Exhibit 99.3
INTERIM
MANAGEMENT’S DISCUSSION AND ANALYSIS
For
the period ended November 30, 2013
January 7, 2014
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 six months ended November 30, 2013 and 2012. The November 30, 2013 interim financial statements and additional information
about the Company, including the annual audited financial statements and MD&A for the year ended May 31, 2013, and the most
recent Annual Information Form can be found on SEDAR at www.sedar.com.
This MD&A is prepared as of January 7,
2014. It contains certain forward-looking statements that involve known and unknown risks and uncertainties which are beyond the
control of the Company. This MD&A should be read in conjunction with the unaudited condensed consolidated interim financial
statements of the Company for the six months ended November 30, 2013 which are incorporated by reference herein and form an integral
part of this MD&A.
CAUTION
REGARDING FORWARD-LOOKING STATEMENTS
This management’s
discussion and analysis may contain forward-looking statements within the meaning of securities laws. 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 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 obligations towards a predecessor of
the Company and its directors, officers and employees in respect of a reorganization
of the Company that occurred in 2007; |
| • | 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
U.S. Securities Exchange Commission, 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 management’s 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.
Development
update
Strategic
Review Process
On September 12, 2013, the Corporation formed
a special committee composed of independent directors to review strategic alternatives available to the Corporation, designed
to secure the long-term financial and operational sustainability of the Corporation with a view to enhance shareholder value (the
“Special Committee”). On October 28, 2013, the Special Committee, after having considered and reviewed a number of
options, concluded its review. The special committee recommended that the board of directors (the “Board”) of Lorus
approve the appointments of William G. Rice, Ph.D. as Chief Executive Officer and Chairman of the board of directors and of Daniel
D. Von Hoff, M.D., to serve as a special advisor to fulfill the functions of the Corporation’s Senior Vice President of
Medical Affairs.
Changes
in Management
On October 28, 2013, William G. Rice,
Ph.D., was appointed as Chief Executive Officer and Chairman of the Board while Dr. Aiping Young continues as President and
Chief Operating Officer of the Corporation. Lorus also appointed Daniel D. Von Hoff, M.D., to serve as a special advisor to
fulfill the functions of the Corporation’s Senior Vice President of Medical Affairs. Dr. Von Hoff is an independent
contractor and advisor but is not an employee of Lorus. The Board of Directors, after receiving the recommendation of the
Special Committee, unanimously approved the appointments. In doing so, the Board determined that such appointments were in
the best interest of Lorus, as they were considered to enhance the management team and advisory team with the addition of two
seasoned and experienced biotechnology executives bringing extensive clinical development and capital raising experience and
improving the awareness and presence of the Corporation in the United States. Dr. Rice, as the new CEO and Chairman of the
Board of Directors of Lorus, was authorized and mandated by the Board to explore all available options to maximize
shareholder value. On October 29, 2013, Brian Druker, M.D., was appointed as the Chair of the Corporation’s Scientific
Advisory Board. Like Dr. Von Hoff, Dr. Druker is an independent contractor and advisor but not an employee of Lorus.
On December 2, 2013, Avanish Vellanki was appointed
as Chief Business Officer of the Corporation, to manage global business development, licensing and corporate strategy, and Gregory
K. Chow was appointed as Chief Financial Officer, and has responsibility for corporate finance and accounting functions for the
Corporation.
program
updates
Lorus is a clinical stage cancer biotechnology
company with a commitment to discovering and developing therapies addressing unmet medical needs in oncology. Our focus is on
cellular targets that are emerging on the leading edge of cancer research and not already widely developed. Our pipeline of cancer
drug candidates includes small molecule products and immunotherapies directed against novel cellular targets and are designed
to be selective for cancer cells and therefore exhibit robust safety profiles.
Our success is dependent upon several factors,
including recruitment and retention of skilled personnel, maintaining sufficient levels of funding through public and/or private
financing, establishing the efficacy and safety of our drug candidates in clinical trials, securing strategic partnerships and
obtaining the necessary regulatory approvals to market our products.
We believe the future of cancer treatment and
management lies in selecting patients having cancers that are predisposed to response based on a drug’s unique mechanism
of action. Our opinion is that many drugs currently approved for the treatment and management of cancer are not selective for
the specific genetic alterations (targets) that cause the patient’s tumor and hence lead to significant toxicities due to
off-target effects.
Lorus’ strategy is to continue the development
of our product pipeline across several therapeutic indications in oncology with therapeutics addressing novel targets that drive
particular types of cancers. We also strive to optimize our therapeutics for synergy with currently available, commercialized
therapeutics for a drug combination regimen with enhanced efficacy. We evaluate the merits of each drug candidate throughout the
clinical trial process and will consider partnering a program when appropriate.
Small
Molecule Program
We
are utilizing our small molecule drug screening technologies and preclinical scientific expertise to identify first in-class small
molecules that demonstrate strong anti-cancer activity and a high therapeutic index with a favorable toxicity profile. Our proprietary
small molecule compounds, which include the lead compound candidate LOR-253, and others, have unique chemical structures and modes
of action, and we consider that they are promising candidates for the treatment of select populations of patients with cancer.
LOR-253
LOR-253 represents a new candidate in a class
of anticancer agents, which may offer a competitive advantage over conventional drugs. LOR-253 is a small molecule optimized to
induce the tumor suppressor Krüppel-like factor 4 (“KLF4”), leading to apoptotic death in cancer cells
that have the KLF4 gene silenced. This drug candidate has shown selective and potent antitumor activity in preclinical investigations,
including in liquid (hematologic or blood cancers) and solid tumors, and has demonstrated a robust safety profile and biological
activity in a Phase I clinical trial in solid tumor patients, most notably in non-small cell lung cancer (“NSCLC”),
but also supporting a dosing strategy for multiple potential indications.
Acute
Myeloid Leukemia
On October 29, 2013, Lorus announced that it
will pursue the clinical development of LOR-253, in acute myeloid leukemia (“AML”) and other hematologic malignancies
based on recent research in AML that has implicated up-regulation of various transcription factors, including CDX2, as a causative
gene in the development or progression of leukemic disease, while absent in the hematopoietic stem and progenitor cells of healthy
individuals. The CDX2 protein is reported to silence the KLF4 tumor suppressor gene as a critical oncogenic event in AML and LOR-253
has demonstrated the ability in preclinical investigations to upregulate the KLF4 gene and induce tumor-killing effect. We believe
these findings warrant investigation of the potential clinical utility of LOR-253 in the treatment of patients with suppressed
KLF4 in AML, Myelodysplastic Syndromes, and potentially other hematologic malignancies.
Acute Myeloid Leukemia is a rapidly progressing
cancer of the blood and bone marrow characterized by the uncontrolled proliferation of dysfunctional myeloblasts that do not mature
into healthy blood cells. It is the most common form of acute leukemia in adults, and the American Cancer Society estimates there
will be approximately 14,590 new cases of AML and approximately 10,370 deaths from AML in the U.S. in 2013. Standard induction
therapy with chemotherapy is successful in many AML patients, but the majority of these patients will relapse with treatment refractory
disease. Patients with relapsed or refractory disease and newly diagnosed AML patients over 60 years of age with poor prognostic
risk factors typically die within one year, a fact that highlights an acute need for new treatment options.
Solid
Tumors
Phase I data with LOR-253 in patients with
solid tumors and extensive preclinical data in solid tumor cells, including NSCLC, have identified an opportunity in patients
possessing cancers with reduced KLF4 gene expression.
NSCLC is an indication that we consider has
a large market potential and important unmet need worldwide, in which KLF4 is a tumor suppressor that is present in case-matched
normal cells but depressed in NSCLC tumor cells. Lorus may evaluate the clinical utility of LOR-253 in additional studies in a
subset of NSCLC patients that may be predisposed to a response with a therapeutic activating KLF4.
LOR-500
The LOR-500 program aims to discover and develop
potent, first-in-class small molecule inhibitors of maternal embryonic leucine zipper kinase (“MELK”). MELK
plays an important role in cancer cell cycle, signaling pathways, and cancer stem cells. MELK is highly expressed in several cancer
types, and its expression correlates with poor prognosis in glioma and breast cancer. These findings provide strong support that
selective targeting of MELK may be an effective cancer treatment strategy. Several lead compounds targeting MELK have been identified
and a clinical
candidate is expected to be selected for preclinical
evaluation within several months. Much of the current focus is on the development of selective kinase inhibitors that hit specific
targets in cancer cells and cause less toxicity associated with off-target effect.
Immunotherapy
Interleukin-17E (“IL-17E”)
(also known as IL-25) is a recently identified cytokine that plays an important role in Th2 type immune response. Lorus scientists
have observed the anticancer properties of IL-17E against a range of solid tumors, including human melanoma, pancreatic, colon,
lung, ovarian and breast tumor models with very low toxicity. IL- 17E is highly potent and does not require further optimization
before proceeding to the formal Investigational New Drug
(“IND”)-enabling preclinical
studies planned to support advancing to a Phase I clinical trial.
Undisclosed
Program
In April 2013, Lorus has entered into a research
and license option agreement with Elanco, the animal health division of Eli Lilly and Corporation, to investigate a new proprietary
series of Lorus’s compounds for veterinary medicine. According to the agreement, Elanco will fund the research program and
has been granted an exclusive option to license the worldwide rights for selected compounds for veterinary use; the terms of which
will be negotiated when the option is exercised by Elanco. Lorus retains the rights to develop and commercialize these compounds
for human use and intends to use the animal data as a basis for a partnership that will seek to take the technology to the clinic
to treat patients with cancer. Lead optimization is underway and the next goal is to identify a clinical drug candidate which
can be developed for both human and animal use.
financing
activities
equity
financing
Subsequent to
the quarter end on December 10, 2013, Lorus completed a public offering of common shares. We issued a total of 12,730,000 common
shares at a price of $0.55 per common share, for aggregate gross proceeds of $7,001,500. A related party of Lorus by virtue of
exercising control or direction over more than 10% of the common shares of Lorus participated in the offering and acquired an
aggregate of 1,820,000 common shares.
warrant
exercises
During the six
month period ended November 30, 2013, 4.445 million warrants (November 30, 2012 - 398 thousand) were exercised for proceeds of
$1.93 million (November 30, 2012 - $180 thousand). The carrying amount related to these warrants was $471 thousand (November 30,
2012 - $43 thousand) and transferred from warrants to share capital.
promissory
notes and warrants
During the six months ended November 30, 2013
Lorus completed a private placement of units at a price of $1,000 per unit, for aggregate gross proceeds of $918 thousand. Each
unit consisted of $1,000 in unsecured promissory notes bearing interest at a rate of 10% per annum and 1,000 common share purchase
warrants priced at $0.25 and exercisable for 24 months. The promissory notes are due June 19, 2014.
Certain related parties participated
in the transaction. Directors and officers acquired $68 thousand of the promissory notes. A company related to Mr. Abramson, a
former director of the Company acquired $250 thousand of the promissory notes and an investor which holds more than 10% of the
common shares of the Company and the ability to acquire control of more than 20% of the Company acquired $100 thousand of the
promissory notes.
The promissory notes contain a liability
component and an equity component represented by the warrants to purchase common shares. The fair value of the liability component
was estimated by discounting the future cash flows associated with the debt at a discounted rate of approximately 19% which represents
the estimated borrowing cost to the Company for similar promissory notes with no warrants. The residual value was allocated to
the warrants. Subsequent to initial recognition, the notes will be recorded at amortized cost using the effective interest rate
method.
Lorus incurred costs associated with
the financing of $23 thousand. These costs are being amortized using the effective interest rate method over the 12-month life
of the notes.
| |
|
Six
months ended |
Six
months ended |
| |
|
November
30, 2013 |
November
30, 2012 |
| |
|
|
|
|
|
|
|
| Promissory Notes |
|
|
$ |
918 |
|
$ |
─ |
| Less:
Equity component of notes |
|
|
|
(75) |
|
|
─ |
| Less:
Issue costs |
|
|
|
(23) |
|
|
|
Accretion in carrying value of notes |
|
|
|
820
43 |
|
|
─ |
| Balance,
end of period |
|
|
$ |
863 |
|
$ |
─ |
Convertible
promissory notes
In September 2013 Lorus completed a private
placement of convertible promissory notes for aggregate gross proceeds of $600 thousand.
Each convertible promissory note consists of
a $1,000 principal amount of unsecured promissory note convertible into common shares of the Company at a price per share of $0.30.
The promissory notes bear interest at a rate of 10% per annum, payable quarterly and are due September 26, 2015.
Certain related parties participated in the
transaction. A company related to a director of Lorus acquired $100 thousand of the promissory notes and two investors who each
hold more than 10% of the common shares of Lorus and the ability to acquire control of more than 20% of Lorus collectively acquired
$262 thousand of the promissory notes.
The promissory notes are a compound instrument
containing a liability component and an equity component represented by the conversion feature. The fair value of the liability
component was estimated by discounting the future cash flows associated with the debt at a discounted rate of approximately 19%
which represents the estimated borrowing cost to Lorus for similar promissory notes with no warrants. The residual value was allocated
to the conversion feature. Subsequent to initial recognition, the notes will be recorded at amortized cost using the effective
interest rate method.
Lorus incurred costs associated with the financing
of $17 thousand. These costs will be amortized using the effective interest rate method over the 24 month life of the notes.
| |
|
Six
months ended |
Six
months ended |
| |
|
November
30, 2013 |
November
30, 2012 |
| |
|
|
|
|
|
|
|
| Promissory
Notes |
|
|
$ |
600 |
|
$ |
─ |
| Less:
Equity component of notes |
|
|
|
(88) |
|
|
─ |
| Less:
Issue costs |
|
|
|
(17) |
|
|
─ |
Accretion in carrying value of notes |
|
|
|
495
8 |
|
|
─ |
| Balance,
end of period |
|
|
$ |
503 |
|
$ |
─ |
Loans
payable
In
September 2013 the Company entered into loan agreements for proceeds of $150 thousand. The loan agreements are unsecured, bear
interest at a rate of 10% per annum payable quarterly and are due September 30, 2015.
warrant
expiry
Broker warrants with a carrying amount of $25 thousand expired
unexercised in August 2013. The impact of the expiry was a reclassification of the amount from Warrants to Contributed Surplus.
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 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.
As of November 30, 2013 the Company has 22 million warrants outstanding at an exercise price of $0.45 the majority of which expire
in June 2014, Management believes that some if not all of these warrants will be exercised in the next six months which may provide
the Company with up to an additional $10 million in financing. Subsequent to the quarter end Lorus raised gross proceeds of approximately
$7 million through a public offering of shares. In addition Management continues to consider financing alternatives on an ongoing
basis and will continue to do so in order to continue funding its operations and clinical trials. However, there can be no assurance
that the warrants will be exercised or that any of the ongoing discussions will materialize into investments and that capital
will be available as necessary to meet 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. 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.
Cash
Position
At November
30, 2013, we had cash and cash equivalents of $1.7 million compared to $653 thousand at May 31, 2013. Subsequent to the quarter
end on December 10, 2013, we raised approximately $7 million in gross proceeds through a public equity offering (described under
Subsequent Events). We invest 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 November 30, 2013 was negative
$943 thousand (May 31, 2013 - negative $798 thousand).
We do not expect to generate positive cash
flow from operations for the foreseeable future 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.
It is expected that 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.
RESULTS
OF OPERATIONS
Our net loss for the three months ended November
30, 2013 was $2.8 million ($0.06 per share) compared to $1.6 million ($0.04 per share) in the same period in the prior year. The
Company incurred a net loss of $3.9 million ($0.09 per share) for the six months ended November 30, 2013 compared to $2.9 million
($0.07 per share) during the same period in the prior year.
In the three-month period ended November 30,
2013 research and development expenditures decreased by $119 thousand due to reduced spending on our LOR-253 and IL-17E programs
as we delayed spending until additional financing was secured. The reduction in program expenditures was offset by increased stock
based compensation and deferred share unit costs. General and administrative expenses increased $1.2 million in the three months
ended November 30, 2013 compared with the prior year due to increased stock based compensation, deferred share unit and salary
costs associated with engaging new executives and an increase in our share price during the quarter.
In the six month period research and development
expenditures decreased by $161 thousand due to reduced program activity in the current year as the Phase I trial completed and
future development was placed on hold, offset by higher stock based compensation and deferred share unit costs. General and administrative
expenses increased by $1.1 million in the six months ended November 30, 2013 compared with the prior year due primarily to increased
stock based compensation, deferred share unit and salary costs associated with engaging new executives and an increase in our
share price during the three month period ended November 30, 2013.
We utilized
cash of $1.5 million in our operating activities in three-month period ended November
30, 2013 compared with $1.3 million during the same period the prior year. For the six months ended November 30, 2013 we utilized
cash of $2.4 million compared with $2.9 million in the same period last year. The increase
in cash utilized in the three months ended November 30, 2013 is due to increased general and administrative activities associated
with the strategic review and hiring of three additional members of management. The decrease in cash utilized in the six months
ended November 30, 2013 is due to cash used to reduce accounts payable and accrual balances in the prior year.
At November
30, 2013, we had cash and cash equivalents of $1.7 million compared to $653 thousand at May 31, 2013.
Research
and Development
Research and development expenses totaled $791
thousand in the three-month period ended November 30, 2013 compared to $910 thousand during the same period in the prior year
and totaled $1.4 million in the six month period ended November 30, 2013 as compared to $1.6 million in the same period in the
prior year. Research and development expenses consisted of the following:
| | |
Three months ended | |
Six months ended |
| | |
November 30 | |
November 30 |
| | |
2013 | |
2012 | |
2013 | |
2012 |
| | |
| |
| |
| |
|
| Program costs | |
$ | 498 | | |
$ | 854 | | |
$ | 1,085 | | |
$ | 1,465 | |
| Stock based compensation | |
| 207 | | |
| 57 | | |
| 240 | | |
| 84 | |
| Deferred share unit costs | |
| 82 | | |
| (9 | ) | |
| 73 | | |
| 2 | |
| Depreciation of equipment | |
| 4 | | |
| 8 | | |
| 8 | | |
| 16 | |
| | |
$ | 791 | | |
$ | 910 | | |
$ | 1,406 | | |
$ | 1,567 | |
Program costs by program:
| | |
Three months ended
November 30, | |
Six months ended
November 30, |
| | |
2013 | |
2012 | |
2013 | |
2012 |
| | |
| |
| |
| |
|
| Small molecules | |
$ | 498 | | |
$ | 751 | | |
$ | 997 | | |
$ | 1,260 | |
| Immunotherapy | |
| — | | |
| 103 | | |
| 88 | | |
| 205 | |
| Total | |
$ | 498 | | |
$ | 854 | | |
$ | 1,085 | | |
$ | 1,465 | |
Research
and development costs in the three months ended November 30, 2013 decreased compared with the three months ended November 30,
2012 primarily due to reduced program costs. Spending on the LOR-253 program was reduced as the Phase I trial has been completed
and further clinical development was placed on hold while the strategic review was completed and additional financing secured.
In addition, spending on the IL-17E program was placed on hold until additional funding is obtained. Reductions in program expenditures
were offset by higher stock based compensation costs due to the engagement of new consultants and scientific advisory board members
during the three months ended November 30, 2013 who were granted stock options upon engagement. Deferred share unit costs increased
during the three months ended November 30, 2013 reflecting the increase in their fair value.
The decrease
in research and development costs during the six months ended November 30, 2013 is primarily the result of reduced activity on
our LOR-253 program as the Phase I clinical trial was completed during the first quarter of fiscal 2014 and we placed the clinical
development on hold as described above. In the six months ended November 30, 2012 the manufacturing of additional LOR-253 was
underway and the Phase I trial was actively enrolling patients. Costs associated with the IL-17E program were lower in the six
months ended November 30, 2013 as we suspended ongoing work in order to conserve our cash resources. Reductions in program expenditures
were offset by higher stock based compensation costs and deferred share unit costs for the reasons described above.
General and Administrative
General
and administrative expenses totaled $1.9 million in the three-month period ended November 30, 2013 compared to $714 thousand in
same period in the prior year. For the six month period ended November 30, 2013, general and administrative expenses were $2.4
million compared with $1.3 million in the same period in the prior year.
Components
of general and administrative expenses:
| | |
Three months ended | |
Six months ended |
| | |
November 30 | |
November 30 |
| | |
2013 | |
2012 | |
2013 | |
2012 |
| | |
| |
| |
| |
|
| Stock based compensation | |
| 708 | | |
| 83 | | |
| 763 | | |
| 156 | |
| General and administrative excluding salaries | |
| 530 | | |
| 491 | | |
| 787 | | |
| 829 | |
| Salaries | |
| 509 | | |
| 161 | | |
| 670 | | |
| 328 | |
| Deferred share unit costs | |
| 191 | | |
| (22 | ) | |
| 169 | | |
| 5 | |
| Depreciation of equipment | |
| ─ | | |
| 1 | | |
| ─ | | |
| 3 | |
| | |
| 1,938 | | |
| 714 | | |
| 2,389 | | |
| 1,321 | |
Stock based compensation expense was
significantly higher in the three and six month periods ended November 30, 2013 compared with the same periods in the prior year
due to option grants in the current quarter to new members of management which vested immediately resulting in the entire fair
value of the option being recognized in the current quarter compared with fewer option grants in the prior year periods which
vested over a longer period of time.
General
and administrative expenses excluding salaries remained consistent in both the three and six months ended November 30, 2013 compared
with the prior year. Increased costs in the current year associated with the strategic review were comparable with legal fees
incurred in the same periods in the prior year associated with licensing activities.
Salary
charges in the three and six months ended November 30, 2013 increased over the prior year periods due to costs associated with
the appointment of additional members of management.
Deferred
share unit costs increased in the three and six months ended November 30, 2013 compared with the prior year due to an increase
in the Deferred Share Unit liability which is marked to market. During the three months ended November 30, 2013 Lorus’ share
price increased significantly which resulted in an increased liability and associated expense.
Finance Expense
Finance
expense for the three months ended November 30, 2013 was $70 thousand compared with $nil for the three months ended November 30,
2012. For the six months ended November 30, 2013 finance expense was $106 thousand compared with $6 thousand in the same period
in the prior year. Finance expense incurred in the three and six months ended November 30, 2013 relates to the 10% promissory
notes issued in June 2013 described above as well as the 10% convertible promissory notes and non-convertible promissory notes
issued in September 2013 described above. Finance expense incurred in the six months ended November 30, 2012 relates to interest
accrued at a rate of 10% on the related party promissory notes repaid in June 2012. There were no interest-bearing liabilities
outstanding at November 30, 2012.
Finance Income
Finance income totaled $1 thousand and $2 thousand
in the three and six-month periods ended November 30, 2013, respectively, compared to $11 thousand and $17 thousand in the same
periods in the prior year. Finance income represents interest earned on our cash and
cash equivalent balances and is lower in the current periods due to lower average cash and cash equivalents balance 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 November 30, 2013 was $2.8 million ($0.06 per share) compared to $1.6 million ($0.04 per share) in the
same period in the prior year. The Company incurred a net loss of $3.9 million ($0.09 per share) for the six months ended November
30, 2013 compared to $2.9 million ($0.07 per share) during the same period in the prior year.
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
fiscal 2013 quarters increased over the same quarters in the prior year
due to increased activity in each of our
key programs. Expenditures were particularly low in the quarter ended May 31, 2012 due to investment tax credits earned as
well as a hold on many activities until additional financing was secured in June 2012. Research and development expenditures
are lower in the quarter ended August 31, 2013 and November 30, 2013 as the LOR-253 Phase I clinical trial concluded and we
delayed costs associated with our other programs while the strategic review was completed and additional cash resources were
secured.
The increased general and administrative costs
in the quarter ended November 30, 2013 is due to stock option
grants during the quarter which vested immediately
and resulted in higher than normal stock based compensation expense. In addition costs associated with hiring three new executives
during the quarter increased salary related costs. Increased spending in the three months ended November 30, 2012 was due to increased
legal costs associated with licensing activities. General and administrative expenses are lower in the quarters of August 31,
2013, May 31, 2013 and February 28, 2013 due to the reduction of previously recorded Deferred Share Unit (“DSU”) expense.
The DSU is ‘marked to market’ and as our share price declined during the last three quarters so did the associated
liability resulting in a reduction of expense.
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 we waited for the June 2012 private placement to close. A subsequent use
of cash occurred in the quarter ended August 31, 2012 as these balances were reduced. Again cash used in operating activities
in the quarters ended May 31, 2013 and August 31, 2013 were lower as we delayed making payments to suppliers in order to conserve
cash resources.
| |
Q2 |
Q1 |
Q4 |
Q3 |
Q2 |
Q1 |
Q4 |
Q3 |
| (Amounts
in 000’s except for per common share data) |
Nov 30,
2013 |
Aug
31, 2013 |
May
31, 2013 |
Feb
28, 2013 |
Nov 30,
2012 |
Aug
31, 2012 |
May
31, 2012 |
Feb
29,
2012 |
| |
|
|
|
|
|
|
|
|
| Revenue |
$ ― |
$ ― |
$ ― |
$ ― |
$ ― |
$ ― |
$ ― |
$ ― |
| Research
and development expense |
791 |
615 |
860 |
889 |
910 |
658 |
391 |
543 |
| General
and administrative expense |
1,938 |
451 |
462 |
491 |
714 |
605 |
605 |
479 |
| Net
loss |
(2,798) |
(1,101) |
(1,318) |
(1,371) |
(1,613) |
(1,263) |
(1,013) |
(1,023) |
| Basic
and diluted |
|
|
|
|
|
|
|
|
| net
loss per share |
$(0.06) |
$(0.03) |
$(0.03) |
$(0.03) |
$(0.04) |
$(0.03) |
$(0.05) |
$(0.05) |
| Cash
(used in) operating activities |
$(1,484) |
$(933) |
$(904) |
$(1,273) |
$(1,336) |
$(1,576) |
$(400) |
$(1,040) |
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 total payment commitments of approximately
$1.5 million. Of this amount, $880 thousand has been paid and $193 thousand has been accrued at November 30, 2013 (May 31, 2013
- $740 thousand paid and $253 thousand accrued). The payments are based on services performed and amounts may be 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.
The Board of Directors has agreed to grant at certain points in
the future, contingent upon the occurrence of certain events, grants of stock-based awards to certain employees and directors.
subsequent
events
equity
financing
Subsequent
to the quarter end on December 10, 2013 Lorus completed a public offering of common shares. We issued a total of 12,730,000 common
shares at a price of $0.55 per common share, for aggregate gross proceeds of $7,001,500. A related party of Lorus by virtue of
exercising control or direction over more than 10% of the common shares of Lorus participated in the offering and acquired an
aggregate of 1,820,000 common shares.
related
party transactions
Please refer to the sections titles ‘Promissory Notes and
Warrants’, ‘Convertible Promissory Notes’ and ‘Subsequent Events’ for disclosures related to related
party transactions.
These transactions were in
the normal course of business and have been measured at the exchange amount, which
is the amount of consideration established
and agreed to by the related parties.
Financial
instruments
We have classified our financial instruments as follows:
| | |
As at | |
As at |
| | |
November 30, 2013 | |
May 31, 2013 |
| | |
| | | |
| | |
| Financial assets | |
| | | |
| | |
| Cash and cash equivalents (consisting of deposits in high interest savings accounts), measured at amortized cost | |
$ | 1,738 | | |
$ | 653 | |
| Financial liabilities | |
| | | |
| | |
| Accounts payable, measured at amortized cost | |
| 190 | | |
| 713 | |
| Accrued liabilities, measured at amortized cost | |
| 2,123 | | |
| 1,103 | |
| Promissory notes payable, measured at amortized cost | |
| 863 | | |
| ─ | |
| Loans payable, measured at amortized cost | |
| 150 | | |
| ─ | |
| Convertible promissory notes, measured at amortized cost | |
| 503 | | |
| ─ | |
| | |
| | | |
| | |
At November 30, 2013, there are no significant differences
between the carrying values of these amounts and their estimated market values.
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 Liquidity and Capital Resources 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
November 30, 2013, U.S. dollar denominated accounts payable and accrued liabilities amounted to $485 thousand (May 31, 2013 -
$448 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 $49 thousand (May 31, 2013
- $45 thousand). The Company does not have any forward exchange contracts to hedge this risk.
The Company has issued deferred
share units. These units represent a cash liability to the Company which fluctuates with 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 November 30, 2013 the Company
had issued 780,000 (May 31, 2013 - 780,000) deferred share units and at November 30, 2013 that represents a cash liability of
$413 thousand (May 31, 2013 - $172 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 $41
thousand (May 31, 2013 - $17 thousand).
The Company does not invest in
equity instruments of other corporations.
Capital management
The Company's primary objective
when managing capital is to ensure that it has sufficient cash resources to fund its development and commercialization activities
and to maintain its ongoing operations. To secure the additional capital necessary to pursue these plans, the Company may attempt
to raise additional funds through the issuance of equity or by securing strategic partners.
The Company includes cash and cash equivalents
and short-term deposits in the definition of capital.
The Company is not subject to externally
imposed capital requirements and there has been no change with respect to the overall capital management strategy during the six
months ended November 30, 2013.
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, 2013 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 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. |
| • | 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. |
| • | 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,
which could increase our costs. |
| • | 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. |
Evaluation
of DISCLOSURE CONTROLS AND INTERNAL CONTROLS
Management, including the Chief Executive Officer and the Chief
Financial Officer, has evaluated the design and effectiveness of the Company’s internal control over financial reporting
and its disclosure controls and procedures (as defined in National Instrument 52-109 of the Canadian Securities Administrators)
as of November 30, 2013. Management has concluded that, as of November 30, 2013, the Company’s disclosure controls and internal
controls are designed and operating effectively to provide reasonable assurance that material information relating to the Company
and its consolidated subsidiary would be made known to them, particularly during the period in which the annual filings were being
prepared.
It should be noted that all internal control systems, no matter
how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.
During the three months ended November 30, 2013 the Company hired
a Chief Financial Officer. The former Acting Chief Financial Officer is continuing with the responsibilities as Director of Finance
and the Chief Financial Officer provides an additional level of review over financial documents. Management believes that the
addition of the Chief Financial Officer will strengthen the Company’s internal controls over financial reporting on an ongoing
basis.
UPDATED
SHARE INFORMATION
As at January
7, 2014, the Company had 59.5 million common shares issued and outstanding. In addition there were 6.6 million common shares issuable
upon the exercise of outstanding stock options, 780 thousand deferred share units which may be redeemed for common shares of the
Company and a total of 24 million common shares issuable upon the exercise of common share purchase warrants. Of these warrants
1.2 million are priced at $0.45 and expire in August 2016, 20.4 million are priced at $0.45 and expire in June 2014, 1.2 million
are priced at $0.32 and expire in June 2014, 568 thousand are priced at $0.25 and expire in June 2015 and 764 thousand are priced
at $0.55 and expire in December 2015. In September 2013 we issued $600 thousand in convertible promissory notes which could be
converted at a price of $0.30 into 2 million common shares of Lorus. In December 2013 as part of the public offering the Company
granted an overallotment option to the underwriters which if exercised could result in the issuance of and additional 1,909,500
common shares at a price of $0.55 per share.
ADDITIONAL
INFORMATION
Additional information relating to Lorus,
including Lorus' 2013 annual information form and other disclosure documents, is available on SEDAR at www.sedar.com.
