—
—
—
8,052
Repayment of long-term debt
—
—
—
(7,773
)
(8,052
)
73,762
74,650
48,529
84,034
331,036
Cash flows from investing activities:
Additions to property and
equipment
(568
)
(575
)
(801
)
(1,126
)
(18,703
)
Additions to patents
(1,166
)
(1,180
)
(1,716
)
(939
)
(7,931
)
Additions to long-term investment
—
—
(1,464
)
—
(1,855
)
Proceeds from (purchase of)
marketable securities
(10,005
)
(10,126
)
18,565
(34,453
)
(41,141
)
Proceeds from disposal of
property and equipment
—
—
—
56
76
(11,739
)
(11,881
)
14,584
(36,462
)
(69,554
)
Net (decrease) increase in cash and
cash equivalents
(4,027
)
(4,076
)
6,676
1,143
10,226
Cash and cash equivalents, beginning
of period
12,013
12,158
6,332
5,988
—
Effect of foreign exchange
on cash and cash equivalents
2,847
2,881
(850
)
(799
)
737
Cash and cash equivalents,
end of period
$
10,833
$
10,963
$
12,158
$
6,332
$
10,963
Supplemental disclosures to cash flow statements (note 18)
See accompanying notes to consolidated financial statements.
Table of Contents
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005 and period from inception (June 17, 1993) to December
31, 2007
(in thousands of US dollars, except per share data, unless otherwise noted)
1. Organization and business activities:
Neurochem Inc. (the Company or Neurochem) is a global health company focused on the research,
development and commercialization of products to provide innovative health solutions to address
critical unmet medical needs.
Since inception, the business activities of the Company have been devoted principally to the
development of the Company’s core technology platform, amyloid inhibitors, which focus on
chemical compounds that could have the potential to inhibit the formation, deposition and
toxicity of amyloid fibrils which are implicated or believed to be the underlying causes of
certain diseases. The diseases currently targeted by the Company include Amyloid A (AA)
amyloidosis, Alzheimer’s disease and Type II Diabetes as well as certain features of metabolic
syndrome.
The status of the Company’s principal product candidates is as follows:
Disease indication
Product candidate
Stage of development
AA amyloidosis
eprodisate (KIACTA
TM
)
Clinical development
Type II Diabetes as well as
features of metabolic syndrome
NC-503
Phase II clinical trial
Alzheimer’s Disease
prodrug
Preclinical development
Neurochem is considered to be in the development stage, with clinical trials for two of its
programs. Since inception, substantially all of the Company’s research and development
expenditures, capital expenditures, including costs incurred to secure patents, and all
revenues from milestone payments, collaboration agreements and research contracts, relate to
the Company’s core technology platform.
In the fiscal period ended June 30, 2003, the Company licensed out intellectual property rights
on preclinical-stage technology in its Type II Diabetes program to Innodia Inc. (Innodia).
Innodia is a private development stage company engaged in developing novel drugs for the
treatment of Type II Diabetes and underlying diseases.
The Company is subject to a number of risks, including the successful development and marketing
of its technologies and product candidates. In order to achieve its business plan, the Company
anticipates the need to raise additional capital and/or achieve sales and other revenue
generating activities. As of December 31, 2007, management believes that funds from operations,
as well as existing financial resources will be sufficient to meet the Company’s requirements
for the next year.
Table of Contents
2. Functional and reporting currency:
(a)
Change in functional and reporting currency:
Effective July 1, 2007, the Company adopted the US dollar as its functional and reporting
currency, as a significant portion of its revenue, expenses, assets, liabilities and
financing are denominated in US dollars. Prior to that date, the Company’s operations were
measured in Canadian dollars and the consolidated financial statements were expressed in
Canadian dollars.
The Company followed the recommendations of the Emerging Issues Committee (EIC) of the
Canadian Institute of Chartered Accountants (CICA), set out in EIC-130, “Translation method
when the reporting currency differs from the measurement currency or there is a change in
the reporting currency”. In accordance with EIC-130, assets and liabilities as at June 30,
2007 were translated into US dollars using the exchange rate in effect on that date;
revenues, expenses and cash flows were translated at the average rate in effect during the
six-month period ended June 30, 2007 and equity transactions were translated at historical
rates. For comparative purposes, historical financial statements have been restated in US
dollars using the current rate method. Under this method, assets and liabilities are
translated at the closing rate in effect at the end of these periods, revenues, expenses
and cash flows are translated at the average rates in effect for these periods and equity
transactions are translated at historical rates. Any exchange differences resulting from
the translation are included in accumulated other comprehensive income presented in
shareholders’ equity.
(b)
Translation of convenience:
The Company’s functional currency is the US dollar. The Company also presents the
consolidated financial statements as at and for the period ended December 31, 2007, in
Canadian dollars, using the convenience translation method whereby all US dollar amounts
are converted into Canadian dollars at the noon exchange rate quoted by the Federal Reserve
Bank of New York as at December 31, 2007, which was 0.9881 Canadian dollar per US dollar.
The supplementary information in Canadian dollars is presented only for the convenience of
some readers and thus has limited usefulness. This translation should not be viewed as a
representation that such US dollar amounts actually represent such Canadian dollar amounts
or could be or would have been converted into Canadian dollars at the rate indicated.
3. Significant accounting policies:
The consolidated financial statements have been prepared in accordance with Canadian generally
accepted accounting principles (GAAP).
(a)
Principles of consolidation:
The consolidated financial statements include the accounts of Neurochem Inc. and its
subsidiaries. All significant intercompany balances and transactions have been eliminated
on consolidation.
(b)
Cash and cash equivalents:
The Company considers all investments with maturities of three months or less at inception,
that are highly liquid and readily convertible into cash, to be cash equivalents.
Table of Contents
3. Significant accounting policies (continued):
(c)
Marketable securities:
Marketable securities are investments with maturities greater than three months and less
than a year, and consist principally of commercial paper. Interest is recognized on an
effective yield basis. Marketable securities are classified as “Financial Assets Available
for Sale” and are marked-to-market with all unrealized gains and losses recognized in
comprehensive loss. Realized gains and losses on sale and losses on impairment of these
securities are recognized in net loss.
(d)
Property and equipment:
Property and equipment are stated at cost. Depreciation is provided at the following
annual rates:
Asset
Basis
Rate/period
Building (to November 2005)
Straight-line
20 years
Research equipment
Declining balance
20%
Office equipment
Declining balance
20%
Computer hardware
Declining balance
30%
Computer software
Straight-line
1-2 years
(e)
Patents:
The capitalized amount with respect to patents relates to direct costs incurred in
connection with securing patents. Patents are stated at cost and are amortized using the
straight-line method over the remaining life of the patent.
(f)
Impairment and disposal of long-lived assets:
Long-lived assets, including property and equipment and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated undiscounted future cash flows, an
impairment charge is recognized for the difference between the carrying amount and the fair
value. Quoted market values are used whenever available to estimate fair value. When
quoted market values are unavailable, the fair value of the long-lived asset is generally
based on estimates of discounted expected net cash flows. Assets to be disposed of would
be separately presented in the balance sheet and reported at the lower of the carrying
amount or the fair value less selling costs, and would no longer be depreciated. The
assets and liabilities of a disposed group classified as held-for-sale would be presented
separately in the appropriate asset and liability sections of the balance sheet.
Table of Contents
3. Significant accounting policies (continued):
(g)
Revenue recognition:
Revenue from collaboration agreements that includes multiple elements is considered to be a
revenue arrangement with multiple deliverables. Under this type of arrangement, the
identification of separate units of accounting is required and revenue is allocated among
the separate units based on their relative fair values. Payments received under the
collaboration agreement may include upfront payments, regulatory and sales-based milestone
payments for specific achievements, as well as distribution fees. Upfront and regulatory
milestone payments, which require the Company’s ongoing involvement, are deferred and
amortized into income on a straight-line basis over the estimated period of service.
Sales-based milestone payments, for which the Company has no future involvement or
obligations to perform related to that specified element of the arrangement, are recognized
into income upon the achievement of the specified milestones. Distribution fees are
recognized when the service has been performed, amount is determinable and collection is
reasonably assured.
License fees are recorded when conditions and events under the license agreement have been
met or occurred, and collectibility is reasonably assured.
Reimbursable costs incurred in connection with the Company’s collaboration agreement with
Centocor, Inc. are included in total revenues and expenses.
Interest income is recognized as earned.
(h)
Research and development:
Research expenditures are expensed as incurred and include a reasonable allocation of
overhead expenses. Development expenditures are deferred when they meet the criteria for
capitalization in accordance with Canadian GAAP, and the future benefits could be regarded
as being reasonably certain. At December 31, 2007 and 2006, no development costs were
deferred.
(i)
Government assistance:
Government assistance, consisting of grants and research tax credits, is recorded as a
reduction of the related expense or the cost of the asset acquired. Grants are recorded
when there is reasonable assurance that the Company has complied with the terms and
conditions of the approved grant program. Research tax credits are recorded when there is
reasonable assurance of their recovery.
(j)
Foreign exchange:
Monetary assets and liabilities denominated in foreign currencies are translated at
year-end exchange rates. Non-monetary assets and liabilities denominated in foreign
currencies are translated at exchange rates in effect at the transaction date. Income and
expenses denominated in foreign currencies are translated at exchange rates in effect at
the transaction date. Translation gains and losses are included in income.
(k)
Income taxes:
Income taxes are provided for using the liability method. Under this method, differences
between the financial reporting bases and the income tax bases of the Company’s assets and
liabilities are recorded using the substantively enacted tax rates anticipated to be in
effect when the tax differences are expected to reverse. A valuation allowance is
recorded against any future tax asset if it is more likely than not that the asset will not
be realized.
Table of Contents
3. Significant accounting policies (continued):
(l)
Costs associated with lease exit activities:
Costs associated with lease obligations for leased premises that are no longer being used
by the Company are recognized and measured at fair value as of the cease-use date. The
fair value of the liability at the cease-use date is determined based on the remaining
lease rentals, reduced by estimated sublease rentals that could reasonably be obtained for
the property, measured using the credit-adjusted risk-free rate.
(m)
Earnings per share:
Basic earnings per share are determined using the weighted average number of common shares
outstanding during the period. Diluted earnings per share are computed in a manner
consistent with basic earnings per share, except that the weighted average shares
outstanding are increased to include additional shares from the assumed exercise of options
and warrants, if dilutive. The number of additional shares is calculated by assuming that
outstanding options and warrants were exercised, and that the proceeds from such exercises
were used to acquire common shares at the average market price during the reporting period.
The dilutive effect of the convertible notes is reflected in diluted earnings per share by
application of the “if-converted” method, if dilutive. Under the if-converted method,
convertible notes are assumed to have been converted at the beginning of the period (or at
time of issuance, if later) and the resulting common shares are included in the
denomination for purposes of calculating diluted earnings per share.
(n)
Stock-based compensation:
The Company follows the fair value based method to account for options granted to employees
and non-employees, whereby compensation cost is measured at fair value at the date of grant
and is expensed over the award’s vesting period.
(o)
Use of estimates:
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Significant areas requiring the use of management estimates
include estimating the useful lives of long-lived assets, including property and equipment
and patent costs, estimating accruals for clinical trial expenses, estimating the timing of
regulatory approvals for revenue recognition purposes, estimating the fair value of
restricted cash, allocating the proceeds received from issuance of convertible notes
between debt and equity components as well as assessing the recoverability of research tax
credits and future tax assets. The reported amounts and note disclosures reflect the most
probable set of economic conditions and planned course of actions. Actual results could
differ from these estimates.
Table of Contents
4. Changes in accounting policies:
(a)
Variable interest entities:
On January 1, 2005, the Company adopted the recommendations of Accounting Guideline 15,
Consolidation of Variable Interest Entities
(AcG-15), which provides guidance for
determining when an enterprise consolidates the assets, liabilities and results of
operations of entities that are subject to control on a basis other than ownership of
voting interests (a variable interest entity (VIE)). This guideline requires the Company
to identify VIEs in which it has an interest, determine whether it is the primary
beneficiary of such entities and, if so, to consolidate the VIE. A primary beneficiary is
an enterprise that will absorb a majority of the VIE’s expected losses, receive a majority
of its expected residual returns, or both. It was determined that the Company’s investment
in a holding company that owns Innodia Inc.’s shares (Innodia Holding) meets the criteria
for being a VIE and that the Company is the primary beneficiary of Innodia Holding.
Innodia Holding’s only activity is the investment in Innodia Inc., which is accounted for
using the equity method. The implementation of AcG-15 resulted in the consolidation of the
Company’s interest in Innodia Holding starting January 1, 2005. The effect of the
implementation of this accounting guideline was to adjust the net carrying value of the
long-term investment and the deficit by $2,079 at January 1, 2005.
In March 2006, the Company invested an additional amount of $1,464 in Innodia Holding in
connection with a financing by Innodia Inc. As at December 31, 2007, the Company’s indirect
equity investment in Innodia Inc. is approximately 23% of the issued and outstanding
shares. For the year ended December 31, 2007, the Company recorded its share of loss in
Innodia Holding bringing the investment to $1. The Company has since ceased to recognize
its share of Innodia Inc.’s losses since it is not committed to provide further financial
support to this company or otherwise guarantee obligations of this company. The Company
continues to track the losses of Innodia Holding should it return to profitability.
(b)
On January 1, 2007, the Company adopted the following new accounting standards issued
by the CICA:
(i)
Comprehensive income:
Section 1530,
Comprehensive Income
, introduces a new financial statement which shows
the change in equity of an enterprise during a period from transactions and other
events arising from non-owner sources. A new financial statement has been presented in
relation to Section 1530.
Table of Contents
4. Changes in accounting policies (continued):
(b)
(continued):
(ii)
Financial instruments — recognition and measurement:
Section 3855,
Financial Instruments – Recognition and Measurement
and Section 3861,
Financial Instruments – Disclosure and Presentation
, establish standards for
recognition and presentation of financial instruments on the balance sheet and the
measurement of financial instruments according to prescribed classifications. The
Company is required to designate its financial instruments into one of five categories,
which determine the manner of evaluation of each instrument and the presentation of
related gains and losses. Depending on the financial instruments’ classifications,
changes in subsequent measurements are recognized in net income or comprehensive
income.
The Company has designated its financial instruments as follows:
–
Cash equivalents, marketable securities and restricted cash are
classified as “Financial Assets Available for Sale”. These financial assets are
marked-to-market at each reporting date with all unrealized gains and losses
recognized in comprehensive income. See note 6 for restricted cash.
–
Other receivables are classified as “Loans and Receivables”.
Accounts payable, accrued liabilities and convertible notes are classified as
“Other Financial Liabilities”. After their initial fair value measurement, these
financial instruments are measured at amortized cost using the effective interest
rate method.
The new standards require derivative instruments to be recorded as either assets or
liabilities measured at their fair value each period through earnings unless exempted
from derivative treatment as a normal purchase and sale. Certain derivatives embedded
in other contracts must also be measured at fair value. Embedded derivatives are
required to be separated from the host contract and accounted for as a derivative
financial instrument if the embedded derivative and host contract are not closely
related, and the combined contract is not held for trading or designated at fair value.
The Company chose to review all contracts in place, that were entered into after
January 1, 2003, for any embedded derivatives within these contracts to determine if
any such embedded derivatives needed to be accounted for separately at fair value from
the base contract. The change in accounting policy related to embedded derivatives
resulted in an increase of $155 to the opening deficit at the date of adoption. As of
December 31, 2007, the fair value of the embedded derivative liability was $109 and was
included in “accrued liabilities” on the consolidated balance sheet. During the year
ended December 31, 2007, the increase in fair value of the embedded derivative
liability of $63 was recorded as an expense in the consolidated statement of
operations.
As a result of adopting Section 3855, deferred financing costs of $1,535 as at January
1, 2007, relating to convertible notes have been reclassified from deferred financing
fees to convertible notes on the consolidated balance sheet. These costs are being
amortized using the effective interest method over the life of the related debt.
(iii)
Equity:
Section 3251,
Equity
, describes standards for the presentation of equity and changes in
equity for the reporting period as a result of the application of Section 1530,
Comprehensive Income
. This standard did not have an impact on the Company’s
consolidated financial statements for the year ended December 31, 2007.
Table of Contents
4. Changes in accounting policies (continued):
(b)
(continued):
(iv)
Hedges:
Section 3865,
Hedges
, specifies the criteria under which hedge accounting may be
applied, how hedge accounting should be performed under permitted hedging strategies
and the required disclosures. This standard did not have an impact on the Company’s
consolidated financial statements for the year ended December 31, 2007.
(c)
Future accounting changes:
The following accounting standards were recently issued by the CICA. The Company is
currently evaluating the impact of the adoption of these new standards on its consolidated
financial statements.
Section 1535,
Capital Disclosures
, establishes guidelines for disclosure of both
qualitative and quantitative information that enables users of financial statements to
evaluate the entity’s objectives, policies and processes for managing capital. This new
standard relates to disclosure only and will not impact the financial results of the
Company. This standard is effective January 1, 2008.
Section 3862,
Financial Instruments – Disclosure
, describes the required disclosure for the
assessment of the significance of financial instruments for an entity’s financial position
and performance and of the nature and extent of risks arising from financial instruments to
which the entity is exposed and how the entity manages those risks. Section 3863,
Financial
Instruments – Presentation
, establishes standards for presentation of the financial
instruments and non-financial derivatives. It carries forward the presentation related
requirements of Section 3861,
Financial Instruments – Disclosure and Presentation
. These
new standards relate to disclosure only and will not impact the financial results of the
Company. These standards are effective January 1, 2008.
International Financial Reporting Standards (IFRS)
In 2005, the Accounting Standards Board of Canada (AcSB) announced that accounting
standards in Canada are to converge with IFRS. In May 2007, the CICA published an updated
version of its “Implementation Plan for Incorporating IFRS into Canadian GAAP”. This plan
includes an outline of the key decisions that the CICA needs to make as it implements the
Strategic Plan for publicly accountable enterprises that will converge Canadian generally
accepted accounting standards with IFRS. While IFRS uses a conceptual framework similar to
Canadian GAAP, there are significant differences in accounting policy which must be
addressed. The Company is currently assessing the future impact of these new standards on
its consolidated financial statements. These standards are effective for fiscal years
beginning January 1, 2011.
Table of Contents
5. Collaboration agreement:
In December 2004, the Company concluded a collaboration and distribution agreement with
Centocor, Inc. (Centocor) for eprodisate (KIACTA
TM
), the Company’s most advanced
product candidate designed to treat AA Amyloidosis. Under this agreement, Neurochem granted to
Centocor, a wholly-owned subsidiary of Johnson & Johnson, Inc., worldwide exclusive
distribution rights for eprodisate (KIACTA
TM
), with the exception of Canada,
Switzerland, China, Japan, Taiwan and South Korea for which the distribution rights remain with
Neurochem. The agreement includes up-front, regulatory and sales-based milestone payments
valued up to $54,000, as well as tiered distribution fees which will be based upon annual sales
of eprodisate (KIACTA
TM
) in the applicable territories over the life of the
agreement. Neurochem will be responsible for the product approval activities in the United
States and in Europe, as well as for global manufacturing activities. Centocor will manage the
marketing and sales of eprodisate (KIACTA
TM
) in the applicable territories.
KIACTA
TM
is a trademark of Johnson & Johnson Corporation.
In 2004, the Company recorded a receivable for the upfront payment due from Centocor upon
signing of the agreement in the amount of $12,000, which was received in 2005. One half of the
upfront payment received by the Company is potentially refundable in specified circumstance.
All of the deferred revenue at December 31, 2007 and 2006 relates to amounts received under
this agreement.
The Company recognized $1,119 of revenue under the agreement in 2007 (2006 — $2,106; 2005 -
$2,793), representing the amortization of the non-refundable upfront payment for the period
from signing the agreement, December 21, 2004, over the remaining estimated period through to
the anticipated regulatory approval date of the related investigational product candidate. The
estimated period over which revenue is being recognized is subject to change based on
additional information that the Company may receive periodically in respect of its expected
date of regulatory approvals.
6. Restricted cash:
Restricted cash is composed of short-term investments pledged to a bank as collateral for two
letters of credit; the first in the amount of $6,000 was issued in connection with the
potentially refundable upfront payment received under the collaboration agreement with Centocor
and the second in the amount of CDN$640 was granted in favour of a landlord in relation to the
lease of a building. As at December 31, 2007, restricted cash is composed of third-party
Asset-Backed Commercial Paper (ABCP). These investments were due to mature during the third
quarter of 2007 but, as a result of a disruption in the credit markets, particularly in the
ABCP market, they did not settle on maturity and currently remain outstanding. At the time
these investments were acquired, the ABCP were rated R1-high by Dominion Bond Rating Service,
which is the highest credit rating for this type of investment. The ABCP are currently subject
to a restructuring proposal under a standstill agreement which is expected to result in the
conversion of the ABCP into longer-term financial instruments with maturities corresponding to
the underlying assets. A Pan-Canadian Investors Committee (the Committee) was established to
oversea the orderly restructuring of these instruments during the standstill agreement period.
A restructuring plan was announced by the Committee on December 23, 2007, and is anticipated to
be completed by the end of March 2008.
Table of Contents
6. Restricted cash (continued):
During the quarter ended December 31, 2007, the Company recorded a provision for losses in the
amount of $1,184 in respect of ABCP, reflecting the Company’s estimated reduction in the fair
value of these investments as at December 31, 2007. The Company estimated the fair value of the
ABCP using a probability weighted discounted cash flow approach, based on its best estimates of
the time period over which the assets in the underlying trust are going to generate cash flows
ranging from 7 to 30 years based on the proposed restructuring, the coupon interest rate, the
discount rate to apply to the net cash flows anticipated to be received commensurate with
highly rated notes and other qualitative factors. This estimate of the fair value of the ABCP
is not supported by observable market prices or rates, therefore is subject to uncertainty,
including, but not limited to, the outcome of the restructuring plan being considered, the
estimated amounts to be recovered, the yield of the substitute financial instruments and the
timing of future cash flows. The resolution of these uncertainties could be such that the
ultimate fair value of these investments may vary from the Company’s current best estimate.
Changes to the near term could require changes in the recognized amount of these assets. The
Company does not expect there will be a material adverse impact on its business as a result of
the Third Party ABCP liquidity issue.
During the third and fourth quarters of 2007, both letters of credit were renewed upon their
respective annual expiry, with the ABCP issued as collateral.
7. Property and equipment:
2007
Accumulated
Net book
Cost
depreciation
value
Research equipment
$
7,568
$
4,648
$
2,920
Computer hardware and software
3,148
2,645
503
Office equipment
973
556
417
$
11,689
$
7,849
$
3,840
2006
Accumulated
Net book
Cost
depreciation
value
Research equipment
$
6,450
$
3,617
$
2,833
Computer hardware and software
2,818
2,160
658
Office equipment
842
421
421
$
10,110
$
6,198
$
3,912
On November 17, 2005, the Company entered into a sale and leaseback transaction for its
facilities for a sale price of $26,411. The transaction generated a net gain of $20,085. The
net gain is deferred and is being amortized over the original term of the lease of 15 years as
a reduction of rent expense. The Company accounts for this lease as an operating lease. Rent
expense is calculated on a straight-line basis over the original term of the lease. The Company
has an option to purchase the property at fair market value beginning on December 1, 2017. The
Company repaid in its totality the remaining balance of the revolving decreasing term credit,
which originally financed the acquisition of the facilities. Interest on long-term debt
amounted to $282 for the year ended December 31, 2005.
Table of Contents
8. Patents:
2007
2006
Cost
$
7,686
$
6,121
Accumulated amortization
1,530
1,041
$
6,156
$
5,080
The remaining weighted average amortization period of patents at December 31, 2007 is 13.6
years (2006 – 14.3 years; 2005 – 15.6 years). The estimated amortization expense for each of
the next five years is approximately $450 per annum or $2,250 in the aggregate.
Effective January 1, 1994, the Company entered into an epilepsy license agreement (Epilepsy
Agreement), with Parteq Research and Development Innovations (Parteq), the commercialization
arm of Queen’s University. Pursuant to the Epilepsy Agreement, the Company was granted the
worldwide exclusive license, under certain intellectual property, including patents and patent
applications (Epilepsy Patents) belonging to Queen’s University to develop, make, have made,
use, sell and have sold certain products. In 2005, the Company provided Parteq with a
termination notice for the Epilepsy Agreement, pursuant to which responsibility for, and all
rights in, the Epilepsy Patents reverted to Parteq. Accordingly, the Company wrote off the net
book value of the Epilepsy Patents in the amount of $704 during the year ended December 31,
2005.
9. Long-term liabilities:
Long-term accrued liabilities consist of:
2007
2006
Lease exit obligation
$
59
$
71
Deferred rent liability
1,161
564
Deferred share unit plan (note 11 (f))
59
—
$
1,279
$
635
Table of Contents
10. Convertible notes:
Convertible notes consist of the following:
2007
2006
6% Senior convertible notes due in 2026 (a)
$
33,618
$
33,650
6% Senior convertible notes due in 2027 (b)
2,825
—
Derivative-related asset (b)
(1,022
)
—
$
35,421
$
33,650
(a)
On November 9, 2006, the Company entered into a private placement of $42,085
aggregate principal amount of convertible senior notes (the 2006 Notes) due in 2026. The
2006 Notes bear interest at a rate of 6% per annum and are payable semi-annually on May 15
and November 15 of each year, beginning on May 15, 2007. The 2006 Notes are convertible
into common shares based on an initial conversion rate of 50.7181 shares per $1 principal
amount of 2006 Notes ($19.72 per share) which represents a conversion premium of 20% over
the Company’s share price at date of issuance.
The 2006 Notes are convertible, at the option of the holder under the following conditions:
(i)
after December 31, 2006, if the closing sale price of the Company’s common
shares for each of 20 or more trading days in a period of 30 consecutive trading days
ending on the last trading day of the preceding calendar quarter exceed 120% of the
conversion price in effect on the last trading day of the immediately preceding
calendar quarter;
(ii)
during the five consecutive business days immediately after any five
consecutive trading day period in which the average trading price per $1 principal
amount of 2006 Notes was equal to or less than 97% of the average conversion value of
the 2006 Notes;
(iii)
if the Company makes certain distributions on its common shares or engages
in certain transactions;
(iv)
at any time from, and including, October 15, 2009 to November 15, 2009, from
October 15, 2011 to November 15, 2011 and at any time on or after November 15, 2021.
On October 15, 2009, the conversion rate of the 2006 Notes will be adjusted to an amount
equal to a fraction whose numerator is $1 and whose denominator is the average of the
closing sale prices of the common shares during the 20 trading days immediately preceding,
and including, the third business day immediately preceding October 15, 2009. However, no
such adjustment will be made if the adjustment will reduce the conversion rate. On and
after November 15, 2009, the conversion rate will be readjusted back to the conversion rate
that was in effect prior to October 15, 2009.
On or after November 15, 2011, the Company may redeem the 2006 Notes, in whole or in part,
at a redemption price in cash equal to 100% of the principal amount of the 2006 Notes, plus
any accrued and unpaid interest. On November 15, 2011, November 15, 2016 and November 15,
2021, the 2006 Note holders may require the Company to purchase all or a portion of their
2006 Notes at a purchase price in cash equal to 100% of the principal amount of the 2006
Notes to be purchased, plus any accrued and unpaid interest.
The Company, at its discretion, may elect to settle the principal amount owing upon
redemption or conversion in cash, shares or a combination thereof.
Table of Contents
10. Convertible notes (continued):
(a)
(continued):
In accordance with Canadian GAAP, the 2006 Notes are accounted for as a compound financial
instrument and are presented in their component parts of debt and equity. The debt
component is measured at the issue date as the present value of the cash payments of
interest and principal due under the terms at a rate which approximates the estimated
interest rate of a similar non-convertible financial instrument with comparable terms and
risk. The difference between the value as determined in this manner and the face value of
the 2006 Notes has been allocated to equity. The debt component is accreted to its face
value through a charge to earnings over its term. The effective interest rate of the 2006
Notes is 12.60%.
Issue costs incurred in connection with the issuance of the 2006 Notes were $1,955 and have
been presented as follows: $1,535 as financing fees and $420 as share issue costs.
Changes in the 2006 Notes for the years ended December 31, 2007 and 2006 were as follows:
Balance, December 31, 2005
$
—
Note issuance as at November 9, 2006
33,465
Accretion expense
550
Interest paid/payable
(365
)
Balance, December 31, 2006
33,650
Adjustment to reflect change in accounting policy
for financial instruments (note 4 (b))
(1,535
)
Accretion expense
4,108
Interest paid/payable
(2,525
)
Foreign exchange gain
(80
)
Balance, December 31, 2007
$
33,618
(b)
On May 2, 2007, the Company issued $80,000 aggregate principal amount of convertible
notes, consisting of $40,000, 6% senior convertible notes due in 2027 (the Senior Notes)
and $40,000, 5% senior subordinated convertible notes due in 2012 (the Junior Notes). The
Senior Notes have an initial conversion price equal to the lesser of $12.68 or the 5-day
weighted average trading price of the common shares preceding any conversion, subject to
adjustments in certain circumstances. The Senior Notes are convertible at the option of
the holder at anytime after three days notice. The conversion price is the average
trading price of the Company’s trading price for the period preceding the conversion,
subject to a ceiling of $12.68 and a floor of $6.00. The conversion price may be fixed,
subject to shareholder’s approval, for the period from October 15, 2009 to November 15,
2009. After November 1, 2011, the Senior Notes may be redeemed by the holders if the
Company fails to maintain a specified net cash position. The Company will pay interest on
the Senior Notes until maturity on May 2, 2027, subject to earlier repurchase, redemption
or conversion. The Junior Notes were subject to mandatory conversion into common shares
under certain circumstances. In connection with this transaction, the Company issued
warrants to purchase an aggregate of 2,250,645 common shares of Neurochem until May 2,
2012, at an initial purchase price of $12.68 per share, subject to adjustments in certain
circumstances.
Table of Contents
10. Convertible notes (continued):
(b)
(continued):
In accordance with Canadian GAAP, the Senior Notes and the Junior Notes are accounted for
as a compound financial instrument and are presented in their component parts of debt and
equity. The Company initially allocated the proceeds from the Senior Notes and the Junior
Notes between its liability and equity components using the residual value method. The
Senior Notes proceeds, net of issue costs of $2,069, were allocated as follows: $23,492 to
debt, $10,909 to equity portion of the convertible notes, $5,907 to warrants and $2,377 to
derivative-related asset. The Junior Notes proceeds, net of issue costs of $2,697, were
allocated as follows: $27,753 to debt, $243 to equity portion of the convertible notes,
$9,533 to warrants and $226 to derivative-related asset. Issue costs of $2,373 in relation
to equity instruments, including $1,417 of warrants, were charged to the deficit. The fair
value of the embedded derivatives was determined using the Binomial model and the fair
value of the warrants was determined using the Black-Scholes pricing model. The models
used in the valuation of the components of the convertible notes contain certain subjective
assumptions, changes of which may cause significant variation in the estimated fair value
of the debt and equity components of the convertible notes.
The Company accretes the carrying value of the Senior Notes and Junior Notes to their face
values through a charge to earnings over their expected lives, which is 54 months for the
Senior Notes and was one month for the Junior Notes. The effective interest rate of the
Senior Notes is 19.97%.
During the year ended December 31, 2007, $35,500 of the Senior Notes were converted into
5,619,321 common shares and the totality of the Junior Notes was converted into 4,444,449
common shares.
Changes in the Senior Notes, Junior Notes and derivative-related asset for the year ended
December 31, 2007, were as follows:
Senior
Junior
Derivative-
Notes
Notes
related asset
Balance as at December 31, 2006
$
—
$
—
$
—
Notes issuance as at May 2, 2007
23,492
27,753
(2,603
)
Accretion expense
1,213
10,430
—
Interest paid/payable
(628
)
(174
)
—
Foreign exchange loss
32
383
90
Conversion by note holders
(21,284
)
(38,392
)
684
Change in fair value
—
—
807
Balance as at December 31, 2007
$
2,825
$
—
$
(1,022
)
Table of Contents
11. Share capital:
(a)
The authorized share capital of the Company consists of:
•
an unlimited number of voting common shares
•
an unlimited number of non-voting preferred shares, issuable in one or more series
(b)
Common shares issued and outstanding:
December 31, 2005
:
(i)
On March 9, 2005, the Company completed a public offering for the issuance
and sale of 4 million common shares at a price of $15.30 for total proceeds of
$61,200. Total share issue costs of $4,107 were charged to the deficit.
(ii)
On July 25, 2005, a subsidiary of Picchio Pharma Inc. (Picchio Pharma)
exercised a warrant to purchase 2.8 million common shares for total proceeds of
$7,189.
December 31, 2006:
(iii)
On February 16, 2006, Picchio Pharma exercised its remaining warrant
outstanding to purchase 1.2 million common shares for total proceeds of $8,095.
December 31, 2007:
(iv)
In 2007, the Company issued 10,063,770 common shares in connection with the
conversion of Senior and Junior convertible notes. See note 10 (b).
(c)
Stock option plan:
Under its stock option plan, the Company may grant options to purchase common shares to
employees, directors and consultants of the Company (the Stock Option Plan). The terms,
number of common shares covered by each option, as well as the vesting period are
determined by the Board of Directors. In general, options vest over periods of up to five
years. During the year ended December 31, 2005, the shareholders approved an amendment to
the Company’s Stock Option Plan to change the maximum number of shares reserved for
issuance from 4,438,767 common shares to 12.5% of the issued and outstanding common shares.
The maximum number of common shares which may be optioned in favor of any single
individual shall not exceed 5% of the issued and outstanding common shares of the Company.
The option price per share is equal to the weighted average trading price of common shares
for the five days preceding the effective date of grant during which the common shares were
traded on the Toronto Stock Exchange. In no event may the term of any option exceed ten
years from the date of the grant of the option.
Table of Contents
11. Share capital (continued):
(c)
(continued):
Changes in outstanding options issued under the Stock Option Plan for the years ended
December 31, 2005, 2006 and 2007 were as follows:
Weighted
average
Number
exercise price
(CDN$)
Options outstanding, December 31, 2004
2,363,784
$
14.51
Granted
318,500
21.31
Exercised
(300,660
)
4.48
Cancelled or expired
(71,666
)
13.68
Options outstanding, December 31, 2005
2,309,958
16.78
Granted
402,000
16.53
Exercised
(100,943
)
4.25
Cancelled or expired
(33,519
)
20.84
Options outstanding, December 31, 2006
2,577,496
17.17
Granted
336,333
11.20
Exercised
(60,803
)
7.12
Cancelled or expired
(36,293
)
11.72
Options outstanding, December 31, 2007
2,816,733
$
16.75
The following table summarizes information about options outstanding and exercisable at
December 31, 2007:
Options outstanding
Options exercisable
Weighted
Weighted
Weighted
average
average
average
exercise
years to
exercise
Exercise price/share
Number
price
expiration
Number
price
(CDN$)
(CDN$)
(CDN$)
$0.36 - $0.65
11,500
$
0.65
0.5
11,500
$
0.65
$2.99 - $6.93
513,127
4.42
5.5
341,552
4.11
$8.11 - $15.35
670,766
10.62
6.3
468,467
9.05
$17.40 - $23.35
801,507
19.76
7.3
376,533
21.10
$25.30 - $33.00
819,833
26.75
6.5
560,708
27.18
2,816,733
$
16.75
6.5
1,758,760
$
16.39
Table of Contents
11. Share capital (continued):
(d)
Agreement to issue shares:
The agreement with the Chief Executive Officer effective December 1, 2004, to issue to him
up to 220,000 common shares upon the execution of the agreement and upon achievement of
specified performance targets was approved by regulatory authorities and shareholders in
2005. During the year ended December 31, 2007, the Company recorded nil (2006 — nil; 2005
— $1,189) in stock-based compensation in relation to nil common shares (2006 — nil; 2005 -
140,000) to be issued to the Chief Executive Officer in connection with his execution and
achievement of certain specified targets. As at December 31, 2007, stock-based compensation
in relation to 140,000 of the total 220,000 common shares has been recognized. The shares
will be issued by the Company upon formal notification by the Chief Executive Officer.
(e)
Equity line of credit:
On August 9, 2006, the Company entered into a securities purchase agreement in respect of
an equity line of credit facility. The facility will terminate February 9, 2009, and it
provides the Company with access to financing of up to $60,000 in return for the issuance
of common shares at a discount of 3.0% to market price at the time of drawdown less a
placement fee equal to 2.4% of gross proceeds payable to the placement agent. Under the
agreement, the Company is committed to draw down at least $25,000 over the term of the
facility. Drawdown requests are subject to the terms and conditions as specified in the
agreement. Either party may terminate the agreement if the volume-weighted average price
of the Company’s common shares is below $5 per share for more than 30 consecutive days.
Given that the current price per share has been below the minimum price as per the
agreement, the agreement may be terminated at any time. As of December 31, 2007, the
Company had not drawn any funds under the equity line of credit.
See subsequent event note 21 (c), for terms of the amendment.
(f)
Deferred share unit plan:
On February 15, 2007, the Company adopted a deferred share unit (DSU) plan for certain
designated employees (the Designated Employees Plan), as well as a DSU plan for members of
the Board of Directors (the Board Plan). The Designated Employees Plan permits employees
to elect to take all or any portion of their annual bonus in the form of DSUs rather than
in cash, while the Board Plan permits members of the Board of Directors to elect to take
all of their annual retainer and/or all of their meeting attendance fees as DSUs rather
than in cash. The number and price of DSUs are determined by the five-day volume weighted
average trading price of the Company’s common shares at the time the DSUs are issued, as
provided for under the respective plans. The DSUs are redeemable only upon the
participant’s resignation, termination, retirement or death, in cash, at a value equal to
the number of DSUs credited multiplied by the market value of common shares on the date a
notice of redemption is filed.
During the year ended December 31, 2007, the Company granted 26,567 DSUs having a weighted
average fair value per unit of CDN$11.26. For DSUs, compensation cost is measured based on
the market price of the Company’s shares from the effective date of grant through to the
settlement date. The offsetting liability is marked-to-market. Any changes in the market
value of the Company’s shares through to the settlement date results in a change to the
measure of compensation cost for those awards and is recorded in the consolidated statement
of operations. At December 31, 2007, the Company had a liability
of $59 with respect to issued DSUs.
Table of Contents
12. Arbitral award:
In June 2006, the International Chamber of Commerce Court of Arbitration (ICC) issued its Final
Award (the Final Award) in the arbitration dispute involving Neurochem and Immtech
Pharmaceuticals, Inc., formerly known as Immtech International, Inc. (Immtech). The dispute
concerned an agreement entered into between Immtech and Neurochem in April 2002 (the Agreement)
under which Neurochem had the right to apply its proprietary anti-amyloid technology to test
certain compounds to be provided by Immtech. The ICC denied the majority of Immtech’s claims
after an evidentiary hearing before the tribunal convened in accordance with the rules of the
ICC (the Tribunal) held in September 2005. In the Final Award, the Tribunal held that
Neurochem did not misappropriate any of Immtech’s compounds, information or trade secrets and
that Immtech was not entitled to any interest in, or ownership or assignment of, Neurochem’s
patent applications.
The Tribunal found that Neurochem had breached certain sections of the Agreement, and Immtech
was awarded $35 in damages, plus interest thereon for a disputed progress payment under the
Agreement. Immtech was awarded only a portion of the ICC’s administrative charges and arbitral
fees and costs incurred by the Tribunal which had been previously advanced by Immtech, as well
as a portion of Immtech’s arbitration-related legal fees. In the second quarter of 2006, the
Company recorded a charge of $1,835 to account for this decision.
On January 25, 2007, Immtech, the University of North Carolina at Chapel Hill (UNC), and
Georgia State University Research Foundation, Inc. (together with UNC, the Universities) filed
with the Federal District Court for the Southern District of New York, USA (the Court) a Notice
of Voluntary Dismissal bringing to an end the litigation action described herein. The
litigation had been stayed since 2004 when the Court ordered Immtech to submit its claims to
arbitration as provided for in the underlying agreement between Immtech and Neurochem, leaving
the claims of the Universities to be decided after the conclusion of the arbitration. The
plaintiffs voluntarily dismissed their litigation complaint against the Company without any
payment, license, business agreement, concession or compromise by the Company.
13. Stock-based compensation:
For the year ended December 31, 2007, the Company recorded total stock-based compensation
(excluding compensation under the deferred share unit plan) of $4,225 (2006 — $3,569; 2005 -
$2,769), related to stock options granted under the Stock Option Plan after July 1, 2002.
The fair value of each option granted is estimated on the date of grant using the Black-Scholes
pricing model. The weighted average assumptions for the years ended December 31, 2007, 2006
and 2005 were as follows:
2007
2006
2005
Risk-free interest rate
4.02
%
4.18
%
3.86
%
Expected volatility
61
%
60
%
58
%
Expected life in years
7
7
7
Expected dividend yield
nil
nil
nil
Table of Contents
13. Stock-based compensation (continued):
The following table summarizes the weighted average grant-date fair value per share for options
granted during the years ended December 31, 2007, 2006 and 2005:
Weighted average
Number of
grant-date
options
fair value
(CDN$)
Years ended:
December 31, 2007
336,333
$
6.94
December 31, 2006
402,000
10.46
December 31, 2005
318,500
12.77
Dividend yield was excluded from the calculation, since it is the present policy of the Company
to retain all earnings to finance operations and future growth.
14. Commitments and contingencies:
(a)
Operating leases:
Minimum annual lease payments for the next five years and thereafter under operating leases
are as follows:
2008
$
2,916
2009
2,952
2010
3,014
2011
3,103
2012
3,195
Thereafter
27,544
$
42,724
In addition, the Company is also responsible for operating costs and taxes under the
operating leases.
(b)
License agreements and research collaborations:
On February 1, 2006, the Company entered into an assignment agreement with Parteq
(Assignment Agreement) which terminated an amyloid license agreement. This amyloid license
agreement granted the Company an exclusive worldwide license under certain intellectual
property (Amyloid Intellectual Property). Pursuant to the Assignment Agreement, Parteq
agreed and assigned the Amyloid Intellectual Property to the Company for consideration,
comprising an upfront payment of CDN$200 and various deferred payment amounts, which are
approximately equal to the payments provided for in the amyloid license agreement. The
Assignment Agreement also provides for annual technology payments, deferred milestone
payments and deferred graduated payments based on gross revenues to be generated from
commercialized products, which approximate the payments included in the amyloid license
agreement.
Table of Contents
14. Commitments and contingencies (continued):
(b)
(continued):
Under the terms of an agreement with the federal Ministry of Industry (Technology
Partnerships Canada Program), as amended in 2005, the Company is committed to pay the
federal government royalties equal to 7.24% of certain milestone revenue and 0.724% of
end-product sales realized from the commercialization of effective orally-administered
therapeutics for the treatment of Alzheimer’s disease until December 31, 2010. After
December 31, 2010, the Company may have to continue to pay royalties until such time as the
aggregate amount of royalties paid pursuant to the agreement reaches CDN$20,540. Under the
agreement, the Company is committed to spend a specified amount on research and development
from the date of regulatory approval to December 31, 2014.
The Company is party to research and license agreements under which it has obtained rights
to use certain technologies to develop certain product candidates. These agreements impose
various milestones, commercialization, sublicensing, royalty and other payment, insurance,
indemnification and other obligations and are subject to certain reservations of rights.
The Company is a party to a collaboration agreement with Centocor for eprodisate
(KIACTA
TM
), under which Neurochem is responsible for the regulatory activities
in the United States and in Europe up to approval, as well as for global manufacturing
activities.
The Company outsources clinical trials in the normal course of business. As at December
31, 2007, the Company’s future obligations with respect to these clinical trial agreements
amount to $3,732 (2006 — $16,615).
(c)
Management services agreement:
The payments under a management services agreement with Picchio International Inc. (Picchio
International), a company related to a shareholder, director and officer (see note 15 (a))
are $2,317 in 2008.
(d)
Guarantees:
The Company is contingently liable for letters of credit, see note 6. The Company has not
recorded a liability with respect to the guarantees, as the Company does not expect to make
any payments for these items. The Company has determined that the fair value of the
non-contingent obligations requiring performance under the guarantees in the event that
specified events or conditions occur approximate the cost of obtaining the letters of
credit.
Table of Contents
15. Related party transactions:
(a)
Under the terms of a management services agreement entered into in March 2003, as
amended, with Picchio International, the Company recorded a management fee of $2,343 for
the year ended December 31, 2007 (2006 – $2,164; 2005 – $1,981). During the year ended
December 31, 2007, the Company paid $848 of performance based fees which was accrued as at
December 31, 2006.
In 2004, the Company entered into an agreement to issue shares to the Chief Executive
Officer. See note 11 (d).
(b)
The Company paid Parteq, a company related to a director, the following amounts in
the normal course of operations:
Years ended:
December 31, 2007
$
23
December 31, 2006
27
December 31, 2005
31
As indicated in note 8, the Company wrote off certain patents related to non-core
technologies that reverted back to Parteq. As indicated in note 14 (b), the Company
entered into an agreement with Parteq which terminated an amyloid license agreement and
assigned the Amyloid Intellectual Property to the Company.
(c)
In 2005, the Company entered into a lease agreement for a three-year period ending
April 2008 with a company in which Picchio Pharma has an equity interest. For the year
ended December 31, 2007, sub-lease revenue under the agreement amounted to $858 (2006 -
$846; 2005 — $579). During 2007, the lease agreement was extended to April 2011, with
gross rent of approximately $968 per year. The Company provided an indemnification to
that company should it be required to vacate its subleased premises by the landlord prior
to the expiration of the lease. At December 31, 2007, Neurochem had an amount receivable
of $19 (2006 — $19) with this company. In addition, Neurochem had amounts receivable of
$2 (2006 — $22) from other companies in which Picchio Pharma has an equity interest.
(d)
In March 2006, as disclosed in note 4 (a), the Company invested an additional amount
of $1,464 in Innodia Holding, a company in which Picchio Pharma has an equity interest.
In addition, during 2006, the Company entered into an amendment agreement with Innodia
amending the May 2003 license agreement, which granted Innodia an exclusive worldwide
license under certain intellectual property relating to diabetes.
These transactions are measured at the exchange amount, which is the amount of consideration
established and agreed to by the related parties.
Table of Contents
16. Income taxes:
(a)
Details of the components of income taxes are as follows:
Year ended
Year ended
Year ended
December 31,
December 31,
December 31,
2007
2006
2005
Loss before income taxes:
Canadian operations
$
(22,150
)
$
(12,290
)
$
(12,702
)
Foreign operations
(59,336
)
(54,179
)
(47,025
)
(81,486
)
(66,469
)
(59,727
)
Basic income tax rate
32.02
%
32.02
%
31.02
%
Computed income tax recovery
(26,092
)
(21,283
)
(18,527
)
Adjustments in income taxes resulting from:
Non-recognition of losses and other deductions
6,915
2,603
12,185
Difference in tax rate of a foreign subsidiary
16,529
15,428
8,773
Non-deductible stock option expense
1,331
1,108
1,193
Non-taxable portion of gain on sale of property-
—
(2,658
)
Permanent differences and other
1,317
(6
)
(966
)
Impact of future changes in enacted rates:
(Increase) decrease in future tax asset
2,856
(58
)
7,658
Increase (decrease) in valuation allowance
(2,856
)
2,208
(7,658
)
$
—
$
—
$
—
Table of Contents
16. Income taxes (continued):
(b)
Net future tax assets:
The future tax assets and liabilities at December 31, 2007 and 2006 are as follows:
2007
2006
Future tax assets:
Patent costs
$
9,677
$
7,829
Unclaimed scientific research and experimental
development expenditures for tax purposes
21,456
13,523
Deferred gain on sale of property
4,638
5,239
Share issue costs
1,352
1,443
Net operating losses of a foreign subsidiary
7,910
5,051
Long-term investment
1,259
1,215
Convertible notes
—
225
Other
837
241
47,129
34,766
Less: valuation allowance
(45,382
)
(33,794
)
1,747
972
Future tax liabilities:
Property and equipment
(841
)
(889
)
Deferred financing fees
(59
)
(83
)
Convertible notes
(847
)
—
Net future tax assets
$
—
$
—
In assessing the realizability of future 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 tax assets is dependent upon the generation
of future taxable income and/or tax planning strategies. Since the Company is a
development stage enterprise, the generation of future taxable income is dependent on the
successful commercialization of its products and technologies.
(c)
The Company has the following unclaimed deductions available to reduce future taxable
income in Canada:
Federal
Quebec
Research expenditure pool (no expiry)
$
93,252
$
38,341
The Company also has approximately $15,207 in federal research investment tax credits that
can be used to reduce future federal taxes payable and which expire as follows:
2014
$
2,074
2015
4,145
2026
5,006
2027
3,982
$
15,207
Table of Contents
16.
Income taxes (continued):
(d)
The Company has non-capital losses carried forward in a foreign subsidiary which are
available to reduce future years’ taxable income of that subsidiary. These expire as
follows:
2011
$
46,752
2012
51,605
2013
63,775
2014
74,875
$
237,007
17.
Loss per share:
The reconciliation between basic and diluted loss per share is as follows:
Year ended
Year ended
Year ended
December 31,
December 31,
December 31,
2007
2006
2005
Basic weighted average
number of common shares
outstanding
44,030,474
38,654,063
35,104,342
Basic net loss per share
$
(1.85
)
$
(1.72
)
$
(1.70
)
Diluted loss per share was not presented as the effect of options, warrants and Notes would
have been anti-dilutive. All outstanding options, warrants and Notes could potentially be
dilutive in the future.
18.
Statements of cash flows — supplementary disclosure:
(a)
Cash and cash equivalents:
Cash and cash equivalents consist of cash balances with banks and short-term investments:
2007
2006
Cash balances with banks
$
1,925
$
2,034
Short-term investments (yielding interest between
4.18% to 4.75% (December 31, 2006: 4.32% to 5.31%))
9,038
10,124
$
10,963
$
12,158
(b)
Interest and income taxes:
Year ended
Year ended
Year ended
December 31,
December 31,
December 31,
2007
2006
2005
Cash paid in the year for:
Interest
$
3,367
$
—
$
212
Income tax
—
—
—
Table of Contents
18.
Statements of cash flows — supplementary disclosure (continued):
(c)
Non-cash transactions:
Year ended
Year ended
Year ended
December 31,
December 31,
December 31,
2007
2006
2005
Additions to property and equipment
and patents included in
accounts payable and accrued
liabilities at year-end
$
404
$
332
$
1,136
19.
Segment disclosures:
(a)
Business segment:
The Company operates in one business segment, the research, development and
commercialization of innovative therapeutics. The Company’s operations are conducted
principally in Canada and Europe.
(b)
Property and equipment and intangible assets (patents) by geographic area are as
follows:
2007
2006
Canada
$
3,801
$
3,841
Europe
6,195
5,151
$
9,996
$
8,992
(c)
Major customers:
All revenues recognized in 2007, 2006 and 2005 were derived from one customer under the
collaboration agreement referred to in note 5.
Table of Contents
20.
Financial instruments:
(a)
Fair value disclosure:
Fair value estimates are made as of a specific point in time, using available information
about the financial instrument. These estimates are subjective in nature and often cannot
be determined with precision.
The Company has determined that the carrying value of its short-term financial assets and
liabilities, including cash and cash equivalents, sales taxes and other receivables, as
well as accounts payable and accrued liabilities, approximates their fair value because of
the relatively short periods to maturity of these instruments. Refer to note 6 for
restricted cash. The fair value of convertible notes is estimated based on discounting
expected future cash flows at the discount rates which represent borrowing rates presently
available to the Company for instruments with similar terms and maturity. At December 31,
2007, the fair values of long-term financial liabilities were as follows:
2007
2006
Carrying
Fair
Carrying
Fair
amount
value
amount
value
Financial liabilities included
in long-term liabilities
$
118
$
118
$
71
$
71
Convertible notes
35,421
21,182
33,650
33,650
Marketable securities are comprised of fixed income instruments with a high credit rating
(not less than R1-mid rating) as rated by Dominion Board Rating Service (DBRS). As at
December 31, 2007, the weighted average effective interest rate of the marketable
securities is approximately 4.61% (2006 – 5.02%). The fair market value of the marketable
securities amounts to $47,709 as at December 31, 2007 (2006 — $36,600).
(b)
Credit risk:
Credit risk results from the possibility that a loss may occur from the failure of another
party to perform according to the terms of the contract. The Company regularly monitors
the credit risk exposure and takes steps to mitigate the likelihood of these exposures from
resulting in actual loss.
Financial instruments that potentially subject the Company to significant concentrations of
credit risk consist principally of cash and cash equivalents, marketable securities and
restricted cash. The Company invests cash with major North American and European financial
institutions. The Company has investment policies that are designed to provide for the
safety and preservation of principal, the Company’s liquidity needs and yields that are
appropriate. Authorized investments include bankers’ acceptances, bearer deposit notes,
corporate and government bonds, certificates of deposit, commercial paper and treasury
bills, and shall not exceed 10% per issuer, subject to certain exceptions.
Refer to note 6 for credit risk related to restricted cash.
(c)
Foreign currency risk management:
A portion of the Company’s expenses, are denominated in Canadian dollars. This results in
financial risk due to fluctuations in the value of the US dollar relative to the Canadian
dollar. The Company does not use derivative financial instruments to reduce its foreign
exchange exposure. Fluctuations in foreign exchange rates could cause unanticipated
fluctuations in the Company’s operating results.
Table of Contents
20.
Financial instruments (continued):
(d)
Interest rate risk:
The Company’s exposure to interest rate risk is as follows:
Cash and cash equivalents
Short-term fixed interest rate
Marketable securities
Short-term fixed interest rate
Convertible notes
Fixed interest rate
21.
Subsequent events:
On February 20, 2008, the Company’s Board of Directors approved the following transactions:
(a)
The issuance of 2,445,000 options to purchase common shares to be issued under the Stock
Option Plan of the Company. The option price per share will be determined based on the
weighted average trading price of common shares for the five days preceding the date of grant
during which the common shares were traded on the Toronto Stock Exchange.
(b)
The Company renewed the management services agreement entered into with Picchio
International Inc., referred to in note 15 (a), to November 30, 2008.
(c)
The Company entered into an amendment with respect to the equity line of credit (ELOC)
facility. The term of the ELOC facility has been extended to February 2010. The minimum
draw-down obligation by the Company has been reduced to $15,000 over the term. The maximum
amount of each monthly draw-down is limited to the lower of $6,000 or 12.5% of the
volume-weighted price calculation of the common shares at the time of draw-down. The common
shares will be issued at a discount of 4.0% to market price if the volume-weighted average
price (VWAP) per share is $6 or higher, and 7% if the VWAP per share is lower than $6 at the
time of draw-down.
(d)
The name-change from Neurochem to BELLUS Health
TM
, pending shareholder approval
at the next annual meeting.
Table of Contents
Shareholder information
Executive management
Dr. Francesco Bellini
Chairman, President and
Chief Executive Officer
Mr. Mariano Rodriguez
Vice President, Finance and
Chief Financial Officer
Dr. Denis Garceau
Senior Vice President,
Drug Development
Dr. Daniel Delorme
Vice President, Research
Dr. Lise Hébert
Vice President,
Corporate Communications
Dr. Shona McDiarmid
Vice President, Intellectual
Property and Compliance
Ms. Judith Paquin
Vice President, Human Resources
Mr. David Skinner
Vice President, General Counsel
and Corporate Secretary
OVOS Natural Health Inc.
Mr. Gary Schmid
Chief Executive Officer
Board of directors
Dr. Francesco Bellini
Chairman, President and
Chief Executive Officer,
Neurochem Inc.
Mr. John Bernbach
President and Founder, NTM Inc.
Dr. Colin Bier
Managing Director,
ABA BioResearch Inc.
Mr. Jean-Guy Desjardins
Chairman, President and
Chief Executive Officer, Centria Inc.
Table of Contents
Mr. André Desmarais
President and Co-Chief
Executive Officer,
Power Corporation of Canada
Mr. Neil Flanzraich
Consultant
Mr. Peter Kruyt
President, Power Technology
Investment Corporation
Mr. François Legault
President and Chief Operating Officer,
ViroChem Pharma Inc.
Mr. John Molloy
President and Chief Executive Officer,
Parte q Research and Development
Innovations
Mr. Calin Rovinescu
Senior Principal,
Genuity Capital Markets
Mr. Graeme K. Rutledge
Consultant
Dr. Emil Skamene
Professor of Medicine and Director,
Centre for the Study of Host Resistance
McGill University
Corporate governance
Neurochem is committed to sound corporate
governance practices which ensure that
its affairs are managed in the best interest
of all stakeholders. The Board of Directors
undertakes a periodic review to verify that
Neurochem’s governance practices have kept
pace with changing regulatory environments
in the United States and Canada, to which
Neurochem is subject as a company listed
on both the Nasdaq and TSX. Please refer
to the management proxy circular for more
information on the overall structure of the
Board and its Committees and for details of
Neurochem’s corporate governance practices.
Auditors
KPMG LLP
600 de Maisonneuve Blvd. West
Suite 1500
Montreal, Quebec, Canada H3A 0A3
Table of Contents
Transfer agents
Computershare Investor Services
100 University Avenue
9th Floor, North Tower
Toronto, Ontario, Canada M5J 2Y1
Stock Listing
Nasdaq National Market (Nasdaq)
Symbol: NRMX
Toronto Stock Exchange (TSX)
Symbol: NRM
Annual and special meeting
The Annual and Special Meeting
of shareholders will be held at 10:00 a.m.
on April 15, 2008, in the Maxwell-Cummings
Auditorium of the Michal and Renata Hornstein
Pavilion of the Montreal Museum of
Fine Arts, 1379 Sherbrooke Street West,
Montreal, Quebec, Canada.
Table of Contents
Corporate profile
Neurochem is a global health company
focused on the research, development and
commercialization of products to provide
innovative health solutions to address critical
unmet medical needs.
Neurochem Inc.
275 Armand-Frappier Blvd.
Laval, Quebec, Canada H7V 4A7
Telephone: (450) 680-4500
Toll-Free: 1 (877) 680-4500
Fax: (450) 680-4501
E-mail:
info@neurochem.com
www.neurochem.com
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