INTERIM
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the interim period ended February
28, 2013
April 11, 2013
This interim Management’s Discussion and Analysis (“MD&A”)
of Lorus Therapeutics Inc. (“Lorus”, the “Company”, “we”, “us” and similar expressions)
should be read in conjunction with the Company’s unaudited condensed consolidated interim financial statements for the three
and nine months ended February 28, 2013 and February 29, 2012. The February 28, 2013 unaudited condensed consolidated interim
financial statements and additional information about the Company, including the annual audited financial statements and MD&A
for the year ended May 31, 2012, and the most recent Annual Information Form (“AIF”) can be found on SEDAR at www.sedar.com.”
CAUTION
REGARDING FORWARD-LOOKING STATEMENTS
This MD&A is
prepared as of April 11, 2013. This MD&A may contain forward-looking statements within the meaning of securities laws, and
that involve known and unknown risks and uncertainties which are beyond the control of the Company. Such statements include, but
are not limited to, statements relating to:
| · | our
ability to obtain
the substantial capital
we require to fund
research and operations; |
| · | our
plans to secure and
maintain strategic
partnerships to assist
in the further development
of our product candidates;
|
| · | our
plans to conduct
clinical trials and
pre-clinical programs; |
| · | our
expectations regarding
the progress and
the successful and
timely completion
of the various stages
of our drug discovery,
pre-clinical and
clinical studies
and the regulatory
approval process; |
| · | our
plans, objectives,
expectations and
intentions; and |
| · | other
statements including
words such as “anticipate”,
“contemplate”,
“continue”,
“believe”,
“plan”,
“estimate”,
“expect”,
“intend”,
“will”,
“should”,
“may”,
and other similar
expressions. |
The forward-looking
statements reflect our current views with respect to future events, are subject to risks and uncertainties, and are based upon
a number of estimates and assumptions that, while considered reasonable by us, are inherently subject to significant business,
economic, competitive, political and social uncertainties and contingencies. Many factors could cause our actual results, performance
or achievements to be materially different from any future results, performance, or achievements that may be expressed or implied
by such forward-looking statements, including, among others:
| · | our
ability to continue
as a going concern; |
| · | our
ability to obtain
the substantial capital
we require to fund
research and operations; |
| · | our
lack of product revenues
and history of operating
losses; |
| · | our
early stage of development,
particularly the
inherent risks and
uncertainties associated
with (i) developing
new drug candidates
generally, (ii) demonstrating
the safety and efficacy
of these drug candidates
in clinical studies
in humans, and (iii)
obtaining regulatory
approval to commercialize
these drug candidates; |
| · | our
drug candidates require
time-consuming and
costly preclinical
and clinical testing
and regulatory approvals
before commercialization; |
| · | clinical
studies and regulatory
approvals of our
drug candidates are
subject to delays,
and may not be completed
or granted on expected
timetables, if at
all, and such delays
may increase our
costs and could delay
our ability to generate
revenue; |
| · | the
regulatory approval
process; |
| · | our
ability to recruit
patients for clinical
trials; |
| · | the
progress of our clinical
trials; |
| · | our
liability associated
with the indemnification
of Old Lorus and
its directors, officers
and employees in
respect of the arrangement;
|
| · | our
ability to find and
enter into agreements
with potential partners; |
| · | our
ability to attract
and retain key personnel; |
| · | our
ability to obtain
patent protection; |
| · | our
ability to protect
our intellectual
property rights and
not infringe on the
intellectual property
rights of others; |
| · | our
ability to comply
with applicable governmental
regulations and standards; |
| · | development
or commercialization
of similar products
by our competitors,
many of which are
more established
and have or have
access to greater
financial resources
than us; |
| · | commercialization
limitations imposed
by intellectual property
rights owned or controlled
by third parties; |
| · | our
business is subject
to potential product
liability and other
claims; |
| · | our
ability to maintain
adequate insurance
at acceptable costs; |
| · | further
equity financing
may substantially
dilute the interests
of our shareholders; |
| · | changing
market conditions;
and |
| · | other
risks detailed from
time-to-time in our
on-going quarterly
filings, annual information
forms, annual reports
and annual filings
with Canadian securities
regulators and the
SEC, and those which
are discussed under
the heading “Risk
Factors” in
this document. |
Should one or more of these risks or
uncertainties materialize, or should the assumptions set out in the section entitled “Risk Factors” underlying those
forward-looking statements prove incorrect, actual results may vary materially from those described herein. These forward-looking
statements are made as of the date of this managements discussion and analysis or, in the case of documents incorporated by reference
herein, as of the date of such documents, and we do not intend, and do not assume any obligation, to update these forward-looking
statements, except as required by law. We cannot assure you that such statements will prove to be accurate as actual results and
future events could differ materially from those anticipated in such statements. Investors are cautioned that forward-looking
statements are not guarantees of future performance and accordingly investors are cautioned not to put undue reliance on forward-looking
statements due to the inherent uncertainty therein.
LIQUIDITY
AND CAPITAL RESOURCES
Since its inception, Lorus has financed
its operations and technology acquisitions primarily from equity and debt financing, proceeds from the exercise of warrants and
stock options, and interest income on funds held for future investment. We plan to continue our development programs from internal
and external resources as they are available.
We have not earned substantial revenues
from our drug candidates and are therefore considered to be in the development stage. The continuation of our research and development
activities and the commercialization of the targeted therapeutic products are dependent upon our ability to successfully finance
and complete our research and development programs through a combination of equity financing and payments from strategic partners.
We have no current sources of significant payments from strategic partners.
There is substantial doubt about the Company’s
ability to continue as a going concern because management has forecasted that the Company's current level of cash and cash equivalents
will not be sufficient to execute its current planned expenditures for the next 12 months without further financing being obtained.
The Company is currently in discussion with several potential investors to provide additional funding. Management believes that
it will complete one or more of these arrangements in sufficient time to continue to execute its planned expenditures without
interruption. However, there can be no assurance that the capital will be available as necessary to meet these continuing expenditures,
or if the capital is available, that it will be on terms acceptable to the Company. The issuance of common shares by the Company
could result in significant dilution in the equity interest of existing shareholders. The Company is also considering alternatives
to delay its research programs or further reduce expenditures until financing is available. There can be no assurance that the
Company will be able to obtain sufficient financing to meet future operational needs. As a result, there is substantial doubt
as to whether the Company will be able to continue as a going concern and realize its assets and pay its liabilities as they fall
due.
The financial
statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate. If the
going concern basis were not appropriate for these financial statements, then adjustments would be necessary in the carrying value
of the assets and liabilities, the reported revenues and expenses and the balance sheet classifications used.
OVERVIEW
Lorus is a life sciences company focused
on the discovery, research, and development of effective anticancer therapies with a high safety profile. Lorus has worked to
establish a diverse anticancer product pipeline, with products in various stages of development. A growing intellectual property
portfolio supports our diverse product pipeline.
We believe that the future of cancer treatment
and improved patient quality of life lies in drugs that are not only effective with minimal side effects, but also approach the
treatment of cancer in novel ways through drugs that offer a unique mechanism of action. Many drugs currently approved for the
treatment and management of cancer are toxic with often limiting side effects, especially when used in combination. We therefore
believe that a product development plan based on novel, effective drugs with minimal potential for toxicity alone or in combination
will have broad applications in cancer treatment.
Lorus' strategy is to continue the development
of our product pipeline using several therapeutic approaches. Each therapeutic approach is dependent on different technologies,
which we believe mitigates the development risks associated with a single technology platform. We evaluate the merits of each
product throughout the clinical trial process and consider commercial viability as appropriate. The most advanced anticancer drugs
in our pipeline, each of which flow from different platform technologies, are small molecules and immunotherapeutics.
Our business model is to take our product
candidates through pre-clinical testing and into Phase I and Phase II clinical trials. It is our intention to partner or co-develop
these drug candidates after successful completion of Phase I or II clinical trials. Lorus will give careful consideration in the
selection of partners that can best advance its drug candidates into a pivotal Phase III clinical trial and, upon positive results,
successfully commercialize our products on a global or regional basis. Our objective is to receive upfront and milestone payments
as well as sales royalties from such partnerships, which will support continued development of our other product candidates.
Our success is dependent upon several factors,
including, maintaining sufficient levels of funding through public and/or private financing, establishing the efficacy and safety
of our products in clinical trials and securing strategic partnerships.
Our net loss for the three months ended
February 28, 2013 was $1.4 million ($0.03 per share) compared to $1.0 million ($0.05 per share) in the same period in the prior
year. The Company incurred a net loss of $4.2 million ($0.10 per share) for the nine month period ended February 28, 2013 compared
to $3.6 million ($0.18 per share) during the same period in the prior year.
In the three month period ended February
28, 2013, research and development expenditures increased by $346 thousand compared with the same period in the prior year, due
to the manufacture of additional quantities of LOR-253, increased clinical costs associated with the LOR-253 Phase I clinical
trial as well as spending on our IL-17E and LOR-500 programs initiated and escalated in the current year. General and administrative
expenses remained consistent in the current quarter in comparison with the same period in the prior year.
In the nine month period ended February
28, 2013, research and development expenditures increased by $678 thousand compared with the same period in the prior year, due
to the manufacture of additional quantities of LOR-253, increased clinical costs associated with the LOR-253 Phase I clinical
trial as well as spending on our IL-17E program initiated in the current year and escalated efforts on our LOR-500 program. General
and administrative expenses remained consistent year over year in the nine months ended February 28, 2013 as increased legal costs
associated with licensing activities were offset by a reduction in the deferred share unit liability.
We utilized cash of $1.3 million in our
operating activities in the three-month period ended February 28, 2013 compared with $1.0 million during the same period the prior
year. For the nine months ended February 28, 2013 we utilized cash of $4.2 million compared with $2.9 million in the same period
last year. The increase in cash utilized is primarily due to increased research and development activities.
At February 28, 2013, we had cash and cash
equivalents of $1.6 million compared to $320 thousand at May 31, 2012.
RESULTS
OF OPERATIONS
Research and Development
Research and development expenses totaled
$889 thousand in the three-month period ended February 28, 2013 compared to $543 thousand during the same period in the prior
year and totaled $2.5 million in the nine month period ended February 28, 2013 as compared to $1.8 million in the same period
in the prior year. Research and development expenses consisted of the following:
| | |
Three months ended | | |
Nine months ended | |
| | |
Feb 28, 2013 | | |
Feb 29, 2012 | | |
Feb 28, 2013 | | |
Feb 29, 2012 | |
| | |
| | |
| | |
| | |
| |
| Stock based compensation | |
$ | 58 | | |
$ | 11 | | |
| 142 | | |
| 132 | |
| Depreciation of equipment | |
| 8 | | |
| 8 | | |
| 24 | | |
| 25 | |
| Program costs | |
| 823 | | |
| 524 | | |
| 2,291 | | |
| 1,622 | |
| | |
$ | 889 | | |
| 543 | | |
| 2,457 | | |
| 1,779 | |
Program costs by program:
| | |
Three months ended | | |
Nine months ended | |
| | |
Feb 28, 2013 | | |
Feb 29, 2012 | | |
Feb 28, 2013 | | |
Feb 29, 2012 | |
| | |
| | |
| | |
| | |
| |
| Small molecules | |
$ | 705 | | |
$ | 524 | | |
$ | 1,968 | | |
$ | 1,622 | |
| Immunotherapy | |
| 118 | | |
| — | | |
| 323 | | |
| — | |
| Total | |
$ | 823 | | |
$ | 524 | | |
$ | 2,291 | | |
$ | 1,622 | |
The increase in research and development
costs during the three months ended February 28, 2013 is primarily the result of increased activity on our LOR-253 program as
we manufactured additional quantities of the drug and as the Biomarker portion of the Phase I clinical trial escalates and approaches
completion. In addition during the current fiscal year we initiated development on our IL-17E program and costs associated with
this program will escalate in the latter portion of the fiscal year as Lorus initiates the manufacturing program to support Cancer
Research UK’s development. Finally, during the three months ended February 28, 2013 we have escalated our research efforts
on our pre-clinical compound LOR-500 including additional personnel and some outsourced research costs.
The increase in research and development
costs for the nine months ended February 28, 2013 again is due to the manufacturing of additional quantities of LOR-253 and increased
activity in the Phase I clinical trial which completed the dose escalation part of the Phase I study in January 2013 as well as
the initiation of activities to support the IL-17E program and the escalation of efforts to develop LOR-500.
General and Administrative
General and administrative expenses totaled
$491 thousand in the three-month period ended February 28, 2013 compared to $479 thousand in same period in the prior year. For
the nine month period ended February 28, 2013, general and administrative expenses were $1.8 million compared with $1.8 million
in the same period in the prior year.
Components
of general and administrative expenses:
| | |
Three months ended | | |
Nine months ended | |
| | |
Feb 28, 2013 | | |
Feb 29, 2012 | | |
Feb 28, 2013 | | |
Feb 29, 2012 | |
| | |
| | |
| | |
| | |
| |
| Stock based compensation | |
$ | 82 | | |
$ | 10 | | |
$ | 238 | | |
$ | 336 | |
| Depreciation of equipment | |
| 1 | | |
| 3 | | |
| 4 | | |
| 8 | |
| General and administrative excluding salaries | |
| 309 | | |
| 303 | | |
| 1,138 | | |
| 960 | |
| Salaries | |
| 99 | | |
| 163 | | |
| 432 | | |
| 521 | |
| | |
$ | 491 | | |
$ | 479 | | |
$ | 1,812 | | |
$ | 1,825 | |
Stock based compensation expense was higher
in the three months ended February 28, 2013 compared with the same period in the prior year due to increased grants in the current
year as well as the vesting schedules of those grants (more up front vesting in the prior year) as well as all grants occuring
in the first quarter in the current year compared with the second and fourth quarters in the prior year. Stock based compensation
is lower for the nine month periods ended February 28, 2013 compared with the same period in the prior year due to certain one
time grants in the prior year and the cancellation of certain outstanding options in the prior year (resulting in the acceleration
of expense) which increased stock based compensation charges.
General and administrative expenses excluding
salaries were consistent in the three months ended February 28, 2013 compared with the same period in the prior year. General
and administrative expenses excluding salaries were higher in the nine months ended February 28, 2013 compared with the prior
year due primarily to increased legal fees associated with licensing activities and higher investor relations costs due to increased
activity in the current year. Salary costs in the three months ended February 28, 2013 were lower than the prior year due to a
reduction in the Deferred Share Unit (“DSU”) liability (marked to market). During the nine month period ended February
28, 2013 salary costs were lower than the prior year due to a reduction in the DSU liability as well as reduced salary and benefit
costs due to a lower headcount.
Finance Expense
Finance expense for the three months ended
February 28, 2013 was $nil compared with $3 thousand for the three months ended February 29, 2012. For the nine months ended February
28, 2013 finance expense was $6 compared with $3 thousand in the same period in the prior year. Finance expense incurred in the
nine months ended February 28, 2013 and February 29, 2012 relates to interest accrued at a rate of 10% on the related party promissory
notes described below and repaid in June 2012. There were no interest-bearing liabilities outstanding at February 28, 2013 and
$300 thousand outstanding at February 29, 2012.
Finance Income
Finance income totaled $9 thousand and
$26 thousand in the three and nine month periods ended February 28, 2013, respectively, compared to $2 thousand and $6 thousand
in the same periods in the prior year. Finance income represents interest earned on our cash and cash equivalent balances and
is higher in the current periods due to higher average cash and cash equivalents balances in the current year compared with the
prior year periods.
Net loss for the period
For the reasons discussed above, net loss
for the three months ended February 28, 2013 was $1.4 million ($0.03 per share) compared to $1.0 million ($0.05 per share) in
the same period in the prior year. The Company incurred a net loss of $4.2 million ($0.10 per share) for the nine months ended
February 28, 2013 compared to $3.6 million ($0.18 per share) during the same period in the prior year.
PRIVATE
PLACEMENT
On June 8, 2012 Lorus completed a private
placement (the “Private Placement”) of 20,625,000 units at a subscription price of $0.32 per unit, each unit
(“Unit”) consisting of one common share and one common share purchase warrant for gross proceeds to Lorus of
$6.6 million.
Each warrant is exercisable for a period
of 24 months from the date of issuance at an exercise price of $0.45 (the “Warrants”). If after one year (the
“Accelerated Exercise Date”) the closing price of the common shares on the Toronto Stock Exchange equals or
exceeds $0.90 for twenty consecutive days, then upon the Company sending the holders of Warrants written notice of such Accelerated
Exercise Date and issuing a news release announcing such Accelerated Exercise Date, the Warrants shall only be exercisable for
a period of 30 days following the date on which such written notice is sent to holders of Warrants.
Lorus paid a cash finder’s
fee of $396 thousand based on 6% of the gross proceeds of the Private Placement and issued 1,237,500 finder’s warrants at
an exercise price of $0.32 each. Each finder’s warrant is exercisable into Units consisting of 1,237,500 common shares and
1,237,500 Warrants.
The total costs
associated with the transaction were approximately $616 thousand which included the $135 thousand which represented the estimated
fair value of the finders warrants issued as part of the Private Placement. Each such finder warrant is exercisable for one Unit
at a price of $0.32 per Unit for a period of 24 months following the closing of the Offering. The Company has allocated the net
proceeds of the Offering to the common shares and the common share purchase warrants based on their estimated relative fair values.
Based on relative fair values, $4.3 million of the net proceeds were allocated to the common shares and $1.7 million to the common
share purchase warrants.
warrant
exercises
During the nine months ended February 28, 2013, 398,000 warrants
related to the August 2011 unit offering were exercised for proceeds of $179 thousand. The carrying amount related to these warrants
was $43 thousand and was transferred from warrants to share capital. There were no warrants exercised in the three months ended
February 28, 2013 or the three months ended February 29, 2012.
SELECTED
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The selected financial information provided
below is derived from the Company’s unaudited quarterly financial statements for each of the last eight quarters.
Research and development expenditures in
the quarters ended February 28, 2013 and November 30, 2012 increased over the prior quarters due the manufacture of additional
quantities of LOR-253 and increased activity in the Phase I clinical trial. Expenditures were lower in the quarter ended May 31,
2012 due to income tax credits earned.
The increased general and administrative
costs in the quarter ended November 30, 2011 was due to stock option grants and cancellations during the quarter which resulted
in higher than normal option expense. Increased spending in the three months ended November 30, 2012 was due to increase legal
costs associated with licensing activities.
Cash used in operating activities fluctuates
significantly due primarily to timing of payments and increases and decreases in the accounts payables and accrued liabilities
balances. The lower use of cash in the quarter ended May 31, 2012 was due to delaying payments which resulted in an increase in
accounts payable and accrued liabilities balances as the Company waited for the private placement to close. A subsequent use of
cash can be seen in the quarter ended August 31, 2012 as these balances were reduced.
| | |
Q3 | | |
Q2 | | |
Q1 | | |
Q4 | | |
Q3 | | |
Q2 | | |
Q1 | | |
Q4 | |
(Amounts
in 000’s except for per
common share data) | |
Feb
28,
2013 | | |
Nov
30,
2012 | | |
Aug
31,
2012 | | |
May
31,
2012 | | |
Feb
29,
2012 | | |
Nov
30,
2011 | | |
Aug
31,
2011 | | |
May
31,
2011 | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Revenue | |
$ | ― | | |
$ | ― | | |
$ | ― | | |
$ | ― | | |
$ | ― | | |
$ | ― | | |
$ | ― | | |
$ | ― | |
| Research and development
expense | |
| 889 | | |
| 910 | | |
| 658 | | |
| 391 | | |
| 543 | | |
| 648 | | |
| 588 | | |
| 536 | |
| General and administrative
expense | |
| 491 | | |
| 714 | | |
| 605 | | |
| 605 | | |
| 479 | | |
| 811 | | |
| 535 | | |
| 545 | |
| Net loss | |
| (1,371 | ) | |
| (1,613 | ) | |
| (1,263 | ) | |
| (1,013 | ) | |
| (1,023 | ) | |
| (1,457 | ) | |
| (1,121 | ) | |
| (1,077 | ) |
| Basic
and diluted net loss per share | |
$ | (0.03 | ) | |
$ | (0.04 | ) | |
$ | (0.03 | ) | |
$ | (0.05 | ) | |
$ | (0.05 | ) | |
$ | (0.07 | ) | |
$ | (0.06 | ) | |
$ | (0.07 | ) |
| Cash
(used in) operating activities | |
$ | (1,273 | ) | |
$ | (1,336 | ) | |
$ | (1,576 | ) | |
$ | (400 | ) | |
$ | (1,040 | ) | |
$ | (811 | ) | |
$ | (1,077 | ) | |
$ | (926 | ) |
Cash
Position and Outlook
At February 28, 2013, we had cash and cash
equivalents of $1.6 million compared to $320 thousand at May 31, 2012. The Company invests in highly rated and liquid debt instruments.
Investment decisions are made in accordance with an established investment policy administered by senior management and overseen
by the board of directors. Working capital (representing primarily cash, cash equivalents and other current assets less current
liabilities) at February 28, 2013 was $374 thousand (May 31, 2012 – negative $2.1 million).
As discussed above, management has forecasted
that the Company’s current level of cash and cash equivalents will not be sufficient to execute its current planned expenditures
for the next twelve months without further investment. The Company is currently investigating various alternatives to obtain sufficient
capital to continue its operations and has implemented a series of strategies to reduce research, development and overhead expenditures
until such time as it can obtain additional capital to fund its operations.
If we are able to secure additional financing,
we intend to use these resources to fund our existing drug development programs and develop new programs from our portfolio of
preclinical research technologies. The amounts actually expended for research and drug development activities and the timing of
such expenditures will depend on many factors, including the ability of the Company to raise additional capital, the progress
of the Company's research and drug development programs, the results of preclinical and clinical trials, the timing of regulatory
submissions and approvals, the impact of any internally developed, licensed or acquired technologies, our ability to find suitable
partnership agreements to assist financially with future development, the impact from technological advances, determinations as
to the commercial potential of the Company's compounds and the timing and development status of competitive products.
We do not expect to generate positive cash
flow from operations in the next several years due to additional research and development costs, including costs related to drug
discovery, preclinical testing, clinical trials, manufacturing costs and operating expenses associated with supporting these activities.
Negative cash flow will continue until such time, if ever, that we receive regulatory approval to commercialize any of our products
under development and/or royalty or milestone revenue from any such products exceeds expenses.
Until one of our drug candidates receives
regulatory approval and is successfully licensed or commercialized, Lorus will continue to incur operating losses. The magnitude
of these operating losses will be largely affected by the timing and scope of future research and development, clinical trials
and the Company’s ability to raise additional working capital and/or establish effective partnerships to share the costs
of development and clinical trials.
Contractual Obligations and Off-Balance Sheet Financing
The Company has entered into various contracts with service
providers with respect to the LOR-253 phase I clinical trial. These contracts could result in future payment commitments of approximately
$1.4 million. Of this amount, $737 thousand has been paid and $165 thousand has been accrued at February 28, 2013 (May 31, 2012
- $439 thousand paid and $70 thousand accrued). The payments are based on estimated services performed and final amounts maybe
higher or lower based on actual services performed.
On November 27, 2012 the Company announced it had entered into
a collaboration agreement with Cancer Research UK for the future development of immunotherapy IL-17E. Under this collaboration
agreement Lorus has committed to provide sufficient quantity of the drug IL-17E, for no cash consideration, to be used by Cancer
Research UK in pre-clinical toxicology studies and should those studies be successful, a Phase I clinical trial. It is expected
that this will result in costs of approximately $4 million over a two year period. The Company has not yet entered into any contracts
related to the drug manufacturing.
Capital
Risk Management
The Company’s objectives
when managing capital are to:
| · | Maintain
its ability to continue
as a going concern
in order to provide
returns to shareholders
and benefits to
other stakeholders; |
| · | Maintain
a flexible capital
structure which
optimizes the cost
of capital at acceptable
risk; and |
| · | Ensure
sufficient cash
resources to fund
its research and
development activity,
to pursue partnership
and collaboration
opportunities and
to maintain ongoing
operations. |
The capital structure of the Company consists
of cash and cash equivalents and equity comprised of share capital, share purchase warrants, stock options, contributed surplus
and deficit. The Company manages its capital structure and makes adjustments to it in light of economic conditions. The Company,
upon approval from its Board of Directors, will balance its overall capital structure through new share issuances, acquiring or
disposing of assets, adjusting the amount of cash balances or by undertaking other activities as deemed appropriate under the
specific circumstances.
The Company is not subject to externally
imposed capital requirements.
While the Company’s overall strategy
with respect to capital risk management remains unchanged from the year ended May 31, 2012, the Company has forecasted that its
current capital resources are not sufficient to carry out its research and development plans and operations for the next twelve
months and continues to investigate various alternatives to obtain sufficient capital to continue its operations.
RISK FACTORS
Before making an investment decision with
respect to our common shares, you should carefully consider the following risk factors, in addition to the other information included
or incorporated by reference into this report. The risks set out below are not the only risks we face. If any of the following
risks should be realized, our business, financial condition, prospects or results of operations would likely suffer. In that case,
the trading price of our common shares could decline and you may lose all or part of the money you paid to buy our common shares.
Please refer to our
MD&A for the year ended May 31, 2012 for a complete discussion of risks and uncertainties.
| · | We
are at an early
stage of development.
Significant additional
investment will
be necessary to
complete the development
of any of our products. |
| · | Our
ability to continue
as a going concern. |
| · | We
need to raise additional
capital. The cash
and cash equivalents
on hand are not
sufficient to execute
our operating strategies
for the next twelve
months and we may
not be able to raise
sufficient funds
to continue operations. |
| · | We
have a history of
operating losses.
We expect to incur
net losses for several
years and we may
never achieve or
maintain profitability.
|
| · | We
may be unable to
obtain partnerships
for one or more
of our product candidates
which could curtail
future development
and negatively impact
our share price.
|
| · | We
maybe unable to
satisfy the conditions
or our partnership
or collaboration
agreements or contracts
which could result
in the forfeit of
those agreements
or contracts. |
| · | There
is no assurance
that an active trading
market in our common
shares will be sustained. |
| · | Clinical
trials are long,
expensive and uncertain
processes and Health
Canada or the FDA
may ultimately not
approve any of our
product candidates.
We may never develop
any commercial drugs
or other products
that generate revenues. |
| · | We
have indemnified
Old Lorus and its
directors, officers
and employees in
respect of the Arrangement. |
| · | As
a result of intense
competition and
technological change
in the pharmaceutical
industry, the marketplace
may not accept our
products or product
candidates, and
we may not be able
to compete successfully
against other companies
in our industry
and achieve profitability.
|
| · | We
may be unable to
obtain patents to
protect our technologies
from other companies
with competitive
products, and patents
of other companies
could prevent us
from manufacturing,
developing or marketing
our products. |
| · | Our
products and product
candidates may infringe
the intellectual
property rights
of others. |
| · | Our
share price has
been and may continue
to be volatile and
an investment in
our common shares
could suffer a decline
in value. |
| · | Future
sales of our common
shares by us or
by our existing
shareholders could
cause our share
price to fall. |
Financial
instruments
The Company has classified its financial instruments as follows:
| | |
As at | | |
As at | |
| | |
February 28, 2013 | | |
May 31, 2012 | |
| | |
| | |
| |
| Financial assets | |
| | | |
| | |
| Cash and cash equivalents, consisting of high interest savings accounts measured at amortized cost | |
| 1,552 | | |
| 320 | |
| | |
| | | |
| | |
| Financial liabilities | |
| | | |
| | |
| Accounts payable, measured at amortized cost | |
| 211 | | |
| 322 | |
| Accrued liabilities, measured at amortized cost | |
| 1,222 | | |
| 1,474 | |
| Promissory note payable, measured at amortized cost | |
| — | | |
| 900 | |
At February 28, 2013, there are no significant differences between
the carrying values of these amounts and their estimated market values due to their short-term nature.
Financial
risk management
The Company has exposure to credit risk,
liquidity risk and market risk. The Company's Board of Directors has the overall responsibility for the oversight of these risks
and reviews the Company's policies on an ongoing basis to ensure that these risks are appropriately managed.
(i) Credit
risk
Credit risk is the risk of financial
loss to the Company if a customer, partner or counterparty to a financial instrument fails to meet its contractual obligations,
and arises principally from the Company's cash and cash equivalents. The carrying amount of the financial assets represents the
maximum credit exposure.
The Company manages credit risk
for its cash and cash equivalents by maintaining minimum standards of R1-low or A-low investments and the Company invests only
in highly rated Canadian corporations with debt securities that are traded on active markets and are capable of prompt liquidation.
(ii) Liquidity
risk
Liquidity risk is the risk that
the Company will not be able to meet its financial obligations as they come due. To the extent that the Company does not believe
it has sufficient liquidity to meet its current obligations, the Board considers securing additional funds through equity, debt
or partnering transactions. The Company manages its liquidity risk by continuously monitoring forecasts and actual cash flows.
Refer to note 2(b) of the condensed consolidated interim financial statements for further discussion on the Company's ability
to continue as a going concern.
(iii)
Market risk
Market risk is the risk that
changes in market prices, such as interest rates, foreign exchange rates and equity prices will affect the Company's income or
the value of its financial instruments.
The Company is subject to interest
rate risk on its cash and cash equivalents. The Company does not believe that the results of operations or cash flows would be
affected to any significant degree by a sudden change in market interest rates relative to interest rates on the investments,
owing to the relative short-term nature of the investments. The Company does not have any material interest bearing liabilities
subject to interest rate fluctuations.
Financial instruments potentially
exposing the Company to foreign exchange risk consist principally of accounts payable and accrued liabilities. The Company holds
minimal amounts of U.S. dollar denominated cash, purchasing on an as needed basis to cover U.S. dollar denominated payments. At
February 28, 2013, U.S. dollar denominated accounts payable and accrued liabilities amounted to $249 thousand (May 31, 2012 -
$148 thousand). Assuming all other variables remain constant, a 10% depreciation or appreciation of the Canadian dollar against
the U.S. dollar would result in an increase or decrease in loss for the year and comprehensive loss of $25 thousand (May
31, 2012 - $15 thousand). The Company does not have any forward exchange contracts to hedge this risk.
The Company has issued deferred
share units. The Company has determined that these units represent a cash liability as it is expected that they will be settled
in cash. The value of these units is tied to the share price of the Company and as such is subject to significant variation as
the Company’s stock price is highly volatile. As at February 28, 2013 the Company had issued 780,000 (May 31, 2012 –
780,000) deferred share units and at February 28, 2013 that represents a cash liability of $207 thousand (May 31, 2012 - $304
thousand). Assuming all other variables remain constant, a 10% depreciation or appreciation of the Company’s share price
would result in an increase or decrease in loss for the year and comprehensive loss of $21 thousand (May 31, 2012 - $30 thousand).
The Company does not invest
in equity instruments of other corporations.
Evaluation
of DISCLOSURE CONTROLS AND INTERNAL CONTROLS
There have been no changes in the Company’s internal control
over financial reporting that occurred during the quarter ended February 28, 2013 that have materially affected or are reasonably
likely to materially affect the Company’s internal control over financial reporting.
UPDATED
SHARE INFORMATION
As at April 11, 2013, the Company had issued
and outstanding 42.3 million common shares and common share purchase warrants convertible into 27.1 million common shares and
an additional 1.4 million shares issuable upon exercise of warrants underlying the broker warrants. In addition, the Company had
issued and outstanding 3.4 million stock options to purchase an equal number of common shares and 780 thousand DSU’s which
may be redeemed for common shares of the Company.
ADDITIONAL
INFORMATION
Additional information relating to Lorus,
including Lorus' 2012 annual information form and other disclosure documents, is available on SEDAR at www.sedar.com.
