Trillium Therapeutics Inc.: Exhibit 99.1 - Filed by newsfilecorp.com

EX-99.1 2 exhibit99-1.htm EXHIBIT 99.1 Trillium Therapeutics Inc.: Exhibit 99.1 - Filed by newsfilecorp.com

INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2019 AND 2018

(UNAUDITED)

2488 Dunwin Drive
Mississauga, Ontario L5L 1J9
www.trilliumtherapeutics.com

TRILLIUM THERAPEUTICS INC.

Interim Condensed Consolidated Statements of Financial Position

Amounts in thousands of Canadian dollars

(Unaudited)

		As at		As at
	Note	September 30, 2019		December 31, 2018
		$		$


ASSETS

Current
Cash and cash equivalents		16,307		20,832
Marketable securities		19,909		24,577
Amounts receivable		621		1,101
Prepaid expenses		596		1,031

Total current assets		37,433		47,541

Property and equipment		2,909		2,155
Intangible assets		-		5,652
Other assets		-		111

Total non-current assets		2,909		7,918

Total assets		40,342		55,459

LIABILITIES

Current
Accounts payable and accrued liabilities	5	13,278		12,896
Other current liabilities	3,6	791		460

Total current liabilities		14,069		13,356

Deferred lease inducement	3	-		375
Warrant liability	7	474		-
Other liabilities	3,6	1,144		127

Total non-current liabilities		1,618		502

Total liabilities		15,687		13,858

EQUITY
Common shares	7	179,471		154,017
Series I preferred shares	7	2,489		2,489
Series II preferred shares	7	30,899		45,120
Contributed surplus		26,236		24,572
Deficit		(214,440	)	(184,597	)

Total equity		24,655		41,601

Total liabilities and equity		40,342		55,459

Commitments and contingencies [note 11]

Events after the balance sheet date [note 13]

See accompanying notes to the interim condensed consolidated financial statements

- 1 -

TRILLIUM THERAPEUTICS INC.

Interim Condensed Consolidated Statements of Loss and Comprehensive Loss

Amounts in thousands of Canadian dollars, except per share amounts

(Unaudited)

		Three months ended		Three months ended		Nine months ended		Nine months ended
	Note	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
		$		$		$		$
REVENUE	8	131		-		165		-
EXPENSES
Research and development	9	8,310		10,752		28,982		32,815
General and administrative	10	1,378		1,100		3,302		3,376
Impairment of intangible assets	4	3,897		-		3,897		-
Operating expenses		13,585		11,852		36,181		36,191
Loss from operating activities		13,454		11,852		36,016		36,191
Finance income		(212	)	(309	)	(666	)	(814	)
Finance costs		62		10		178		33
Net foreign currency loss (gain)		(232	)	1,498		829		(1,484	)
Revaluation of warrant liability, net	7	(491	)	-		(6,617	)	-
Net finance costs (income)		(873	)	1,199		(6,276	)	(2,265	)
Loss before income taxes		12,581		13,051		29,740		33,926
Current income tax expense		17		1		32		7
Net loss and comprehensive loss for the period		12,598		13,052		29,772		33,933
Basic and diluted loss per common share	7(c)	0.45		0.91		1.23		2.49

See accompanying notes to the interim condensed consolidated financial statements

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TRILLIUM THERAPEUTICS INC.

Interim Condensed Consolidated Statements of Changes in Equity

Amounts in thousands of Canadian dollars

(Unaudited)

													Contributed
	Common shares			Series I preferred shares			Series II preferred shares				Warrants		surplus		Deficit		Total
	#	$		#	$		#		$		$		$		$		$
		(note 7	)		(note 7	)			(note 7	)	(note 7	)	(note 7	)

Balance, December 31, 2018	14,688,831	154,017		17,171,541	2,489		4,368,403		45,120		-		24,572		(184,597	)	41,601

Net loss and comprehensive loss for the period	-	-		-	-		-		-		-		-		(29,772	)	(29,772	)

Transactions with owners of the Company, recognized directly in equity
Changes in accounting policy (note 3)	-	-		-	-		-		-		-		-		(71	)	(71	)
Units issued, net of issue costs	6,550,000	3,919		-	-		12,200,000		7,314		-		-		-		11,233
Conversion of preferred shares	6,800,000	21,535		-	-		(6,800,000	)	(21,535	)	-		-		-		-
Share-based compensation	-	-		-	-		-		-		-		1,664		-		1,664
Total transactions with owners of the Company	13,350,000	25,454		-	-		5,400,000		(14,221	)	-		1,664		(71	)	12,826
Balance, September 30, 2019	28,038,831	179,471		17,171,541	2,489		9,768,403		30,899		-		26,236		(214,440	)	24,655

											Contributed
	Common shares		Series I preferred shares				Series II preferred shares		Warrants		surplus	Deficit		Total
	#	$	#		$		#	$	$		$	$		$


Balance, December 31, 2017	13,147,404	145,920	52,325,827		7,586		4,368,403	45,120	6,871		15,191	(142,111	)	78,577

Net loss and comprehensive loss for the period	-	-	-		-		-	-	-		-	(33,933	)	(33,933	)

Transactions with owners of the Company, recognized directly in equity
Shares issued, net of issue cost	369,621	3,000	-		-		-	-	-		-	-		3,000
Expiry of warrants	-	-	-		-		-	-	(373	)	373	-		-
Conversion of preferred shares	1,171,806	5,097	(35,154,286	)	(5,097	)	-	-	-		-	-		-
Share-based compensation	-	-	-			-	-	-		-	1,651	-		1,651
Total transactions with owners of the Company	1,541,427	8,097	(35,154,286	)	(5,097	)	-	-	(373	)	2,024	-		4,651
Balance, September 30, 2018	14,688,831	154,017	17,171,541		2,489		4,368,403	45,120	6,498		17,215	(176,044	)	49,295

See accompanying notes to the interim condensed consolidated financial statements

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TRILLIUM THERAPEUTICS INC.

Interim Condensed Consolidated Statements of Cash Flows

Amounts in thousands of Canadian dollars

(Unaudited)

		Nine months ended		Nine months ended
	Note	September 30, 2019		September 30, 2018
		$		$


OPERATING ACTIVITIES
Net loss for the period		(29,772	)	(33,933	)
Adjustments for items not affecting cash
Interest accretion	3,6	160		18
Change in fair value of contingent consideration	6	(127	)	-
Share-based compensation	7	1,664		1,651
Amortization of warrant discount	7	387		-
Change in fair value of warrant liability	7	(7,575	)	-
Amortization of intangible assets	9	1,755		1,754
Impairment of intangible assets	4	3,897		-
Depreciation of property and equipment	9	758		606
Deferred lease inducement		-		(23	)
Unrealized foreign exchange loss (gain)		463		(1,296	)
License agreement amendment	7 (b)	-		3,000
		(28,390	)	(28,223	)
Changes in non-cash working capital balances
Amounts receivable		480		(395	)
Prepaid expenses		435		(258	)
Accounts payable and accrued liabilities	5	382		(1,979	)
Other current liabilities		168		8

Cash used in operating activities		(26,925	)	(30,847	)

INVESTING ACTIVITIES
Net maturities of marketable securities		4,205		14,481
Purchase of property and equipment		(302	)	(59	)

Cash provided by investing activities		3,903		14,422

FINANCING ACTIVITIES
Repayment of lease liabilities	3	(312	)	-
Repayment of loan payable	6	(86	)	(86	)
Issuance of warrants	7	7,662		-
Issuance of share capital, net of issuance costs	7	11,233		-

Cash provided by (used in) financing activities		18,497		(86	)

Impact of foreign exchange rate on cash and cash equivalents		-		251

Net decrease in cash and cash equivalents during the period		(4,525	)	(16,260	)

Cash and cash equivalents, beginning of period		20,832		28,361

Cash and cash equivalents, end of period		16,307		12,101

See accompanying notes to the interim condensed consolidated financial statements

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TRILLIUM THERAPEUTICS INC.

Notes to the Interim Condensed Consolidated Financial Statements

For the three and nine months ended September 30, 2019 and 2018

Amounts in thousands of Canadian dollars, except per share amounts and where noted

(Unaudited)

1.	Corporate information

	Trillium Therapeutics Inc. (the "Company" or "Trillium") is a clinical-stage immuno-oncology company developing innovative therapies for the treatment of cancer. The Company is a corporation existing under the laws of the Province of Ontario. The Company’s head office is located at 2488 Dunwin Drive, Mississauga, Ontario, L5L 1J9, and it is listed on the Toronto Stock Exchange and on the Nasdaq Capital Market.

2.	Basis of presentation

(a)	Statement of compliance

	These unaudited interim condensed consolidated financial statements have been prepared in compliance with International Accounting Standard 34 Interim Financial Reporting. The notes presented in these unaudited interim condensed consolidated financial statements include only significant events and transactions occurring since the Company’s last fiscal year -end and are not fully inclusive of all matters required to be disclosed in its annual audited consolidated financial statements.

	The policies applied in these unaudited interim condensed consolidated financial statements are based on International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). The board of directors approved the unaudited interim condensed consolidated financial statements on November 7, 2019. Any subsequent changes to IFRS or their interpretation that are given effect in the Company’s annual audited consolidated financial statements for the year ending December 31, 2019, could result in a restatement of these unaudited interim condensed consolidated financial statements.

(b)	Basis of measurement

	These unaudited interim condensed consolidated financial statements have been prepared on the historical cost basis, unless otherwise noted.

(c)	Functional and presentation currency

	These unaudited interim condensed consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency.

(d)	Use of significant estimates and assumptions

	The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies, the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. Actual results could differ materially from these estimates and assumptions. The Company reviews its estimates and underlying assumptions on an ongoing basis. Revisions are recognized in the period in which the estimates are revised and may impact future periods.

	Management has applied significant estimates and assumptions to the following:

	Going concern

	In the preparation of financial statements, management is required to identify when events or conditions indicate that significant doubt may exist about the Company’s ability to continue as a going concern. Significant doubt about the Company’s ability to continue as a going concern would exist when relevant conditions and events, considered in the aggregate, indicate that the Company will not be able to meet its obligations as they become due for a period of at least, but not limited to, twelve months from the balance sheet date. When the Company identifies conditions or events that raise potential for significant doubt about its ability to continue as a going concern, the Company considers whether its plans that are intended to mitigate those relevant conditions or events will alleviate the potential significant doubt.

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TRILLIUM THERAPEUTICS INC.

Notes to the Interim Condensed Consolidated Financial Statements

For the three and nine months ended September 30, 2019 and 2018

Amounts in thousands of Canadian dollars, except per share amounts and where noted

(Unaudited)

2.	Basis of presentation (continued)

	The Company’s ability to continue as a going concern for the next twelve months involves significant judgment. The Company will require ongoing financing in order to continue research and development activities, as it has not earned significant revenue or reached successful commercialization of its products. After considering its plans to mitigate the going concern risk, management has concluded that there are no material uncertainties related to events or conditions that may cast significant doubt upon the Company’s ability to continue as a going concern for a period of twelve months from the balance sheet date.

	Impairment of long-lived assets

	Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances indicating that the carrying value of the asset may not be recoverable. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use (being the present value of the expected future cash flows of the relevant asset or cash-generating unit). An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. Management evaluates impairment losses for potential reversals when events or circumstances warrant such consideration.

	Valuation of share-based compensation and warrants

	Management measures the costs for share-based compensation and warrants using market-based option valuation techniques. Assumptions are made and estimates are used in applying the valuation techniques. These include estimating the future volatility of the share price, expected dividend yield, expected risk-free interest rate, future employee turnover rates, future exercise behaviours and corporate performance. Such estimates and assumptions are inherently uncertain. Changes in these assumptions affect the fair value estimates of share-based compensation and warrants.

	The fair value of the warrant liability was calculated using a Black-Scholes fair value model and was then recorded at its relative fair value following an approach to allocate proceeds to the warrant liability and shares. The difference between the independent Black-Scholes warrant value and the relative fair value of the warrants represents a discount on issuance that is being amortized over the five-year life of the warrants.

	Functional currency

	Management considers the determination of the functional currency of the Company a significant judgment. Management has used its judgment to determine the functional currency that most faithfully represents the economic effects of the underlying transactions, events and conditions and considered various factors including the currency of historical and future expenditures and the currency in which funds from financing activities are generated. A Company’s functional currency is only changed when there is a material change in the underlying transactions, events and conditions.

3.	Significant accounting policies

	The Company’s significant accounting policies were outlined in the Company’s annual audited consolidated financial statements for the year ended December 31, 2018, and have been applied consistently to all periods presented in these unaudited interim condensed consolidated financial statements, except for the newly adopted standards described in note 3(c). In the opinion of management, all adjustments considered necessary for fair presentation have been included in these unaudited interim condensed consolidated financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements for the year ended December 31, 2018.

- 6 -

TRILLIUM THERAPEUTICS INC.

Notes to the Interim Condensed Consolidated Financial Statements

For the three and nine months ended September 30, 2019 and 2018

Amounts in thousands of Canadian dollars, except per share amounts and where noted

(Unaudited)

3.	Significant accounting policies (continued)

(a)	Basis of consolidation

	These unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Trillium Therapeutics USA Inc.

	Subsidiaries are fully consolidated from the date at which control is determined to have occurred and are deconsolidated from the date that the Company no longer controls the entity. The financial statements of the subsidiaries are prepared for the same reporting period as the Company using consistent accounting policies. Intercompany transactions, balances and gains and losses on transactions between subsidiaries are eliminated.

(b)	Revenue recognition

	The Company recognizes revenue at the inception of a license or option agreement when there are no future performance obligations.

	With the application of the sales-based royalties exception, sales-based royalties contingent on sales-based thresholds are recognized when the subsequent sales occur.

(c)	New standards, amendments and interpretations adopted during 2019

	IFRS 16 Leases

	IFRS 16 Leases ("IFRS 16") sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model, with certain exemptions. The standard includes two recognition exemptions for lessees – leases of "low-value" assets and short-term leases with a lease term of 12 months or less. At the commencement date of a lease, a lessee will recognize a liability to make lease payments and an asset representing the right to use the underlying asset during the lease term. Lessees will be required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessees are also required to remeasure the lease liability upon the occurrence of certain events such as a change in lease term. The lessee will generally recognize the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. The new standard was effective for annual periods beginning on or after January 1, 2019.

	The Company adopted IFRS 16 using the modified retrospective transition approach, and elected to use the exemptions proposed by the standard on lease contracts for which the lease term ends within 12 months as of the lease commencement date and on lease contracts where the underlying asset is of low value. The Company has leases of certain office equipment (i.e. photocopying machines) that are considered of low value.

	The effect of adoption of IFRS 16 as at January 1, 2019 (increase/(decrease)) was as follows:

	January 1, 2019
	$

Assets
Right-of-use asset (included in property and equipment)	419
Prepayments	(111	)
	308
Liabilities
Lease liabilities (included in other liabilities)	786
Deferred lease inducement	(407	)
	379
Deficit	(71	)

- 7 -

TRILLIUM THERAPEUTICS INC.

Notes to the Interim Condensed Consolidated Financial Statements

For the three and nine months ended September 30, 2019 and 2018

Amounts in thousands of Canadian dollars, except per share amounts and where noted

(Unaudited)

3.	Significant accounting policies (continued)

	The Company recognized a right-of-use asset based on the amount equal to the lease liability, adjusted for any related prepaid and accrued lease payments previously recognized. The lease liability was recognized based on the present value of remaining lease payments, discounted using the incremental borrowing rate at the date of initial application. The lease payments include fixed payments less any lease incentives receivable, variable lease payments that depend on an index or rate, and amounts expected to be paid under residual value guarantees. The variable lease payments that do not depend on an index or a rate are recognized as expense in the period as incurred.

	The Company also applied the following available practical expedients:

		Excluded the initial direct costs from the measurement of the right-of-use asset at the date of initial application;
		Used hindsight in determining the lease term where the contract contains options to extend or terminate the lease; and
		Elected not to separate non-lease components from lease components, and instead accounted for each lease component and any associated non-lease components as a single lease component.

	In addition to the Mississauga facility lease that was transitioned as at January 1, 2019, an office lease for operations in Cambridge, Massachusetts was recognized under IFRS 16 during the nine months ended September 30, 2019. This lease resulted in the recognition of a right-of-use asset and corresponding lease liability of $797.

	The carrying amounts of the Company’s right-of-use assets and lease liabilities and movements during the period were as follows:

	Right-of-use		Lease
	assets		liabilities
	$		$

Balance, January 1, 2019	419		786
Additions	797		797
Depreciation expense	(180	)	-
Accreted interest expense	-		153
Payments	-		(318	)
Balance, September 30, 2019	1,036		1,418

	The Company recognized rent expense from short-term leases of $17 and variable lease payments of $134 for the nine months ended September 30, 2019.

4.	Intangible assets

	For the nine months ended September 30, 2019, the Company recognized an impairment charge of $3,897 to fully write down the remaining carrying value of the intangible assets recognized in the January 26, 2016 acquisition of Fluorinov Pharma Inc. ("Fluorinov"). The factors leading to this impairment included the discontinuation of discovery research activities and revised expected realization from Fluorinov legacy products.

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TRILLIUM THERAPEUTICS INC.

Notes to the Interim Condensed Consolidated Financial Statements

For the three and nine months ended September 30, 2019 and 2018

Amounts in thousands of Canadian dollars, except per share amounts and where noted

(Unaudited)

5.	Accounts payable and accrued liabilities

	September 30,	December 31,
	2019	2018
	$	$

Trade and other payables	1,542	649
Accrued liabilities	11,147	11,344
Due to related parties	589	903
	13,278	12,896

Amounts due to related parties include cash-settled deferred share units ("DSUs"), accrued vacation and expense reimbursements.

6.	Other liabilities

(a)	Trillium is indebted to the Federal Economic Development Agency for Southern Ontario under a non-interest-bearing contribution agreement and is making monthly repayments of $10 through November 2019. As at September 30, 2019 and December 31, 2018, the balance repayable was $9 and $96, respectively. The loan payable was discounted using an estimated market interest rate of 15%. Interest expense accretes on the discounted loan amount until it reaches its face value at maturity.

(b)	As at September 30, 2019 and December 31, 2018, the Company had short-term liabilities of $274 and $nil, and long-term lease liabilities of $1,144 and $nil, respectively, for facility leases.

(c)	As at September 30, 2019 and December 31, 2018, the Company had a long-term liability of $nil and $127, respectively, related to contingent consideration on the acquisition of Fluorinov. On May 13, 2019, Trillium and former Fluorinov shareholders amended the Fluorinov purchase agreements to remove the existing milestone and royalty payments in favour of a revenue sharing arrangement. On the deletion of the milestones from the agreements, the contingent consideration was reduced to $nil.

(d)	As at September 30, 2019 and December 31, 2018, the Company had a short-term liability of $508 and $nil, respectively, related to a retention provision for key employees.

7.	Share capital

(a)	Authorized

	The authorized share capital of the Company consists of an unlimited number of common shares, Class B shares and First Preferred Shares, in each case without nominal or par value. Common shares are voting and may receive dividends as declared at the discretion of the board of directors. Class B shares are non-voting and convertible to common shares at the holder’s discretion, on a one-for-one basis. Upon dissolution or wind-up of the Company, Class B shares participate rateably with the common shares in the distribution of the Company’s assets. First Preferred Shares have voting rights as decided upon by the board of directors at the time of grant. Upon dissolution or wind-up of the Company, First Preferred Shares are entitled to priority over common and Class B shares.

	The Company has Series I First Preferred Shares that are non-voting, may receive dividends as declared at the discretion of the board of directors, and are convertible to common shares at the holder’s discretion, on the basis of 30 Series I First Preferred Shares for one common share.

	The Company has Series II First Preferred Shares that are non-voting, may receive dividends as declared at the discretion of the board of directors, and are convertible to common shares at the holder’s discretion, on the basis of one Series II First Preferred Share for one common share.

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TRILLIUM THERAPEUTICS INC.

Notes to the Interim Condensed Consolidated Financial Statements

For the three and nine months ended September 30, 2019 and 2018

Amounts in thousands of Canadian dollars, except per share amounts and where noted

(Unaudited)

7.	Share capital (continued)

	Holders may not convert Series I or Series II First Preferred Shares into common shares if, after giving effect to the exercise of conversion, the holder would have beneficial ownership or direction or control over common shares in excess of 4.99% of the then outstanding common shares. This limit may be raised at the option of the holder on 61 days’ prior written notice: (i) up to 9.99%, (ii) up to 19.99%, subject to clearance of a personal information form submitted by the holder to the Toronto Stock Exchange; and (iii) above 19.99%, subject to approval by the Toronto Stock Exchange and shareholder approval.

(b)	Share capital issued – nine months ended September 30, 2019

	In February 2019, the Company completed an underwritten public offering of 6,550,000 common share units and 12,200,000 Series II Non-Voting Convertible First Preferred Share units, each issued at U.S. $0.80 per unit. The gross proceeds from this offering were $19,800 (U.S. $15,000), before deducting offering expenses of $1,476 (U.S. $1,119). Each common share unit comprises one common share of the Company and one common share purchase warrant. Each common share purchase warrant will be exercisable for one common share at a price of U.S. $0.96 per common share purchase warrant for 60 months. Each preferred share unit comprises one Series II First Preferred Share and one Series II First Preferred Share purchase warrant. Each Series II First Preferred Share purchase warrant will be exercisable for one Series II First Preferred Share at a price of U.S. $0.96 per Series II First Preferred Share purchase warrant for 60 months. Each purchase warrant has a price protection feature that resets the exercise price of the warrant under certain conditions including the issuance of common shares, or securities convertible into common shares, at prices below the exercise price.

	Proceeds were allocated amongst common shares, preferred shares and warrants by applying a relative fair value approach, with fair value of the warrants determined using the Black-Scholes model, resulting in an initial warrant liability of $7,662. The difference between the allocated amount of the warrants and their fair value was a discount of $3,319, which is being amortized on a straight-line basis over the five-year term of the warrants. Purchase warrants are recognized as liabilities, as the price protection feature creates potential variability in the price at which the warrants will be settled as well as the warrants being issued in U.S. dollars, which differs from the Company’s functional currency. Warrants are revalued each period-end at fair value through profit and loss. The change in fair value of the warrant liability for the nine months ended September 30, 2019 was $7,575.

	The warrant liability was determined based on the fair value of warrants at the issue date and the reporting date using the Black-Scholes model with the following assumptions:

	Issue date	Reporting date
	February 28, 2019	September 30, 2019
Expected warrant life	5.0 years	4.4 years
Risk-free interest rate	1.8%	1.3%
Dividend yield	0%	0%
Expected volatility	86.9%	90.6%

The risk-free interest rate is based on the implied yield on a Government of Canada zero-coupon issue with a remaining term equal to the expected term of the warrants. The expected volatility is based on the historical volatility for the Company.

During the nine months ended September 30, 2019, 6,800,000 Series II First Preferred Shares were converted into 6,800,000 common shares.

Share capital issued – nine months ended September 30, 2018

In a June 2018 amendment to the license agreement for SIRPαFc, the sublicense revenue sharing provisions were removed in return for a payment to the licensors of $3,000 in the form of 369,621 common shares, which was recorded in research and development expenses.

During the nine months ended September 30, 2018, 35,154,286 Series I First Preferred Shares were converted into 1,171,806 common shares.

- 10 -

TRILLIUM THERAPEUTICS INC.

Notes to the Interim Condensed Consolidated Financial Statements

For the three and nine months ended September 30, 2019 and 2018

Amounts in thousands of Canadian dollars, except per share amounts and where noted

(Unaudited)

7.	Share capital (continued)

(c)	Weighted average number of common shares

	The weighted average number of common shares outstanding for the three and nine months ended September 30, 2019 were 28,038,831 and 24,214,106, respectively (2018 – 14,369,911 and 13,642,288, respectively). The Company has not adjusted its weighted average number of common shares outstanding in the calculation of diluted loss per share, as any adjustment would be antidilutive.

(d)	Stock option plan

	The 2018 Stock Option Plan was approved by the Company’s shareholders at the annual meeting held on June 1, 2018. Stock options granted are equity-settled, have a vesting period of between 18 months and 4 years and have a maximum term of 10 years. The total number of common shares available for issuance under the Company’s 2018 Stock Option Plan is 3,894,501. As at September 30, 2019, the Company was entitled to issue an additional 1,363,475 stock options under the 2018 Stock Option Plan.

	In September 2019, the Company introduced an Inducement Stock Option Plan for new executive hires. Stock options granted are equity-settled, have a vesting period of 4 years and have a maximum term of 10 years. The total number of common shares available for issuance under the Inducement Stock Option Plan is 3,000,000. As at September 30, 2019, the Company was entitled to issue an additional 1,200,000 stock options under the Inducement Stock Option Plan.

	Changes in the number of options outstanding during the nine months ended September 30 were as follows:

				2019				2018

				Weighted				Weighted
				average				average
	Number of			exercise	Number of			exercise
	options			price	options			price

Balance, beginning of period	2,699,205		$	9.69	1,746,982		$	12.87
Granted	2,496,500			0.59	212,000			7.92
Forfeited	(170,763	)		12.91	(128,356	)		12.98
Cancelled/Expired	(693,916	)		12.01	(396	)		13.98

Balance, end of period	4,331,026		$	3.83	1,830,230		$	12.29

Options exercisable, end of period	1,032,412		$	9.91	1,074,451		$	13.02

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TRILLIUM THERAPEUTICS INC.

Notes to the Interim Condensed Consolidated Financial Statements

For the three and nine months ended September 30, 2019 and 2018

Amounts in thousands of Canadian dollars, except per share amounts and where noted

(Unaudited)

7.	Share capital (continued)

	The following table reflects stock options outstanding as at September 30, 2019:

		Stock options outstanding			Stock options exercisable

		Weighted average
		remaining
	Number	contractual life		Weighted average	Number		Weighted average
Exercise prices	outstanding	(in years)		exercise price	exercisable		exercise price

$0.38 - $0.77	2,496,500	9.9	$	0.59	-		-
$3.90 - $4.23	856,300	9.1	$	4.23	340,000	$	4.23
$6.36 - $9.89	432,953	7.4	$	7.96	239,273	$	8.08
$10.35 - $12.22	221,217	6.4	$	11.28	162,735	$	10.95
$13.98 - $15.30	175,214	6.6	$	14.04	146,189	$	14.04
$17.00 - $23.44	119,842	6.0	$	19.22	115,215	$	19.22
$28.05	29,000	5.7	$	28.05	29,000	$	28.05

	4,331,026	9.0	$	3.83	1,032,412	$	9.91

Share-based compensation expense was determined based on the fair value of the options at the date of measurement using the Black-Scholes model with the weighted average assumptions for the nine months ended September 30 as follows:

	2019	2018
Expected option life	6.0 years	6.1 years
Risk-free interest rate	1.3%	2.1%
Dividend yield	0%	0%
Expected volatility	89.0%	82.9%

For the nine months ended September 30, 2019 and 2018, the Company issued 2,496,500 and 212,000 stock options with a fair value of $1,084 and $1,195 and a weighted average grant date fair value of $0.43 and $5.64, respectively.

During the nine months ended September 30, 2019, 340,000 unvested stock options were modified to be fully vested. The modification resulted in the recognition of $790 of share-based compensation expense in the period but no additional incremental fair value.

(e)	Deferred Share Unit Plan

	The board of directors approved a Cash-Settled DSU Plan on November 9, 2016. For the nine months ended September 30, 2019 and 2018, there were 807,261 and 14,309 DSUs issued, respectively. The fair values of issued DSUs as at September 30, 2019 and December 31, 2018 were $510 and $806, respectively. The number of DSUs outstanding as at September 30, 2019 and December 31, 2018 were 1,142,243 and 334,982, respectively.

8.	Revenue

	In July 2019, the Company entered into a right-to-use license agreement for one of its small molecule compounds, with initial license fees of $131 (U.S. $100). Sales-based royalties, anniversary payments, and milestone payments will be recognized when incurred in future periods.

	For the three months ended September 30, 2019, the Company recognized licensing revenues of $131 (2018 - $nil). For the nine months ended September 30, 2019, the Company recognized licensing revenues of $165 (2018 - $nil).

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TRILLIUM THERAPEUTICS INC.

Notes to the Interim Condensed Consolidated Financial Statements

For the three and nine months ended September 30, 2019 and 2018

Amounts in thousands of Canadian dollars, except per share amounts and where noted

(Unaudited)

9.	Research and development

	Components of research and development expenses for the three months ended September 30 were as follows:

	2019		2018
	$		$

Research and development programs, excluding the below items	4,797		7,375
Salaries, fees and short-term benefits	2,279		1,988
Share-based compensation	401		636
Amortization of intangible assets	584		585
Depreciation of property and equipment	264		202
Tax credits	(15	)	(34	)
	8,310		10,752

Components of research and development expenses for the nine months ended September 30 were as follows:

	2019		2018
	$		$

Research and development programs, excluding the below items	16,984		19,850
Salaries, fees and short-term benefits	8,302		6,396
License agreement amendment (note 7(b))	-		3,000
Share-based compensation	1,457		1,393
Amortization of intangible assets	1,754		1,754
Depreciation of property and equipment	758		606
Change in fair value of contingent consideration	(127	)	-
Tax credits	(146	)	(184	)
	28,982		32,815

10.	General and administrative

	Components of general and administrative expenses for the three months ended September 30 were as follows:

	2019	2018
	$	$

General and administrative expenses, excluding the below items	605	372
Salaries, fees and short-term benefits	674	640
Change in fair value of deferred share units	11	6
Share-based compensation	88	82
	1,378	1,100

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TRILLIUM THERAPEUTICS INC.

Notes to the Interim Condensed Consolidated Financial Statements

For the three and nine months ended September 30, 2019 and 2018

Amounts in thousands of Canadian dollars, except per share amounts and where noted

(Unaudited)

10.	General and administrative (continued)

	Components of general and administrative expenses for the nine months ended September 30 were as follows:

	2019		2018
	$		$

General and administrative expenses, excluding the below items	1,824		1,435
Salaries, fees and short-term benefits	2,060		1,887
Change in fair value of deferred share units	(789	)	(204	)
Share-based compensation	207		258
	3,302		3,376

11.	Commitments and contingencies

	As at September 30, 2019, the Company had obligations to make future payments, representing significant research and development contracts and other commitments that are known and committed in the amount of approximately $19,528. Most of these agreements are cancellable by the Company with notice. These commitments include agreements related to the conduct of the clinical trials, sponsored research, manufacturing and preclinical studies. The Company also has minimum lease payments for operating lease commitments, primarily for its office and laboratory leases, in the amount of $506 over the next 12 months and $1,474 thereafter. The Mississauga facility lease contains options for early termination and for lease extension. The Company has potential future payments of $1,491 related to retention agreements for key employees.

	The Company enters into research, development and license agreements in the ordinary course of business where the Company receives research services and rights to proprietary technologies. Milestone and royalty payments that may become due under various agreements are dependent on, among other factors, clinical trials, regulatory approvals and ultimately the successful development of a new drug, the outcome and timing of which are uncertain. Under the license agreement for SIRPαFc, the Company has future contingent milestones payable of $25 related to successful patent grants, $200 and $300 on the first patient dosed in phase 2 and 3 trials, respectively, regulatory milestones on their first achievement totalling $5,000, and royalties on commercial sales.

	Under the May 2019 amending agreement, Trillium and the former Fluorinov shareholders will share 50% of net revenues relating to Fluorinov’s legacy products.

	The Company has two agreements with Catalent Pharma Solutions pursuant to which Trillium acquired the right to use a proprietary expression system for the manufacture of two SIRPαFc constructs. Consideration for each license includes potential pre-marketing approval milestones of up to U.S. $875 and aggregate sales milestone payments of up to U.S. $28,750.

	The Company periodically enters into research and license agreements with third parties that include indemnification provisions customary in the industry. These guarantees generally require the Company to compensate the other party for certain damages and costs incurred as a result of claims arising from research and development activities undertaken by or on behalf of the Company. In some cases, the maximum potential amount of future payments that could be required under these indemnification provisions could be unlimited. These indemnification provisions generally survive termination of the underlying agreement. The nature of the indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay. Historically, the Company has not made any indemnification payments under such agreements and no amount has been accrued in the unaudited interim condensed consolidated financial statements with respect to these indemnification obligations.

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TRILLIUM THERAPEUTICS INC.

Notes to the Interim Condensed Consolidated Financial Statements

For the three and nine months ended September 30, 2019 and 2018

Amounts in thousands of Canadian dollars, except per share amounts and where noted

(Unaudited)

12.

Financial instruments

(a)	Fair value

	IFRS 13 Fair Value Measurement provides a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs are those that reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions with respect to how market participants would price an asset or liability. These two inputs used to measure fair value fall into the following three different levels of the fair value hierarchy:

	Level 1	Quoted prices in active markets for identical instruments that are observable.
	Level 2	Quoted prices in active markets for similar instruments; inputs other than quoted prices that are observable and derived from or corroborated by observable market data.
	Level 3	Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

	The hierarchy requires the use of observable market data when available.

	The Company has classified cash and cash equivalents as Level 1. The marketable securities and loan payable have been classified as Level 2. The warrant liability in other liabilities has been classified as Level 3.

	Cash and cash equivalents, marketable securities, amounts receivable, accounts payable and accrued liabilities, and other current liabilities, due within one year, are all short-term in nature and, as such, their carrying values approximate fair values. Marketable securities, which primarily include guaranteed investment certificates held by the Company, are valued at amortized cost.

(b)	Liquidity risk

	Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company is a development stage company and is reliant on external fundraising to support its operations. Once funds have been raised, the Company manages its liquidity risk by investing in cash and short-term instruments to provide regular cash flow for current operations. It also manages liquidity risk by continuously monitoring actual and projected cash flows. The board of directors reviews and approves the Company’s operating and capital budgets, as well as any material transactions not in the ordinary course of business.

(c)	Currency risk

	The Company is exposed to currency risk related to the fluctuation of foreign exchange rates and the degree of volatility of those rates. Currency risk is limited to the portion of the Company’s business transactions denominated in currencies other than the Canadian dollar, which are primarily expenses in U.S. dollars. As at September 30, 2019 and December 31, 2018, the Company held U.S. dollar cash and cash equivalents and marketable securities in the amount of U.S. $25,677 and U.S. $30,208, and had U. S. dollar denominated accounts payable and accrued liabilities in the amount of U.S. $7,669 and U.S. $7,404, respectively. Therefore, a 1% change in the foreign exchange rate would have a net impact on finance costs as at September 30, 2019 and December 31, 2018 of $238 and $296, respectively.

	U. S. dollar expenses for the nine months ended September 30, 2019 and 2018 were approximately U.S. $13,955 and U.S. $12,660, respectively. Varying the U.S. exchange rate for the nine months ended September 30, 2019 and 2018 to reflect a 1% strengthening of the Canadian dollar would have decreased the net loss by approximately $186 and $163, respectively, assuming that all other variables remained constant.

13.	Events after the balance sheet date

	On October 22, 2019, the Company announced a corporate restructuring which included a headcount reduction. The Company expects to incur estimated cash payments of $1,100 related to employee separation benefits. This restructuring charge is expected to be incurred in the fourth quarter of 2019.

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