FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REPORT OF FOREIGN ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of August 2008
Commission File No. 000-30752
AETERNA ZENTARIS INC.
-------------------------------------
1405, boul. du Parc-Technologique
Quebec, Quebec
Canada, G1P 4P5
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F /X/ Form 40-F / /
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
Yes / / No /X/
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-____
DOCUMENTS INDEX
DOCUMENTS DESCRIPTION
1. AEterna Zentaris' Interim Report Second Quarter 2008 (Q2)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AETERNA ZENTARIS INC.
Date: August 13, 2008 By: /s/Dennis Turpin
---------------------- ------------------------------------
Dennis Turpin
Senior Vice President, Chief Financial Officer
MD&A -Second Quarter 2008 [AETERNA ZENTARIS LOGO]
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING ANALYSIS PROVIDES A REVIEW OF THE COMPANY'S RESULTS OF OPERATIONS,
FINANCIAL CONDITION AND CASH FLOWS FOR THE THREE-MONTH AND SIX-MONTH PERIODS
ENDED JUNE 30, 2008 AND 2007. IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS
(MD&A), THE "COMPANY", "WE", "US", AND "OUR" MEAN AETERNA ZENTARIS INC. AND ITS
SUBSIDIARIES. THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE INFORMATION
CONTAINED IN AETERNA ZENTARIS INC.'S INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AND RELATED NOTES FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED ON JUNE 30,
2008 AND 2007. OUR CONSOLIDATED FINANCIAL STATEMENTS ARE REPORTED IN UNITED
STATES DOLLARS AND HAVE BEEN PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES IN CANADA, OR CANADIAN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (CANADIAN GAAP). ALL AMOUNTS ARE IN US DOLLARS UNLESS OTHERWISE
INDICATED.
COMPANY OVERVIEW
AEterna Zentaris Inc. (TSX: AEZ, NASDAQ: AEZS) is a global biopharmaceutical
company focused on endocrine therapy and oncology.
Our pipeline encompasses compounds at all stages of development, from drug
discovery through marketed products. The two highest priority clinical programs
are our lead value driver, cetrorelix for benign prostatic hyperplasia (BPH) and
our lead oncology program, AEZS-108 for advanced endometrial and advanced
ovarian cancers.
KEY DEVELOPMENTS FOR THE QUARTER ENDED JUNE 30, 2008
On April 11, 2008, Juergen Ernst, Chairman of the Board, was appointed interim
President and CEO, replacing David J. Mazzo, Ph.D., former President and CEO of
the Company. The Company also announced the departure of Ellen McDonald, former
Senior Vice President Business Operations and Chief Business Officer.
On April 15, 2008, we announced completion of patient recruitment for the first
efficacy trial of our Phase 3 program in BPH with our lead compound, cetrorelix.
On May 14, 2008, we reported first patient dosing for the safety trial of the
same Phase 3 program in BPH with cetrorelix.
On June 26, 2008, we completed the sale of our Quebec City property for $7.1
million.
MD&A -Second Quarter 2008 [AETERNA ZENTARIS LOGO]
DRUG DEVELOPMENT:
STATUS OF OUR DRUG PIPELINE AS OF JUNE 30, 2008
DISCOVERY PRECLINICAL PHASE 1 PHASE 2 PHASE 3 COMMERCIAL
---------------------------------------------------------------------------------------------------------------
120,000 compound AEZS-115 AEZS-112 AEZS-108 Cetrorelix Cetrotide(R)
library (endometriosis & urology) (oncology) (endometrial and (BPH) (IN VITRO
ovarian cancers) fertilization)
AEZS-120 AEZS-130 Cetrorelix
(oncology vaccine) (endocrinology) (endometriosis)
(BPH in Japan)
Erk & PI3K Ozarelix
Inhibitors (BPH, prostate
(oncology) cancer)
Ghrelin receptor ligands Perifosine
(endocrinology and oncology) (multiple cancers)
AEZS-127
(oncology)
PARTNERS
AEZS-127: AEZS-130: Cetrorelix: Cetrotide(R):
KERYX ARDANA SHIONOGI in Japan MERCK SERONO
(World ex-Japan)
Ozarelix: NIPPON KAYAKU / SHIONOGI
SPECTRUM in North (Japan)
America and India,
NIPPON KAYAKU in
Japan
Perifosine:
KERYX in North
America
CETRORELIX
In April 2008, we reported the completion of patient recruitment for the first
efficacy trial of our Phase 3 program in BPH. This study involves approximately
600 patients primarily in the United States and Canada, with additional sites in
Europe. The corresponding results are expected in the third quarter of 2009. As
for the second
(2)
MD&A -Second Quarter 2008 [AETERNA ZENTARIS LOGO]
efficacy trial of our Phase 3 program in BPH, which will involve approximately
400 patients primarily in Europe, the recruitment of this double-blind placebo
controlled study is progressing as planned; and we expect it will be completed
by September 30, 2008.
In May 2008, we reported first patient dosing for the safety trial of the same
Phase 3 program in BPH. This open-label, single-armed, multi-center study will
involve approximately 500 patients in both North America and Europe.
OZARELIX
On April 14, 2008, our partner, Spectrum Pharmaceuticals (NASDAQ: SPPI),
released Phase 2b results for ozarelix in BPH which demonstrated sufficient
clinical activity to justify its continued development in BPH. Based on these
results, Spectrum is planning to submit a protocol to the FDA for the next study
in BPH.
AEZS-108
Our Phase 2 trial in gynaecological cancers is ongoing. First patient dosing
commenced in February 2008 and the planned study period is approximately 24
months. As of July 30, 2008, we had recruited 36 patients. This open-label,
non-comparative multi-center Phase 2 trial, will treat up to 82 women with
LHRH-receptor positive ovarian and endometrial cancerous tumors.
CONSOLIDATED RESULTS OF OPERATIONS
For the three-month and six-month periods ended June 30, 2007, consolidated
revenues and expenses of Echelon Biosciences have been reclassified as
discontinued operations. Since we disposed of our entire position in Echelon
Biosciences in November 2007, going forward we will no longer have access to
liquidity or cash flows from said company.
(3)
MD&A -Second Quarter 2008 [AETERNA ZENTARIS LOGO]
The following table sets forth selected Canadian GAAP consolidated financial
data in thousands of US dollars, except shares and per share data.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(UNAUDITED) 2008 2007 2008 2007
=========================================================================================================
$ $ $ $
REVENUES
Sales and royalties 8,250 7,698 16,192 15,020
License fees 2,207 3,853 4,013 5,765
---------------------------------------------------------------------------------------------------------
10,457 11,551 20,205 20,785
---------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales 4,758 3,075 9,362 6,385
Research and development costs, net of tax credits
and grants 17,345 7,815 31,034 15,722
Selling, general and administrative 6,606 4,517 11,010 9,410
Depreciation and amortization
Property, plant and equipment 397 392 766 757
Intangible assets 876 928 1,716 1,990
---------------------------------------------------------------------------------------------------------
29,982 16,727 53,888 34,264
---------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (19,525) (5,176) (33,683) (13,479)
OTHER REVENUES (EXPENSES)
Interest income 311 300 588 875
Interest expense (53) (53) (68) (53)
Foreign exchange (loss) gain (502) (637) 1,753 (596)
Loss on disposal of long-lived assets held for
sale (810) - (35) -
---------------------------------------------------------------------------------------------------------
(1,054) (390) 2,238 226
---------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (20,579) (5,566) (31,445) (13,253)
INCOME TAX RECOVERY - 731 - 3,275
---------------------------------------------------------------------------------------------------------
NET LOSS FROM CONTINUING OPERATIONS (20,579) (4,835) (31,445) (9,978)
NET (LOSS) EARNINGS FROM DISCONTINUED OPERATIONS - (11) - 22
---------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD (20,579) (4,846) (31,445) (9,956)
=========================================================================================================
NET LOSS PER SHARE FROM CONTINUING OPERATIONS
Basic and diluted (0.39) (0.09) (0.59) (0.19)
=========================================================================================================
NET LOSS PER SHARE
Basic and diluted (0.39) (0.09) (0.59) (0.19)
=========================================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES
Basic and diluted 53,187,470 53,179,470 53,187,470 53,179,470
=========================================================================================================
(4)
MD&A -Second Quarter 2008 [AETERNA ZENTARIS LOGO]
CONSOLIDATED REVENUES
CONSOLIDATED REVENUES are derived from sales and royalties as well as license
fees. Sales are derived from Cetrotide(R) (cetrorelix), active pharmaceutical
ingredients and Impavido(R) (miltefosine), the latter being applicable for the
first quarter ended March 31, 2008 and the full year 2007. Royalties are derived
from Cetrotide(R) (cetrorelix), sold by Merck Serono in reproductive health
assistance for IN VITRO fertilization. Furthermore, license fees are derived
from non-periodic milestone payments, R&D contract fees and amortization of
upfront payments received to date from our licensing partners.
During the first quarter of 2008, the Company entered into an agreement, with
respect to the sale of its intangible property - Impavido(R) (miltefosine) with
Paladin Labs Inc. On March 31, 2008, this transaction was completed for cash at
a gross selling price of approximately $8.9 million (CAD$9.1 million). In 2007,
annual sales of Impavido(R) represented $3 million. As a result of the sale of
the Impavido(R)'s intangible property, we expect a corresponding decrease in
sales and royalties for 2008.
Consolidated sales and royalties increased to $8.2 million for the three-month
period ended June 30, 2008, compared to $7.7 million for the same period in
2007. The increase in sales and royalties for the three-month period ended June
30, 2008 compared to the same period last year is related primarily to
additional sales of Cetrotide(R), partly offset by the exclusion of sales from
Impavido(R) in the second quarter of 2008.
Consolidated sales and royalties increased to $16.2 million for the six-month
period ended June 30, 2008, compared to $15 million for the same period in 2007.
The increase in sales and royalties for the six-month period ended June 30, 2008
compared to the same period last year, is mainly related to a 70% increase in
sales of Cetrotide(R), partly offset by lower sales of Impavido(R).
License fees revenues decreased to $2.2 million for the three-month period ended
June 30, 2008 compared to $3.9 million for the same period in 2007.
License fees revenues decreased to $4 million for the six-month period ended
June 30, 2008 compared to $5.8 million for the same period in 2007.
The decrease for the three-month and six-month periods ended June 30, 2008,
compared to the same periods in 2007, is mainly attributable to the termination
of the Company's licensing agreement with Solvay Pharmaceuticals in 2007, which
triggered additional amortization of upfront payments in the second quarter of
2007.
License fees revenues are expected to decrease in 2008 primarily from the
termination of the collaboration agreement with Solvay Pharmaceuticals in 2007.
(5)
MD&A -Second Quarter 2008 [AETERNA ZENTARIS LOGO]
CONSOLIDATED OPERATING EXPENSES
CONSOLIDATED COST OF SALES increased to $4.8 million for the three-month period
ended June 30, 2008 compared to $3.1 million for the same period in 2007. The
cost of sales as a percentage of sales and royalties was 58% in the second
quarter 2008 compared to 40% for the same period in 2007. The higher percentage
of cost of sales in the second quarter of 2008, compared to the same period in
2007, is due to favourable product mix sold in 2007 which included more active
ingredients and Impavido(R) with higher margins. The product mix for the second
quarter of 2008 contained a high concentration of Cetrotide(R) which is more
expensive to produce.
Consolidated cost of sales increased to $9.4 million for the six-month period
ended June 30, 2008 compared to $6.4 million for the same period in 2007. The
cost of sales as a percentage of sales and royalties remains at 58% for the
six-month period ended June 30, 2008 compared to 43% for the same period in
2007. The higher percentage of cost of sales for the six-month period ended June
30, 2008 is directly related to product mix which includes a high concentration
of sales related to Cetrotide(R).
The cost of sales as a percentage of sales and royalties is expected to reach
nearly 55% in 2008, mainly due to the completion of the sale of the Impavido(R)
intangible assets.
CONSOLIDATED R&D COSTS, NET OF TAX CREDITS AND GRANTS were $17.3 million for the
three-month period ended June 30, 2008 compared to $7.8 million for the same
period in 2007.
Consolidated R&D costs, net of tax credits and grants were $31 million for the
six-month period ended June 30, 2008 compared to $15.7 million for the same
period in 2007.
Additional R&D expenses in the three-month and six-month periods ended June 30,
2008, compared to the same periods in 2007 are mainly related to the advancement
of our Phase 3 program in BPH with our lead product, cetrorelix.
(6)
MD&A -Second Quarter 2008 [AETERNA ZENTARIS LOGO]
The following table summarizes the allocation of R&D external costs supported by
the Company for the six-month period ended June 30, 2008.
SIX MONTHS ENDED
(in thousands of US dollars) JUNE 30, 2008
=====================================================================================
PRODUCTS STATUS INDICATION R&D COSTS
=====================================================================================
$ %
Cetrorelix Phase 3 BPH 13,006 64.4
AEZS-108 Phase 2 Endometrial and ovarian cancers 660 3.3
Perifosine Phase 2 Oncology 972 4.8
Ozarelix Phase 2 BPH and prostate cancer 119 0.6
AEZS-112 Phase 1 Oncology 1,039 5.1
Erk PI3K Preclinical Oncology 804 4.0
Ghrelin receptor Preclinical Endocrinology and oncology 678 3.4
AEZS-115 Preclinical Endocrinology and oncology 465 2.3
Other Preclinical Multiple 2,467 12.1
=====================================================================================
20,210 100
=====================================================================================
We expect R&D investments in 2008 to range from $55 million to $58 million, an
increase of approximately 45% from 2007. This year-over-year increase will
primarily be related to the advancement of our Phase 3 program in BPH with our
lead compound cetrorelix, including a 500-patient safety study in North America
and Europe, a 400-patient efficacy study in Europe, as well as a 600-patient
efficacy study in North America and Europe. The cost of these studies will be
combined with the ongoing preclinical carcinogenicity study and the
manufacturing of cetrorelix drug supply. The expected increase in R&D is also
related to the impact of the increased Euro exchange rate.
R&D investments in AEZS-108 are expected to increase in 2008, as we initiated
the dosing of patients in the Phase 2 study in early 2008.
Our other programs will represent a lower portion of our investment in R&D for
2008, as our focus is on advancing our later-stage lead compounds cetrorelix in
BPH and AEZS-108 in endometrial and ovarian cancers.
(7)
MD&A -Second Quarter 2008 [AETERNA ZENTARIS LOGO]
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES were $6.6
million for the three-month period ended June 30, 2008 compared to $4.5 million
for the same period in 2007.
Consolidated selling, general and administrative (SG&A) expenses were $11
million for the six-month period ended June 30, 2008 compared to $9.4 million
for the same period in 2007.
The increase in SG&A expenses for the three-month and six-month periods ended
June 30, 2008 compared to the same periods in 2007 is primarily due to
non-recurring corporate expenses related to organizational changes, including
severance paid to the former President and CEO, as well as to the Senior Vice
President and CBO that were implemented in the second quarter of 2008.
We expect to maintain the SG&A in 2008 at comparable levels of 2007.
CONSOLIDATED DEPRECIATION AND AMORTIZATION (D&A) reached $1.3 million for the
three-month period ended June 30, 2008 compared to $1.3 million for the same
period in 2007.
Consolidated D&A decreased to $2.5 million for the six-month period ended June
30, 2008 compared to $2.7 million for the same period in 2007.
D&A expense was similar period over period due to the reclassification of the
building in Quebec City as a long-lived asset held for sale and the conclusion
of its sale during the second quarter of 2008, combined with the selling of
Impavido(R)'s intangible property on March 31, 2008.
CONSOLIDATED LOSS FROM OPERATIONS increased to $19.5 million for the three-month
period ended June 30, 2008 compared to $5.2 million for the same period in 2007.
Consolidated loss from operations increased to $33.7 million for the six-month
period ended June 30, 2008 compared to $13.5 million for the same period in
2007.
The increase in loss from operations for the three-month and six-month periods
ended June 30, 2008, compared to the same periods in 2007, is primarily
attributable to additional R&D expenses related to the advancement of our Phase
3 program with cetrorelix in BPH and additional SG&A non-recurring corporate
expenses.
We expect our consolidated loss from operations to increase in 2008, mainly due
to additional R&D expenses for cetrorelix in BPH.
(8)
MD&A -Second Quarter 2008 [AETERNA ZENTARIS LOGO]
CONSOLIDATED OTHER EXPENSES, NET OF REVENUES for the three-month period ended
June 30, 2008 were $1 million compared to $0.4 million for the same period in
2007. The increase of consolidated other expenses, net of revenues for the
three-month period ended June 30, 2008 compared to the same period in 2007, is
mainly attributable to the recording of an additional loss of $810,000 on the
disposal of the Quebec City property as a long-lived asset held for sale.
Consolidated other revenues, net of expenses for the six-month period ended June
30, 2008 were $2.2 million compared to $0.2 million for the same period in 2007.
The increase of consolidated other revenues, net of expenses for the six-month
period ended June 30, 2008 is mainly attributable to an unrealized foreign
exchange gain amounting to $1,8 million compared to an unrealized foreign
exchange loss of $596,000 for the same period in 2007. The foreign exchange gain
for the six-month period ended June 30, 2008 is primarily related to accounts
payable denominated in US currency of our subsidiary in Germany with the Euro as
the functional currency. It is also related to an advance in Euro by the parent
Company to our subsidiary in Germany, which has not been designated as a hedge
of a net investment in a self-sustaining subsidiary and the corresponding
strength of the Euro compared to the Canadian dollar, the functional currency of
the parent Company. The end-of-period conversion rates from Euro to Canadian
dollar and from Euro to US dollar for June 30, 2008 and December 31, 2007 were
1.60 compared to 1.44 for Euro to Canadian dollar and 1.57 compared to 1.46 for
Euro to US dollar, respectively.
CONSOLIDATED INCOME TAX RECOVERY for the three-month period ended June 30, 2008
was nil compared to $0.7 million for the same period in 2007.
Consolidated income tax recovery for the six-month period ended June 30, 2008
was nil compared to $3.3 million for the same period in 2007.
The income tax recovery recorded in 2007 was related to the utilization of some
of our future income tax assets following the taxable capital gain realized by
the spin-off of our former subsidiary, Atrium Biotechnologies Inc., now known as
Atrium Innovations Inc.
CONSOLIDATED NET LOSS FROM CONTINUING OPERATIONS for the three-month period
ended June 30, 2008 was $20.6 million compared to $4.8 million for the same
period in 2007.
Consolidated net loss from continuing operations for the six-month period ended
June 30, 2008 was $31.4 million compared to $10 million for the same period in
2007.
The periods-over-periods increase in consolidated net loss from continuing
operations is primarily attributable to higher R&D costs and non-recurring SG&A
corporate expenses.
(9)
MD&A -Second Quarter 2008 [AETERNA ZENTARIS LOGO]
CONSOLIDATED NET LOSS for the three-month period ended June 30, 2008 was $20.6
million or $0.39 per basic and diluted share compared to $4.8 million or $0.09
per basic and diluted share for the same period in 2007.
Consolidated net loss for the six-month period ended June 30, 2008 was $31.4
million or $0.59 per basic and diluted share compared to $10 million or $0.19
per basic and diluted share for the same period in 2007.
The periods-over-periods increase in net loss is primarily attributable to the
increased R&D costs related to the advancement of cetrorelix into our Phase 3
program for the treatment of BPH and non-recurring SG&A corporate costs.
THE WEIGHTED AVERAGE NUMBER OF SHARES of 53.2 million shares used to calculate
the basic and diluted net loss per share for the three-month and six-month
periods ended June 30, 2008 was similar compared to the same periods in 2007.
TOTAL CONSOLIDATED ASSETS AND LONG-TERM FINANCIAL LIABILITIES
CONSOLIDATED BALANCE SHEET DATA
AS AT As at
JUNE 30, December 31,
(in thousands of US dollars) 2008 2007
================================================================================
$ $
TOTAL ASSETS 95,549 123,363
--------------------------------------------------------------------------------
LONG-TERM FINANCIAL LIABILITIES 3,347 3,333
================================================================================
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no significant changes in our accounting policies and estimates
since December 31, 2007, with the exception of the application of new accounting
standards as described below. Please refer to the corresponding section in our
2007 Annual Report for a complete description of our critical accounting
policies and estimates. Access to a summary of differences between Canadian and
U.S. Generally Accepted Accounting Principles (Canadian and U.S. GAAP) is
referenced in Note 24 of our annual 2007 financial statements. Furthermore,
significant differences in measurement and disclosure from the U.S. GAAP are set
forth in Note 11 of our interim consolidated financial statements.
(10)
MD&A -Second Quarter 2008 [AETERNA ZENTARIS LOGO]
NEW ACCOUNTING STANDARDS
ADOPTED IN 2008
On January 1, 2008 the Company adopted the Canadian Institute of Chartered
Accountants ("CICA") Handbook Sections 1535, CAPITAL DISCLOSURE; CICA Handbook
Section 3862, FINANCIAL INSTRUMENTS - DISCLOSURE; CICA Handbook Sections 3863,
FINANCIAL INSTRUMENTS - PRESENTATION; and CICA Handbook Section 3031,
INVENTORIES, which replaces Section 3030.
The CICA Section 1535, "CAPITAL DISCLOSURES" establishes guidelines for
disclosure of information regarding an entity's capital which will enable users
of its financial statements to evaluate an entity's objectives, policies and
processes for managing capital, including disclosures of any externally imposed
capital requirements and the consequences of non-compliance, see Note 5 of our
interim consolidated financial statements.
The CICA Section 3862, "FINANCIAL INSTRUMENTS - DISCLOSURES" and Section 3863,
"FINANCIAL INSTRUMENTS - PRESENTATION" which replace Section 3861, "FINANCIAL
INSTRUMENTS - DISCLOSURE AND PRESENTATION", requires the disclosure of
additional details of financial asset and liability categories as well as a
detailed discussion on the risks associated with the Company's financial
instruments. The presentation requirements are carried forward unchanged, see
Note 9 of our interim consolidated financial statements.
The CICA issued Section 3031, "INVENTORIES" which replaced existing Section 3030
having the same title. This standard requires that inventories should be
measured at the lower of cost and net realizable value, and includes guidance on
the determination of cost, including allocation of overheads and other costs.
The standard also requires that similar inventories within a consolidated group
be measured using the same method. It also requires the reversal of previous
write-downs to net realizable value when there is a subsequent increase in the
value of inventories, The Company has applied this standard for the fiscal year
beginning January 1, 2008, and there has been no impact on the consolidated
financial statements.
FUTURE ACCOUNTING CHANGES
In January 2008, the CICA issued Handbook Section 3064, "GOODWILL AND INTANGIBLE
ASSETS". This standard provides guidance on the recognition of intangible assets
in accordance with the definition of an asset and the criteria for asset
recognition, clarifying the applications of the concept of matching revenues and
expenses, whether these assets are separately acquired or are developed
internally. The standard will apply to the Company's interim and annual
financial statements beginning in 2009. The Company has not yet determined the
impact that the adoption of this standard will have on the consolidated
financial statements.
(11)
MD&A -Second Quarter 2008 [AETERNA ZENTARIS LOGO]
In 2007, the CICA published an update to the Accounting Standards Board of
Canada's ("AcSB) "IMPLEMENTATION PLAN FOR INCORPORATING INTERNATIONAL FINANCIAL
REPORTING STANDARDS ("IFRS") INTO CANADIAN GAAP". The plan outlines the key
decisions that the CICA will need to make as it implements the Strategic Plan to
converge Canadian GAAP standards with IFRS. While IFRS uses a similar conceptual
framework to that of Canadian GAAP, there are still significant accounting
policies differences that will need to be resolved. The CICA has confirmed on
January 1, 2011 the change from current Canadian GAAP to IFRS for publicly
accountable companies. In sequence with these changes, the Company is currently
developing its internal implementation plans to meet the guidelines of the
future reporting requirements.
CAPITAL DISCLOSURE
The Company's objective in managing capital composed of shareholders' equity is
to ensure a sufficient liquidity position to finance its research and
development activities, general and administrative expenses, working capital and
overall capital expenditures, including those associated with patents and
trademarks. The Company makes every effort to manage its liquidity to minimize
dilution to its shareholders.
Initially, the Company had funded its activities through public offerings of
common shares and convertible term loans. Currently, the Company is optimizing
its liquidity needs by non-dilutive sources, including the spin-off and sales of
non-core assets, investment tax credits and grants, interest income, licensing,
service and royalty proceeds.
The Company's policy is to maintain a minimum level of debt. As at June 30,
2008, the Company had an outstanding loan from the Canadian government with a
nominal value of CAD$400,000 discounted at an effective rate of 8.43%
(US$392,000), non-interest bearing, payable in five annual equal and consecutive
installments since July 2004. The balance of the loan is due and payable in July
2008.
As part of the selling of long-lived assets held for sale, the Company agreed to
renegotiate with the principal tenant of the building, a long-term lease
agreement to facilitate the selling of its property in Quebec City. Effective
June 26, 2008, the Company agreed to pay over the next 5 years a total of
$294,000 as an incentive and service fee to the principal tenant. This amount
will be paid bi-annually at a rate of $29,400. The payable is non-interest
bearing, with $235,000 being classified as long-term payable.
The capital management objective of the Company remains the same as that of
previous years. The policy on dividends is to retain cash and to keep funds
available to finance the activities required to advance our product development
pipeline, prioritizing our lead product candidate, cetrorelix, into Phase 3 for
BPH and bringing the drug to market.
The Company is not subject to any capital requirements imposed by any
regulators.
(12)
MD&A -Second Quarter 2008 [AETERNA ZENTARIS LOGO]
LIQUIDITY, CASH FLOWS AND CAPITAL RESOURCES
Our operations and capital expenditures are mainly financed through cash flows
from operating activities, the use of our liquidity, as well as the issuance of
debt and common shares.
Our cash and short-term investments amounted to $24.8 million as at June 30,
2008 compared to $41.4 million as at December 31, 2007. Possible additional
operating losses may require additional financing. As of June 30, 2008, cash and
short-term investments of the Company included $20.7 million in Canadian
currency and 2.2 million in Euros. The short-term investments do not include
asset-backed commercial papers which are affected by liquidity issues.
The variation of our liquidity by activities is explained below, not considering
any cash flows used or provided by discontinued operation activities.
OPERATING ACTIVITIES
Cash flows used by our continuing operating activities were $19.4 million for
the three-month period ended June 30, 2008 compared to $6.6 million for the same
period in 2007. The increase in net cash used in 2008 is primarily attributable
to additional investments in R&D related to the Phase 3 program in BPH for
cetrorelix and non-recurring SG&A corporate expenses.
Cash flows used by our continuing operating activities were $27.6 million for
the six-month period ended June 30, 2008 compared to $12.2 million for the same
period in 2007. The increase in net cash used in 2008 is primarily attributable
to increased R&D expenses related to the cetrorelix Phase 3 programs and
non-recurring SG&A corporate expenses.
We expect net cash used in continuing operating activities to increase in 2008,
as we will continue our Phase 3 clinical program with cetrorelix in BPH and will
further advance targeted, earlier-stage development programs.
Our strategy includes the signature of partnerships to support the development
and commercialization of our products from our extensive pipeline. Our goal is
to sign additional strategic partnerships in the last two quarters of 2008.
FINANCING ACTIVITIES
Net cash used in continuing financing activities was $0.3 million for the
three-month period ended June 30, 2008 compared to $0.8 million for the same
period in 2007. These funds were mostly used for repayment of long-term debt.
Net cash used in continuing financing activities was $0.8 million for the
six-month period
(13)
MD&A -Second Quarter 2008 [AETERNA ZENTARIS LOGO]
ended June 30, 2008 compared to $0.7 million for the same period in 2007. These
funds were mostly used for financing activities related to the shelf prospectus
and long-term debt repayments.
INVESTING ACTIVITIES
Net cash provided by continuing investing activities (excluding the change in
short-term investments) amounted to $5.5 million for the three-month period
ended June 30, 2008 compared to a use of cash of $1.1 million for the same
period in 2007. The increase in inflow for the three-month period ended June 30,
2008 is mainly related to the sale of the Quebec City building and land
property.
Net cash provided by continuing investing activities (excluding the change in
short-term investments) amounted to $13.8 million for the six-month period ended
June 30, 2008 compared to a use of funds of $1 million for the same period in
2007. The increase in inflow for the six-month period ended June 30, 2008 is
mainly related to the disposal of the Quebec City building and land property
combined with the disposal of the long-lived asset held for sale, Impavido(R).
CONTRACTUAL OBLIGATIONS
We have certain contractual obligations and commercial commitments. Commercial
commitments mainly include R&D services and manufacturing agreements related to
the execution of our Phase 3 program with cetrorelix in BPH. The following table
indicates our cash requirements with respect to these obligations:
CONTRACTUAL OBLIGATIONS AS OF JUNE 30, 2008:
CARRYING LESS THAN 1 TO 3 OVER 3
AMOUNT 1 YEAR YEARS YEARS
=================================================
$ $ $ $
Accounts payable and accrued liabilities 20,170 20,170 - -
Operating leases 10,555 2,392 6,136 2,027
Long-term debt and payable 686 451 176 59
Manufacturing contracts 26,505 16,930 9,575 -
-------------------------------------------------
Total 57,916 39,943 15,887 2,086
=================================================
OUTSTANDING SHARE DATA
As of August 5, 2008, there were 53,187,470 common shares issued and
outstanding, as well as 4,196,093 stock options outstanding.
It is important to note that historical patterns of expenditures cannot be taken
as an indication of future expenditures. The amount and timing of expenditures
and availability
(14)
MD&A -Second Quarter 2008 [AETERNA ZENTARIS LOGO]
of capital resources vary substantially from period to period, depending on the
level of research and development activity being undertaken at any one time and
the availability of funding from investors and prospective commercial partners.
QUARTERLY SUMMARY FINANCIAL INFORMATION
(in thousands of US dollars, except per share data)
QUARTERS ENDED
-------------------------------------------------------------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
UNAUDITED 2008 2008 2007 2007
=============================================================================================================
$ $ $ $
Revenues 10,457 9,748 10,240 11,044
Loss from operations (19,525) (14,158) (11,664) (9,461)
Net loss from continuing operations (20,579) (10,866) (13,854) (8,112)
Net loss (20,579) (10,866) (13,636) (8,704)
Net loss per share from continuing operations
Basic and diluted (0.39) (0.20) (0.26) (0.16)
Net loss per share
Basic and diluted (0.39) (0.20) (0.26) (0.16)
QUARTERS ENDED
-------------------------------------------------------------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
2007 2007 2006 2006
=============================================================================================================
$ $ $ $
Revenues 11,551 9,233 11,937 9,928
Loss from operations (5,176) (8,303) (6,457) (5,833)
Net earnings (loss) from continuing operations (4,835) (5,143) 22,526 (4,741)
Net earnings (loss) (4,846) (5,110) 39,101 (1,569)
Net earnings (loss) per share from continuing
operations
Basic and diluted (0.09) (0.10) 0.42 (0.09)
Net earnings (loss) per share
Basic and diluted (0.09) (0.10) 0.74 (0.03)
NOTE: PER SHARE DATA IS CALCULATED INDEPENDENTLY FOR EACH OF THE QUARTERS
PRESENTED. THEREFORE, THE SUM OF THIS QUARTERLY INFORMATION DOES NOT EQUAL
THE CORRESPONDING ANNUAL INFORMATION.
(15)
MD&A -Second Quarter 2008 [AETERNA ZENTARIS LOGO]
OUTLOOK FOR 2008
We expect that during the remainder of the year 2008 our license fees revenues
will be negatively impacted by the recently announced financial difficulties of
our partner, Ardana Bioscience Ltd. (Ardana), from which we were expecting
approximately $1.2 million of milestone payments related to the advancement of
AEZS-130 - growth hormone secretagogue.
We expect R&D expenses over time to increase primarily due to the continuation
of our Phase 3 clinical development program with cetrorelix in BPH.
With an expected shortage in milestone payments, increased R&D costs due to the
Phase 3 program of cetrorelix that is running faster than expected; and the
increase of the Euro as compared to the U.S. and Canadian currencies, net cash
outflow for the fiscal year 2008 is now projected to range from $30 million to
$35 million. This does not take into account additional non-dilutive
transactions and strategic partnerships that we expect to conclude within the
next 6 months.
We believe that the Company has sufficient funds to finish the year 2008 and we
do not expect to pursue dilutive financings.
FINANCIAL AND OTHER INSTRUMENTS
FOREIGN CURRENCY RISK
Since the Company operates on an international scale, it is exposed to currency
risks as a result of potential exchange rate fluctuations. For the three-month
and six-month periods ended June 30, 2008, there were no operations using
forward-exchange contracts and no forward-exchange contract is outstanding as of
today.
CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist primarily of cash and cash equivalents, short-term
investments and accounts receivable. Cash and cash equivalents are maintained
with high-credit quality financial institutions. Short-term investments consist
primarily of bonds issued by high-credit quality corporations and institutions.
Consequently, management considers the risk of non-performance related to cash
and cash equivalents and short-term investments to be minimal.
Generally, we do not require collateral or other security from customers for
trade accounts receivable; however, credit is extended following an evaluation
of creditworthiness. In addition, we perform ongoing credit reviews of all our
customers and establish an allowance for doubtful accounts when accounts are
determined to be uncollectible.
(16)
MD&A -Second Quarter 2008 [AETERNA ZENTARIS LOGO]
RISK FACTORS AND UNCERTAINTIES
RISKS ASSOCIATED WITH OPERATIONS:
- Many of our products are currently in an early development stage. It
is impossible to ensure that the R&D on these products will result in
the creation of profitable operations;
- We are currently developing our products based on R&D activities
conducted to date, and we may not be successful in developing or
introducing to the market these or any other new products or
technology. If we fail to develop and deploy new products on a
successful and timely basis, we may become non-competitive and unable
to recoup the R&D and other expenses we incur to develop and test new
products;
- Even if successfully developed, our products may not gain market
acceptance among physicians, patients, healthcare payers and the
medical community which may not accept or utilize our products. If
they do not achieve significant market acceptance, our business and
financial conditions will be materially adversely affected. In
addition, we may fail to further penetrate our core markets and
existing geographic markets or successfully expand our business into
new markets; the growth in sales of our products, along with our
operating results, could be negatively impacted. Our ability to
further penetrate our core markets and existing geographic markets in
which we compete or to successfully expand our business into
additional countries in Europe, Asia or elsewhere, to the extent we
believe that we have identified attractive geographic expansion
opportunities in the future, is subject to numerous factors, many of
which are beyond our control. We cannot assure that our efforts to
increase market penetration in our core markets and existing
geographic markets will be successful. Our failure to do so could have
an adverse effect on our operating results;
- We rely heavily on our proprietary information in developing and
manufacturing our product candidates. Despite efforts to protect our
proprietary rights from unauthorized use or disclosure, third parties
may attempt to disclose, obtain, or use our proprietary information or
technologies;
- We have to forge and maintain strategic alliances to develop and
market products in our current pipeline. If we are unable to reach
agreements with such collaborative partners, or if any such agreements
are terminated or substantially modified, we may be unable to obtain
sufficient licensing revenue for our products, which might have a
material adverse effect on their development and the Company;
- In carrying out our operations, we are dependent on a stable and
consistent supply of ingredients and raw materials. There can be no
assurance that we will be able, in the future, to continue to purchase
products from our current suppliers
(17)
MD&A -Second Quarter 2008 [AETERNA ZENTARIS LOGO]
or any other supplier on terms similar to current terms or at all. An
interruption in the availability of certain raw materials or
ingredients, or significant increases in the prices paid by us for
them, could have a material adverse effect on our business, financial
condition, liquidity and operating results.
CASH FLOWS AND FINANCIAL RESOURCES
Based on our current plans, we will need to raise additional funds for future
operating costs, research and development activities, preclinical studies, and
clinical trials necessary to bring our potential products to market,
particularly cetrorelix in BPH, or to potentially establish marketing, sales and
distribution capabilities. We may endeavor to secure additional financing, as
required, through strategic alliance arrangements, issuance of new share
capital, as well as other financing opportunities.
However, there can be no assurance that these financing efforts will be
successful or that we will continue to meet our ongoing cash requirements. It is
possible that financing may not be available or, if available, will not be on
acceptable terms. The availability of financing will be affected by the results
of our preclinical and clinical development, including the cetrorelix Phase 3
program, the AEZS-108 Phase 2 study, as well as other studies ongoing from our
pipeline. It may also be affected by our ability to obtain regulatory approvals,
market acceptance of our products, the state of the capital markets generally,
the status of our listing on the NASDAQ and TSX markets, strategic alliance
agreements, and other relevant commercial considerations.
We believe that we will be able to obtain long-term capital, if necessary, to
support our corporate objectives, including the clinical development program of
our products. Our planned cash requirements may vary materially in response to a
number of factors, including R&D on our products; clinical trial results,
increases in our manufacturing capabilities; changes in any aspect of the
regulatory process; and delays in obtaining regulatory approvals. Depending on
the overall structure of current and future strategic alliances, we may have
additional capital requirements related to the further development of existing
or future products.
We have not entered into any forward currency contracts or other financial
derivatives to hedge foreign exchange risk and, therefore, we are subject to
foreign currency transaction and translation gains and losses. Foreign exchange
risk is managed primarily by satisfying foreign denominated expenditures with
cash flows or assets denominated in the same currency. However, with companies
operating in foreign countries, we are more exposed to foreign currency risk.
(18)
MD&A -Second Quarter 2008 [AETERNA ZENTARIS LOGO]
KEY PERSONNEL
Our success is also dependent upon our ability to attract and retain a highly
qualified work force, and to establish and maintain close relations with
research centers. The competition in that regard is very severe. Our success is
dependent to a great degree on our senior officers, scientific personnel and
consultants. The failure to recruit qualified staff and the loss of key
employees could compromise the pace and success of product development.
ACQUISITION PROGRAM
We intend to continue to acquire new technologies and/or businesses. There is no
assurance that we will make certain acquisitions or that we will succeed in
integrating the newly-acquired technologies or businesses into its operations.
The failure to successfully integrate the personnel and operations of businesses
which we may acquire in the future with ours could have a material adverse
effect on our operations and results.
VOLATILITY OF SHARE PRICES
Share prices are subject to change due to numerous factors including reports of
new information, changes in the Company's financial situation, sale of shares in
the market, the Company's failure to obtain results in line with the
expectations of analysts, an announcement by the Company or any of its
competitors concerning technological innovation, etc. During the past few years,
shares of AEterna Zentaris, other biopharmaceutical companies, and the
investment market in general have been subjected to extreme fluctuations that
were unrelated to the operational results of the companies affected. There is no
guarantee that the market price of the Company's shares will be protected from
any such fluctuations in the future.
The Company is a reporting issuer under the securities legislation of all of the
provinces of Canada and is registered in the United States and it is, therefore,
required to file continuous disclosure documents such as interim and annual
financial statements, a Proxy Circular, an Annual Information Form, material
change reports and press releases with such securities regulatory authorities.
Copies of these documents may be obtained free of charge upon request from the
office of the Secretary of the Company or through the Internet at the following
addresses: www.aezsinc.com, www.sedar.com and www.sec.gov/edgar.shtml.
A DETAILED LIST OF THE RISKS AND UNCERTAINTIES AFFECTING US CAN BE FOUND IN OUR
SHELF-PROSPECTUS AND PUBLIC DOCUMENTS FILED ON SEDAR AND EDGAR.
(19)
MD&A -Second Quarter 2008 [AETERNA ZENTARIS LOGO]
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There has been no change in the Company's internal control over financial
reporting which occurred during the three-month period ended June 30, 2008 that
has materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements, which reflect our current
expectations regarding future events. Forward-looking statements may include
words such as anticipate, believe, could, expect, goal, guidance, intend, may,
objective, outlook, plan, seek, should, strive, target and will.
The forward-looking statements involve risks and uncertainties. Results or
performances may differ significantly from expectations. For example, the
results of current clinical trials cannot be foreseen, nor can changes in policy
or actions taken by such regulatory authorities as the US Food and Drug
Administration and the Therapeutic Products Directorate of Health Canada, or any
other organization responsible for enforcing regulations in the pharmaceutical
industry.
Given these uncertainties and risk factors, readers are cautioned not to place
undue reliance on such forward-looking statements. We disclaim any obligation to
update any such factors or to publicly announce the result of any revisions to
any of the forward-looking statements contained herein to reflect future
results, events or developments except as requested by a governmental authority
or applicable law.
On behalf of management,
/s/ Dennis Turpin
Dennis Turpin, CA
Senior Vice President and Chief Financial Officer
August 12, 2008
(20)
Interim Consolidated Financial Statements
(UNAUDITED)
AETERNA ZENTARIS INC.
For the three-month and six-month periods ended June 30, 2008 and 2007
(expressed in thousands of US dollars)
AETERNA ZENTARIS INC.
Interim Consolidated Financial Statements
(UNAUDITED)
For the three-month and six-month periods ended June 30, 2008 and 2007
FINANCIAL STATEMENTS
Interim Consolidated Balance Sheets......................................2
Interim Consolidated Statements of Changes in Shareholders' Equity.......3
Interim Consolidated Statements of Earnings and Comprehensive Income.....5
Interim Consolidated Statements of Cash Flows............................6
Notes to Interim Consolidated Financial Statements.......................7
AETERNA ZENTARIS INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(expressed in thousands of US dollars)
================================================================================
(UNAUDITED) AS AT AS AT
JUNE 30, DECEMBER 31,
2008 2007
------------------------------------------------------------------------------------------
$ $
ASSETS
CURRENT ASSETS
Cash and cash equivalents 11,435 10,272
Short-term investments 13,392 31,115
Accounts receivable
Trade 8,013 6,170
Other 2,026 3,044
Income taxes 69 -
Inventory (note 6) 4,918 5,406
Prepaid expenses 2,992 3,573
------------------------------------------------------------------------------------------
42,845 59,580
PROPERTY, PLANT AND EQUIPMENT 8,251 7,460
LONG-LIVED ASSETS HELD FOR SALE (note 3) 178 13,999
DEFERRED CHARGES AND OTHER LONG-TERM ASSETS 1,840 1,441
INTANGIBLE ASSETS 31,099 30,391
GOODWILL (note 4) 11,336 10,492
------------------------------------------------------------------------------------------
95,549 123,363
==========================================================================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 20,170 16,084
Income taxes - 23
Deferred revenues 3,425 5,373
Current portion of long-term debt and payable (note 5) 451 775
------------------------------------------------------------------------------------------
24,046 22,255
DEFERRED REVENUES 3,112 3,333
LONG-TERM PAYABLE (note 5) 235 -
EMPLOYEE FUTURE BENEFITS 10,337 9,184
------------------------------------------------------------------------------------------
37,730 34,772
------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (note 8) 30,566 30,566
OTHER CAPITAL 79,448 79,306
DEFICIT (74,442) (42,997)
ACCUMULATED OTHER COMPREHENSIVE INCOME 22,247 21,716
------------------------------------------------------------------------------------------
57,819 88,591
------------------------------------------------------------------------------------------
95,549 123,363
==========================================================================================
Basis of presentation (note 1)
The accompanying notes are an integral part of these interim consolidated
financial statements.
APPROVED BY THE BOARD OF DIRECTORS
/s/ Juergen Ernst /s/ Gerard Limoges
-------------------------------- -------------------------------
Juergen Ernst, MBA Gerard Limoges, FCA
Director Director
(2)
AETERNA ZENTARIS INC.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(tabular amounts in thousands of US dollars, except common shares data)
================================================================================
ACCUMULATED
COMMON OTHER
SHARES COMPREHENSIVE
(UNAUDITED) (NUMBER OF) SHARE CAPITAL OTHER CAPITAL DEFICIT INCOME TOTAL
=================================================================================================================================
$ $ $ $ $
BALANCE - DECEMBER 31, 2007 53,187,470 30,566 79,306 (42,997) 21,716 88,591
Net loss for the period - - - (10,866) - (10,866)
Foreign currency translation - - - - (9) (9)
Variation in fair value of
short-term investments - - - - 47 47
Stock based compensation costs - - 270 - - 270
---------------------------------------------------------------------------------------------------------------------------------
BALANCE - MARCH 31, 2008 53,187,470 30,566 79,576 (53,863) 21,754 78,033
Net loss for the period - - - (20,579) - (20,579)
Foreign currency translation - - - - 528 528
Variation in fair value of
short-term investments - - - - (35) (35)
Stock based compensation costs - - (128) - - (128)
---------------------------------------------------------------------------------------------------------------------------------
BALANCE - JUNE 30, 2008 53,187,470 30,566 79,448 (74,442) 22,247 57,819
=================================================================================================================================
ACCUMULATED
COMMON OTHER
SHARES COMPREHENSIVE
(UNAUDITED) (NUMBER OF) SHARE CAPITAL OTHER CAPITAL DEFICIT INCOME TOTAL
=================================================================================================================================
$ $ $ $ $
BALANCE - DECEMBER 31, 2006 53,169,470 168,466 6,226 (10,114) 14,301 178,879
Net loss for the period - - - (5,110) - (5,110)
Adjustment related to the
implementation of new
accounting standards - - - (587) (41) (628)
Foreign currency translation - - - - 998 998
Variation in fair value of
short-term investments - - - - (24) (24)
Issued pursuant to the stock
option plan
For cash 10,000 18 - - - 18
Ascribed value from Other
Capital - 13 (13) - - -
Reduction of stated capital - (137,959) 70,032 - (5,624) (73,551)
Stock based compensation costs - - 454 - - 454
---------------------------------------------------------------------------------------------------------------------------------
BALANCE - MARCH 31, 2007 53,179,470 30,538 76,699 (15,811) 9,610 101,036
Net loss for the period - - - (4,846) - (4,846)
Foreign currency translation - - - - 5,891 5,891
Variation in fair value of
short-term investments - - - - (144) (144)
Stock based compensation costs - - 527 - - 527
---------------------------------------------------------------------------------------------------------------------------------
BALANCE - JUNE 30, 2007 53,179,470 30,538 77,226 (20,657) 15,357 102,464
=================================================================================================================================
The accompanying notes are an integral part of these interim consolidated
financial statements.
(3)
AETERNA ZENTARIS INC.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(tabular amounts in thousands of US dollars)
================================================================================
AS AT
ACCUMULATED OTHER COMPREHENSIVE INCOME AND DEFICIT JUNE 30,
(UNAUDITED) 2008 2007
=================================================================================
$ $
Consisting of the following:
Foreign currency translation adjustment 22,225 15,566
Variation in fair market value of short-term investments 22 (209)
---------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME 22,247 15,357
DEFICIT (74,442) (20,657)
---------------------------------------------------------------------------------
(52,195) (5,300)
=================================================================================
The accompanying notes are an integral part of these interim consolidated
financial statements. (4)
AETERNA ZENTARIS INC.
INTERIM CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(Expressed in thousands of US dollars, except shares and per share data)
================================================================================
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(UNAUDITED) 2008 2007 2008 2007
=============================================================================================================================
$ $ $ $
REVENUES
Sales and royalties 8,250 7,698 16,192 15,020
License fees 2,207 3,853 4,013 5,765
-----------------------------------------------------------------------------------------------------------------------------
10,457 11,551 20,205 20,785
-----------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales 4,758 3,075 9,362 6,385
Research and development costs, net of tax credits and grants* 17,345 7,815 31,034 15,722
Selling, general and administrative* 6,606 4,517 11,010 9,410
Depreciation and amortization
Property, plant and equipment 397 392 766 757
Intangible assets 876 928 1,716 1,990
-----------------------------------------------------------------------------------------------------------------------------
29,982 16,727 53,888 34,264
-----------------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (19,525) (5,176) (33,683) (13,479)
OTHER REVENUES (EXPENSES)
Interest income 311 300 588 875
Interest expense (53) (53) (68) (53)
Foreign exchange (loss) gain (502) (637) 1,753 (596)
Loss on disposal of long-lived assets held for sale (note 3) (810) - (35) -
-----------------------------------------------------------------------------------------------------------------------------
(1,054) (390) 2,238 226
-----------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (20,579) (5,566) (31,445) (13,253)
INCOME TAX RECOVERY - 731 - 3,275
-----------------------------------------------------------------------------------------------------------------------------
NET LOSS FROM CONTINUING OPERATIONS (20,579) (4,835) (31,445) (9,978)
NET (LOSS) EARNINGS FROM DISCONTINUED OPERATIONS - (11) - 22
-----------------------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD (20,579) (4,846) (31,445) (9,956)
=============================================================================================================================
NET LOSS PER SHARE FROM CONTINUING OPERATIONS
Basic and diluted (0.39) (0.09) (0.59) (0.19)
=============================================================================================================================
NET LOSS PER SHARE
Basic and diluted (0.39) (0.09) (0.59) (0.19)
=============================================================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES (NOTE 10)
Basic and diluted 53,187,470 53,179,470 53,187,470 53,179,470
=============================================================================================================================
* Stock-based compensation costs included in:
Research and development 54 61 116 116
Selling, general and administrative (182) 466 26 865
-----------------------------------------------------------------------------------------------------------------------------
(128) 527 142 981
=============================================================================================================================
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(UNAUDITED) 2008 2007 2008 2007
=============================================================================================================================
$ $ $ $
NET LOSS FOR THE PERIOD (20,579) (4,846) (31,445) (9,956)
Other comprehensive income (loss):
Foreign currency translation 528 5,891 519 6,889
Variation in the fair value of short-term investments (35) (144) 12 (168)
-----------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE (LOSS) INCOME (20,086) 901 (30,914) (3,235)
=============================================================================================================================
The accompanying notes are an integral part of these interim consolidated
financial statements. (5)
AETERNA ZENTARIS INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(Expressed in thousands of US dollars)
================================================================================
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(UNAUDITED) 2008 2007 2008 2007
=============================================================================================================================
$ $ $ $
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period (20,579) (4,846) (31,445) (9,956)
Net earnings (loss) from discontinued operations - (11) - 22
-----------------------------------------------------------------------------------------------------------------------------
Net loss from continuing operations (20,579) (4,835) (31,445) (9,978)
Items not affecting cash and cash equivalents
Depreciation and amortization 1,273 1,320 2 482 2,747
Stock-based compensation costs (128) 527 142 981
Future income taxes - (731) - (3,105)
Loss on disposal of long-lived assets held for sale 810 - 35 -
Employee future benefits 215 165 400 291
Deferred charges 9 252 104 366
Deferred revenues (1,410) (3,040) (2,795) (4,423)
Accretion on long-term borrowings (15) 53 - 53
Foreign exchange loss (gain) on long-term items
denominated in foreign currency 346 526 (903) 508
Change in non-cash operating working capital items (note 7) 100 (920) 4,359 239
-----------------------------------------------------------------------------------------------------------------------------
Net cash used in continuing operating activities (19,379) (6,683) (27,621) (12,321)
Net cash provided by discontinued operating activities - 78 - 86
-----------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (19,379) (6,605) (27,621) (12,235)
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt (362) (751) (362) (751)
Issuance of shares pursuant to the exercise of stock options - - - 18
Share issue expenses 12 - (438) -
-----------------------------------------------------------------------------------------------------------------------------
Net cash used in continuing financing activities (350) (751) (800) (733)
Net cash used in discontinued financing activities - (8) - (16)
-----------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (350) (759) (800) (749)
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments - (3,291) - (5,851)
Proceeds from maturity of short-term investments 8,839 13,591 17,213 18,876
Net proceeds from sale of long-lived assets held for sale 6,545 - 14,854 -
Purchase of property, plant and equipment (1,005) (1,436) (1,061) (1,436)
Proceeds from sale of property, plant and equipment 10 353 12 612
Acquisition of amortizable intangible assets (1) (20) (16) (28)
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing investing activities 14,388 9,197 31,002 12,173
Net cash provided by (used in) discontinued investing activities - 27 - (14)
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 14,388 9,224 31,002 12,159
-----------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (82) 497 (1,418) 553
-----------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (5,423) 2,357 1,163 (272)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 16,858 6,727 10,272 9,356
-----------------------------------------------------------------------------------------------------------------------------
CASH - END OF PERIOD 11,435 9,084 11,435 9,084
=============================================================================================================================
CASH RELATED TO:
Continuing operations 11,435 8,791 11,435 8,791
Discontinued operations - 293 - 293
-----------------------------------------------------------------------------------------------------------------------------
11,435 9,084 11,435 9,084
=============================================================================================================================
The accompanying notes are an integral part of these interim consolidated
financial statements. (6)
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(tabular amounts in thousands of US dollars, except share/option data and per
share/option data and as otherwise noted)
================================================================================
1. BASIS OF PRESENTATION
These interim consolidated financial statements as at June 30, 2008 and for the
three-month and six-month periods ended June 30, 2008 and 2007 are unaudited.
They have been prepared by the Company in accordance with Canadian generally
accepted accounting principles (GAAP) for interim financial information. The
unaudited consolidated financial statements reflect all adjustments which, in
the opinion of management, are necessary for a fair statement of the results of
operations, financial position and cash flows for the interim periods presented.
All such adjustments are of a normal recurring nature.
The accounting policies and methods of computation adopted in these financial
statements are the same as those used in the preparation of the Company's most
recent annual consolidated financial statements with the exception of the
application of new accounting standards as described in note 2 hereunder. All
disclosures required for annual financial statements have not been included in
these financial statements. These consolidated financial statements should be
read in conjunction with the Company's most recent annual consolidated financial
statements. The results of the interim periods are not necessarily indicative of
results which may be expected for any other interim period or for the full year.
EVALUATION OF GOING CONCERN, RESULTS OF OPERATIONS, AND MANAGEMENT'S PLANS:
After reviewing its strategic plan and the corresponding budget of 2008 and
forecasts for 2009 and 2010 as well as following the sale of non-core assets
described in note 3, management believes that the Company currently has
sufficient cash and short-term investments to fund planned expenditures until
the end of the year 2008. Furthermore, management believes that additional
non-core assets monetization, strategic partnerships and/or financings will be
required to provide sufficient cash for the next 12 months. During the second
part of year 2008, the Company endeavors to conclude additional monetization of
non-core assets and strategic partnerships.
2. NEW ACCOUNTING STANDARDS AND PRONOUNCEMENTS
a) ADOPTED IN 2008
On January 1, 2008 the Company adopted the Canadian Institute of Chartered
Accountants ("CICA") Handbook Sections 1535, CAPITAL DISCLOSURE; CICA Handbook
Section 3862, FINANCIAL INSTRUMENTS - DISCLOSURE; CICA Handbook Sections 3863,
FINANCIAL INSTRUMENTS - PRESENTATION; and CICA Handbook Section 3031,
INVENTORIES, which replaces Section 3030.
The CICA Section 1535, "CAPITAL DISCLOSURES" establishes guidelines for
disclosure of information regarding an entity's capital which will enable users
of its financial statements to evaluate an entity's objectives, policies and
processes for managing capital, including disclosures of any externally imposed
capital requirements and the consequences of non-compliance, see note 5.
(7)
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(tabular amounts in thousands of US dollars, except share/option data and per
share/option data and as otherwise noted)
================================================================================
The CICA Section 3862, "FINANCIAL INSTRUMENTS - DISCLOSURES" and Section 3863,
"FINANCIAL INSTRUMENTS - PRESENTATION" which replace Section 3861, "FINANCIAL
INSTRUMENTS - DISCLOSURE AND PRESENTATION", requires the disclosure of
additional details of financial asset and liability categories as well as a
detailed discussion on the risks associated with the company's financial
instruments. The presentation requirements are carried forward unchanged, see
note 9.
The CICA issued Section 3031, "INVENTORIES" which replaced existing Section 3030
with the same title. This standard requires that inventories should be measured
at the lower of cost and net realizable value, and includes guidance on the
determination of cost, including allocation of overheads and other costs. The
standard also requires that similar inventories within a consolidated group be
measured using the same method. It also requires the reversal of previous
write-downs to net realizable value when there is a subsequent increase in the
value of inventories. On January 1, 2008, the Company has adopted this standard
and there has been no impact on the financial statements.
b) FUTURE ACCOUNTING CHANGES
In January 2008, the CICA issued Handbook Section 3064, GOODWILL AND INTANGIBLE
ASSETS. This standard provides guidance on the recognition of intangible assets
in accordance with the definition of an asset and the criteria for asset
recognition, clarifying the applications of the concept of matching revenues and
expenses, whether these assets are separately acquired or are developed
internally. The standard will apply to the Company's interim and annual
financial statements beginning in 2009. The Company has not yet determined the
impact that adoption of this standard will have on the consolidated financial
statements.
3. LONG-LIVED ASSETS HELD FOR SALE
In September 30, 2007, as part of its strategy to finance with non-dilutive
vehicles, using non-core assets, the Company decided to put up for sale its
building and land properties located in Quebec City. The building and land were
classified as "long-lived assets held for sale". Management, during the December
2007 year-end close, evaluated the net realizable value of the building and land
held for sale based on bids that were received, and recorded an impairment loss
of $735,000 against the assets held for sale. On June 26, 2008 the Company sold
the Quebec City building and land for a gross amount of $7,061,000 payable cash
at that date. The Company recorded an additional loss on sale of long-lived
assets held for sale of $810,000. The net proceeds from disposal of long-lived
assets held for sale was $6,545,000. As part of the sale of the building, the
Company agreed to renegotiate with the principal tenant of the building, a
long-term lease agreement to facilitate the transaction. Effective June 26th
2008, the Company agreed to pay the tenant, over the next 5 years, $294,000 as
an incentive and service fee. This amount is included in the additional loss
accounted for and will be paid by bi-annually installments of $29,400. The
payable is non-interest bearing.
On March 1, 2008, the Company entered into a definite purchase and sale
agreement with respect to all rights related to the manufacture, production,
distribution, marketing, sale and/or use of Impavido(R) (miltefosine) with
Paladin Labs Inc. The transaction was finalized on March 31, 2008 with net cash
proceeds of $8,309,000, resulting in a gain of $775,000.
(8)
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(tabular amounts in thousands of US dollars, except share/option data and per
share/option data and as otherwise noted)
================================================================================
4. GOODWILL
The change in carrying value is as follows:
$
BALANCE AS AT DECEMBER 31, 2007 10,492
Effect of foreign exchange rate 844
--------------------------------------------------------------------------------
BALANCE AS AT JUNE 30, 2008 11,336
================================================================================
5. CAPITAL DISCLOSURE
The Company's objective in managing capital composed of shareholders' equity is
to ensure a sufficient liquidity position to finance its research and
development activities, general and administrative expenses, working capital and
overall capital expenditures. The Company makes every effort to manage its
liquidity to minimize dilution to its shareholders, when possible.
Initially, the Company had funded its activities through public offerings of
common shares and convertible term loans. Currently, the Company has tried to
optimize its liquidity needs by non-dilutive sources, including the spin-off and
sales of non-core assets, investment tax credits and grants, interest income,
licensing, service and royalty proceeds.
The Company's policy is to maintain minimum level of debt. As at June 30, 2008
the Company has a loan from the federal and provincial governments with a
nominal value of CAD$400,000 discounted at an effective rate of 8.43%
(US$392,000), non-interesting bearing, which has been payable in five annual
equal and consecutive instalments since July 2004. The balance of the loan is
due and payable in July 2008.
The capital management objective of the Company remains the same as that of
previous years. The policy on dividends is to retain cash to keep funds
available to finance the activities required to advance our product development
pipeline, prioritizing our lead product candidate cetrorelix in Phase 3 for BPH.
The Company is not subject to any capital requirements imposed by any regulators
or any other external source.
(9)
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(tabular amounts in thousands of US dollars, except share/option data and per
share/option data and as otherwise noted)
================================================================================
6. INVENTORY
AS AT JUNE 30, 2008 AS AT DECEMBER 31, 2007
$ $
================================================================================
Raw materials 3,193 3,399
Work in progress 1,560 1,602
Finished goods 165 405
--------------------------------------------------------------------------------
TOTAL INVENTORY 4,918 5,406
================================================================================
7. STATEMENTS OF CASH FLOWS AND ADDITIONAL INFORMATION
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2008 2007 2008 2007
====================================================================================================================
$ $ $ $
CHANGE IN NON-CASH OPERATING WORKING CAPITAL ITEMS
Accounts receivable (1,024) (880) (499) (475)
Inventory 527 313 900 570
Prepaid expenses 780 (112) 823 (272)
Accounts payable and accrued liabilities (111) (769) 3,216 (424)
Income taxes (72) 528 (81) 840
--------------------------------------------------------------------------------------------------------------------
100 (920) 4,359 239
====================================================================================================================
ADDITIONAL INFORMATION:
Interest paid:
From continuing operations - - - 1
Income taxes recovered:
From continuing operations - (1,011) - (1,002)
EMPLOYEE FUTURE BENEFITS:
Defined benefit plans 235 178 435 318
Defined contribution plans 170 104 305 156
(10)
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(tabular amounts in thousands of US dollars, except share/option data and per
share/option data and as otherwise noted)
================================================================================
8. SHARE CAPITAL
The following table summarizes the stock option activity under the Stock Option
Plan:
CANADIAN DOLLAR OPTIONS:
SIX MONTHS ENDED JUNE 30, 2008 YEAR ENDED DECEMBER 31, 2007
===========================================================================================================================
WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE EXERCISE PRICE
NUMBER (CAN$) NUMBER (CAN$)
Balance - Beginning of period 4,136,092 3.83 3,490,092 4.00
Granted - - 815,000 3.24
Exercised - - (18,000) 1.96
Expired - - - -
Forfeited (263,333) 3.94 (151,000) 4.93
---------------------------------------------------------------------------------------------------------------------------
Balance - End of period 3,872,759 3.82 4,136,092 3.83
===========================================================================================================================
US DOLLAR OPTIONS:
SIX MONTHS ENDED JUNE 30, 2008 YEAR ENDED DECEMBER 31, 2007
===========================================================================================================================
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER EXERCISE PRICE (US$) NUMBER EXERCISE PRICE (US$)
Balance - Beginning of period 870,000 2.79 - -
Granted - - 870,000 2.79
Exercised - - - -
Expired - - - -
Forfeited (546,666) 2.82 - -
---------------------------------------------------------------------------------------------------------------------------
Balance - End of period 323,334 2.74 870,000 2.79
===========================================================================================================================
9. FINANCIAL RISK MANAGEMENT
This note provides disclosures relating to the nature and extent of the
Company's exposure to risks arising from financial instruments, including credit
risk, liquidity risk, foreign currency risk and interest rate risk, and how the
Company manages those risks.
(a) CREDIT RISK
Credit risk is the risk of an unexpected loss if a customer or third party to a
financial instrument fails to meet its contractual obligations. The Company
regularly monitors the credit risk exposure and takes steps to mitigate the
likelihood of these exposures from resulting in actual loss. The company is
protected against concentration of credit risk through its products, clientele
and partners, and its geographic diversity. In addition, the Company has
concluded long-term contracts with all of its key customers.
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist primarily of cash and cash equivalents, short-term
investments and accounts receivable. Cash and cash equivalents are maintained
with high-credit quality financial institutions. Short-term investments consist
primarily of bonds issued by high-credit quality corporations and institutions.
Consequently, management
(11)
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(tabular amounts in thousands of US dollars, except share/option data and per
share/option data and as otherwise noted)
================================================================================
considers the risk of non-performance related to cash and cash equivalents and
short-term investments to be minimal.
(b) FOREIGN CURRENCY RISK
Since the Company operates on an international scale, it is exposed to currency
risks as a result of potential exchange rate fluctuations. Fluctuations in the
U.S. dollar (US$), Canadian dollar (CAN$) and the Euro (EUR) exchange rates
could have a potentially significant impact on the Company's results of
operations. The following variations are reasonably possible over a 12-month
period:
- Foreign exchange rate variation of -5% (depreciation of US$) and +5%
(appreciation of US$) against the CAN$. From a period-end rate of CAN$1 =
US$0.9807.
- Foreign exchange rate variation of -5% (depreciation of CAN$) and +5%
(appreciation of CAN$) against the EUR. From a period-end rate of EUR1 =
CAN$1.6041.
- Foreign exchange rate variation of -5% (depreciation of US$) and +5%
(appreciation of US$) against the EUR. From a period-end rate of EUR1 =
US$1.5731.
If these variations were to occur, the impact on consolidated net loss for each
category of financial instruments held at the balance sheet date would be as
follows:
LOCATION USING CAN$ AS FUNCTIONAL CURRENCY
CARRYING EUR
(IN THOUSANDS OF US DOLLARS) AMOUNT -5% +5%
==================================================================================
ASSETS $ $ $
Advance from parent Company to a subsidiary (1) 8,868 (443) 443
--------------------------------
TOTAL NET LOSS (INCREASE) DECREASE (443) 443
--------------------------------
LOCATION USING EUR AS FUNCTIONAL CURRENCY
CARRYING US
(IN THOUSANDS OF US DOLLARS) AMOUNT -5% +5%
==================================================================================
ASSETS $ $ $
Cash 1,332 (67) 67
Accounts receivable 1,495 (75) 75
LESS:
LIABILITIES
Accounts payable and accrued liabilities 2,385 (119) 119
--------------------------------
TOTAL NET LOSS (INCREASE) DECREASE (23) 23
--------------------------------
(1) AEterna Zentaris' parent Company located in Canada has an advance to be
received from its German subsidiary of 5,637 EUR (CAN$9,042 using a
period-end exchange rate 1 EUR = CAN$1.6041 and US$8,868 using a period-end
exchange rate 1 EUR = US$1.5731) which is eliminated in the consolidated
balance sheet. A foreign exchange gain/loss for the parent Company would be
recorded under the consolidated statements of earnings since this advance
has not been considered to be part of a net investment in a self-sustaining
subsidiary.
(12)
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(tabular amounts in thousands of US dollars, except share/option data and per
share/option data and as otherwise noted)
================================================================================
(c) 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 manages liquidity risk
through the management of its capital structure and financial leverage, as
outline in Note 5. It also manages liquidity risk by continuously monitoring
actual and projected cash flow. The Board of Directors reviews and approves the
Company's operating and capital budgets, and reviews any material transactions
outside of the normal course of business.
The company investment policy ensure the safety and preservation of its
principal, as outlined in section (a) above, to ensure the Company's liquidity
needs are met.
(d) THE FOLLOWING ARE THE FINANCIAL LIABILITIES AS OF JUNE 30, 2008
CARRYING LESS THAN 1 TO 3 OVER
AMOUNT 1 YEAR YEARS 3 YEARS
=================================================
$ $ $ $
Accounts payable and accrued liabilities 20,170 20,170 - -
Operating leases 10,555 2,392 6,136 2,027
Long-term debt and payable 686 451 176 59
-------------------------------------------------
31,411 23,013 6,312 2,086
=================================================
(13)
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(tabular amounts in thousands of US dollars, except share/option data and per
share/option data and as otherwise noted)
================================================================================
10. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per
share:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2008 2007 2008 2007
===============================================================================================================
$ $ $ $
NET LOSS FROM CONTINUING OPERATIONS (20,579) (4,835) (31,445) (9,978)
---------------------------------------------------------------------------------------------------------------
NET (LOSS) EARNINGS FROM DISCONTINUED OPERATIONS - (11) - 22
---------------------------------------------------------------------------------------------------------------
NET LOSS (20,579) (4,846) (31,445) (9,956)
===============================================================================================================
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2008 2007 2008 2007
===============================================================================================================
BASIC WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 53,187,470 53,179,470 53,187,470 53,179,470
Effect of dilutive stock options - 575,423 - 982,738
---------------------------------------------------------------------------------------------------------------
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 53,187,470 53,754,893 53,187,470 54,162,208
===============================================================================================================
ITEMS EXCLUDED FROM THE CALCULATION OF DILUTED NET LOSS PER SHARE BECAUSE THE
EXERCISE PRICE WAS GREATER THAN THE AVERAGE MARKET PRICE OF THE COMMON SHARES OR
DUE TO THEIR ANTI-DILUTIVE EFFECT.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2008 2007 2008 2007
===============================================================================================================
Stock options 4,196,093 2,489,335 4,196,093 1,750,944
For the six-month and the three-month periods ended June 30, 2008 and 2007, the
diluted net loss per share was the same as the basic net loss per share since
the dilutive effect of stock options was not included in the calculation;
otherwise, the effect would have been anti-dilutive. Accordingly, the diluted
net loss per share for these periods was calculated using the basic weighted
average number of shares outstanding.
11. DIFFERENCES BETWEEN CANADIAN AND U.S. GAAP
These interim consolidated financial statements are prepared in accordance with
Canadian GAAP and significant differences in measurement and disclosure from
U.S. GAAP are set out in note 24 to the Company's most recent annual
consolidated financial statements. This note describes significant changes
occurring since the most recent annual consolidated financial statements and
provides a quantitative analysis of all significant differences. All disclosure
required in annual financial statements under U.S. GAAP and regulation S-X of
the Securities and Exchange Commission in the United States have not been
provided in these interim consolidated financial statements.
(14)
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(tabular amounts in thousands of US dollars, except share/option data and per
share/option data and as otherwise noted)
================================================================================
RECONCILIATION OF NET LOSS TO U.S. GAAP
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2008 2007 2008 2007
============================================================================================================================
$ $ $ $
NET LOSS FOR THE PERIOD UNDER CANADIAN GAAP (20,579) (4,846) (31,445) (9,956)
Amortization of in-process R&D (a) 382 387 736 763
Other
Deferred income taxes (b) - (172) - (1,363)
Income tax effects of above adjustments - (158) - (312)
----------------------------------------------------------------------------------------------------------------------------
Net loss for the period under US GAAP (20,197) (4,789) (30,709) (10,868)
----------------------------------------------------------------------------------------------------------------------------
Comprising of:
Net loss from continuing operations (20,197) (4,778) (30,709) (10,890)
Net (loss) earnings from discontinued operations - (11) - 22
NET LOSS PER SHARE
Basic and diluted (0.38) (0.09) (0.58) (0.20)
From continuing operations (0.38) (0.09) (0.58) (0.20)
From discontinued operations - - - -
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING UNDER U.S.
GAAP
Basic 53,187,470 53,179,470 53,187,470 53,179,470
Effect of diluted stock options - 575,423 - 982,738
Diluted weighted average number of shares outstanding 53,187,470 53,754,893 53,187,470 54,162,208
For the periods ended June 30, 2008 and 2007, the diluted net loss per share was
the same as the basic net loss per share since the dilutive effect of stock
options was not included in the calculation; otherwise, the effect would have
been anti-dilutive. Accordingly, the diluted net loss per share for these
periods was calculated using the basic weighted average number of shares
outstanding.
a) Research and development costs
Under U.S. GAAP, in-process research and development acquired in a business
combination is written off at the time of acquisition. Under Canadian GAAP,
in-process research and development acquired in a business combination is
capitalized and amortized over its estimated useful life.
b) Deferred income taxes
This adjustment reflects the accounting of an additional valuation allowance for
U.S. GAAP purposes arising from different amounts of temporary differences under
U.S. GAAP.
(15)
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(tabular amounts in thousands of US dollars, except share/option data and per
share/option data and as otherwise noted)
================================================================================
STATEMENT OF COMPREHENSIVE INCOME
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2008 2007 2008 2007
===========================================================================================
NET LOSS FOR THE PERIOD UNDER U.S. GAAP (20,197) (4,789) (30,709) (10,868)
Other comprehensive income:
Foreign currency translation 857 4,450 1,317 3,812
Change in fair value of investments (35) (144) 12 (168)
-------------------------------------------------------------------------------------------
Comprehensive loss in accordance with U.S. GAAP (19,375) (483) (29,380) (7,224)
===========================================================================================
RECONCILIATION OF SHAREHOLDERS' EQUITY TO CONFORM TO U.S. GAAP
The following summary sets out the significant differences between the Company's
reported shareholders' equity under Canadian GAAP as compared to U.S. GAAP.
Please see corresponding explanatory notes for additional information.
AS AT AS AT
JUNE 30, 2008 DECEMBER 31, 2007
==========================================================================================
$ $
Shareholders' equity in accordance with
Canadian GAAP 57,819 88,591
In-process R&D (a) (12,647) (14,181)
------------------------------------------------------------------------------------------
Shareholders' equity in accordance with U.S. GAAP 45,172 74,410
==========================================================================================
(16)
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(tabular amounts in thousands of US dollars, except share/option data and per
share/option data and as otherwise noted)
================================================================================
THE FOLLOWING TABLE SUMMARIZES THE SHAREHOLDERS' ACTIVITY UNDER U.S. GAAP
ACCUMULATED OTHER
SHARE OTHER COMPREHENSIVE SHAREHOLDERS'
CAPITAL CAPITAL DEFICIT INCOME EQUITY
======================================================================================================================
$ $ $ $ $
BALANCE AS AT DECEMBER 31, 2007 22,589 83,282 (51,280) 19,819 74,410
Net loss as per U.S. GAAP - - (10,512) - (10,512)
Change in fair value of investments - - - 47 47
Stock based compensation costs - 270 - - 270
Foreign currency translation adjustments - - - 460 460
----------------------------------------------------------------------------------------------------------------------
BALANCE AS AT MARCH 31, 2008 22,589 83,552 (61,792) 20,326 64,675
----------------------------------------------------------------------------------------------------------------------
Net loss as per U.S. GAAP - - (20,197) - (20,197)
Change in fair value of investments - - - (35) (35)
Stock based compensation costs - (128) - - (128)
Foreign currency translation adjustments - - - 857 857
----------------------------------------------------------------------------------------------------------------------
BALANCE AS AT JUNE 30, 2008 22,589 83,424 (81,989) 21,148 45,172
======================================================================================================================
ACCUMULATED OTHER
SHARE OTHER COMPREHENSIVE SHAREHOLDERS'
CAPITAL CAPITAL DEFICIT INCOME EQUITY
======================================================================================================================
$ $ $ $ $
BALANCE AS AT DECEMBER 31, 2006 160,489 10,202 (13,852) 12,865 169,704
Net loss as per U.S. GAAP - - (6,079) - (6,079)
Change in fair value of investments - - - (24) (24)
Reduction of stated capital (137,959) 70,032 - (5,624) (73,551)
Issued pursuant to the stock option plan - - - - -
For cash 18 - - - 18
Ascribed value from Other Capital 13 (13) - - -
Stock based compensation costs - 454 - - 454
Foreign currency translation adjustments - - - (638) (638)
----------------------------------------------------------------------------------------------------------------------
BALANCE AS AT MARCH 31, 2007 22,561 80,675 (19,931) 6,579 89,884
----------------------------------------------------------------------------------------------------------------------
Net loss as per U.S. GAAP - - (4,789) - (4,789)
Change in fair value of investments - - - (144) (144)
Stock based compensation costs - 527 - - 527
Foreign currency translation adjustments - - - 4,450 4,450
----------------------------------------------------------------------------------------------------------------------
BALANCE AS AT JUNE 30, 2007 22,561 81,202 (24,720) 10,885 89,928
======================================================================================================================
(17)
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(tabular amounts in thousands of US dollars, except share/option data and per
share/option data and as otherwise noted)
================================================================================
ACCUMULATED OTHER COMPREHENSIVE INCOME IS COMPRISED OF THE FOLLOWING:
AS AT AS AT
JUNE 30, 2008 DECEMBER 31, 2007
----------------------------------
$ $
Foreign currency translation adjustments 21,126 19,809
Unrealized gains on investments 22 10
----------------------------------
Accumulated other comprehensive income in
accordance with U.S. GAAP 21,148 19,819
==================================
BALANCE SHEETS
The following table summarizes the significant differences in balance sheet
items between Canadian and U.S. GAAP:
AS AT JUNE 30, 2008 AS AT DECEMBER 31, 2007
AS REPORTED U.S. GAAP AS REPORTED U.S. GAAP
====================================================
$ $ $ $
Intangible assets 31,099 18,442 36,945 22,764
STATEMENT OF CASH FLOWS
For the three-month and six-month periods ended June 30, 2008 and 2007 there was
no significant differences between the statements of cash flows under Canadian
GAAP as compared to U.S. GAAP.
RESEARCH AND DEVELOPMENT TAX CREDITS
Under Canadian GAAP, all research and development tax credits are recorded as a
reduction of costs in the statement of operations. Under U.S. GAAP, tax credits
that are refundable against taxable income are recorded in the income taxes.
This difference has no impact on the net loss and on the net loss per share
figures for the reporting periods.
(18)
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(tabular amounts in thousands of US dollars, except share/option data and per
share/option data and as otherwise noted)
================================================================================
NEW ACCOUNTING STANDARDS
FASB STATEMENT NO. 157 - FAIR VALUE MEASUREMENTS (SFAS 157)
In September 2006, the FASB issued SFAS No. 157, "FAIR VALUE MEASUREMENTS"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value and expands disclosures regarding fair value measurements. SFAS 157
does not require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting pronouncements. In
February 2008, the FASB amended SFAS 157 (FSP 157-2) to exclude leasing
transactions and to delay the effective date by one year for non-financial
assets and liabilities that are recognized or disclosed at fair value in the
financial statements on a non-recurring basis. The Company has adopted this
statement as of January 1, 2008. There is no significant impact from SFAS 157 on
the Company's consolidated financial statements.
FASB STATEMENT NO. 159 - THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND
FINANCIAL LIABILITIES - INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115 (SFAS
159)
On February 15, 2007, the FASB issued SFAS 159, "THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES - Including an amendment of FASB
Statement No. 115", which permits entities to choose to measure many financial
instruments and certain other items at fair value. Most of the provisions of
this statement apply only to entities that elect the fair value option. However,
the amendment to SFAS 115, "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES", applies to all entities with available-for-sale and trading
securities. This statement is effective for fiscal years beginning after
November 15, 2007. The Company has adopted this statement as of January 1, 2008
and has not elected to use the fair value option and accordingly there has not
been any impact.
EITF ISSUE NO. 07-1 - ACCOUNTING FOR COLLABORATIVE AGREEMENTS RELATED TO THE
DEVELOPMENT AND COMMERCIALIZATION OF INTELLECTUAL PROPERTY (EITF 07-01)
The Emerging Issues Task Force has issued guidance accounting for arrangements
under which companies participate in the development and commercialization of
intellectual property into commercially viable products. The ETIF defines a
collaborative arrangement is a contractual arrangement that involves a joint
operating activity. These arrangements involve two (or more) parties who are
both (a) active participants in the activity and (b) exposed to significant
risks and rewards dependent on the commercial success of the activity. A company
may receive revenues and incur costs under such arrangements as well as make or
received payments from the other participant in the arrangement. The EITF
concluded revenues earned and costs incurred by a company should be presented
gross or net depending on whether the company is the principal in the
arrangement. The EITF has approved this pronouncement in December 2007 and it
will become effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. The
Company is currently assessing the impact on the presentation of revenues and
costs within the Company's financial statements.
(19)
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(tabular amounts in thousands of US dollars, except share/option data and per
share/option data and as otherwise noted)
================================================================================
EITF ISSUE NO. 07-3 - ACCOUNTING FOR ADVANCE PAYMENTS FOR GOODS OR SERVICES TO
BE RECEIVED FOR USE IN FUTURE RESEARCH AND DEVELOPMENT ACTIVITIES (EITF 07-3)
Issued in June 2007, EITF 07-3 provides clarification surrounding the accounting
for non-refundable research and development advance payments, whereby such
payments should be recorded as an asset when the advance payment is made and
recognized as an expense when the research and development activities are
performed. EITF 07-3 is effective for interim and annual reporting periods
beginning after December 15, 2007. The Company adopted the provisions of EITF
07-3 on January 1, 2008. There has been no impact on the financial records of
the Company.
FASB STATEMENT NO. 161 - DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES - INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 133 (SFAS 133)
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities." This Statement is effective for financial
statements issued for periods beginning after November 15, 2008, with early
application encouraged. This statement amends and expands the disclosure
requirements in SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and other related literature. The Company believes that the updated
disclosures will not have a material impact on its consolidated financial
statements.
FASB STATEMENT NO. 141(R) - BUSINESS COMBINATIONS (REVISED - 2007) - (SFAS
141(R))
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations
(revised - 2007)" (SFAS 141(R)). SFAS 141(R) is a revision to previously
existing guidance on accounting for business combinations. The statement retains
the fundamental concept of the purchase method of accounting, and introduces new
requirements for the recognition and measurement of assets acquired, liabilities
assumed and non-controlling interests. The statement is effective for fiscal
years beginning after December 15, 2008. The Company does not expect adoption of
this standard to have a material impact on its existing consolidated results of
operations and financial condition.
FASB STATEMENT NO. 162 - THE HIERARCHY OF GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
In May of 2008, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 162, "The Hierarchy of Generally Accepted Accounting Principles"
("FAS162"). The new standard is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles (GAAP) for
non-governmental entities. The guidance in FAS 162 replaces that prescribed in
Statement on Auditing Standards (SAS) No. 69, "The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles". FAS 162 will become
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board (PCAOB) Auditing amendment to AU Section 411, "The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting Principles". The
Company is currently evaluating the potential impact, if any, of the adoption of
FAS162 on its consolidated financial statements.
(20)
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(tabular amounts in thousands of US dollars, except share/option data and per
share/option data and as otherwise noted)
================================================================================
FASB STAFF POSITION NO. FAS 142-3 - DETERMINATION OF THE USEFUL LIFE OF
INTANGIBLE ASSETS
On April 25, 2008, the FASB issued FASB Staff Position ("FSP") No. FAS 142-3,
"Determination of the Useful Life of Intangible Assets". FSP FAS 142-3 amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under Financial Accounting Standards Board (FASB) issued FASB Statement No. 142,
"Goodwill and Other Intangible Assets" (FAS 142). The intent of this FSP is to
improve the consistency between the useful life of a recognized intangible asset
under SFAS 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS 41 (revised 2007), "Business Combination", and
other U.S. generally accepted accounting principles. FSP FAS 142-3 is effective
for financial years beginning after December 15, 2008 (January 1, 2009 for the
Company) and interim periods within those fiscal years. Early adoption is
prohibited. The guidance for determining the useful life of a recognized
intangible asset of this FSP shall be applied prospectively to intangible assets
acquired after the effective date. The disclosure requirements shall be applied
prospectively to all intangible assets recognized as of, and subsequent to, the
effective date. The Company is currently evaluating the impact of adoption of
FSP FAS 142-3 on its consolidated financial statements.
12. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform with the current
period presentation.
(21)
[AEterna Zentaris LOGO]
I, Juergen Ernst, President and Chief Executive Officer of AEterna Zentaris
Inc., certify that:
1. I have reviewed the interim filings (as this term is defined in
Multilateral Instrument 52-109 Certification of Disclosure in Issuers'
Annual and Interim Filings) of AEterna Zentaris Inc. for the interim period
ended June 30, 2008 ;
2. Based on my knowledge, the interim filings do not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated or that is necessary to make a statement not misleading in light
of the circumstances under which it was made, with respect to the period
covered by the interim filings;
3. Based on my knowledge, the interim financial statements together with the
other financial information included in the interim filings fairly present
in all material respects the financial condition, results of operations and
cash flows of the company, as of the date and for the periods presented in
the interim filings; and
4. The company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures and
internal controls over financial reporting for the company, and we have:
a. designed such disclosure controls and procedures, or caused them to be
designed under our supervision, to provide reasonable assurance that
material information relating to the company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which the interim filings
are being prepared; and
b. designed such internal control over financial reporting, or caused it
to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with the
company's GAAP;
5. I have caused the company to disclose in the interim MD&A any change in the
company's internal control over financial reporting that occurred during
the company's most recent interim period that has materially affected, or
is reasonably likely to materially affect, the company's internal control
over financial reporting.
August 12, 2008
/s/ Juergen Ersnt
Juergen Ersnt
President and Chief Executive Officer
[AEterna Zentaris LOGO]
I, Dennis Turpin, Vice President and Chief Financial Officer of AEterna Zentaris
Inc., certify that:
1. I have reviewed the interim filings (as this term is defined in
Multilateral Instrument 52-109 Certification of Disclosure in Issuers'
Annual and Interim Filings) of AEterna Zentaris Inc. for the interim period
ended June 30, 2008;
2. Based on my knowledge, the interim filings do not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated or that is necessary to make a statement not misleading in light
of the circumstances under which it was made, with respect to the period
covered by the interim filings;
3. Based on my knowledge, the interim financial statements together with the
other financial information included in the interim filings fairly present
in all material respects the financial condition, results of operations and
cash flows of the company, as of the date and for the periods presented in
the interim filings; and
4. The company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures and
internal controls over financial reporting for the company, and we have:
a. designed such disclosure controls and procedures, or caused them to be
designed under our supervision, to provide reasonable assurance that
material information relating to the company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which the interim filings
are being prepared; and
b. designed such internal control over financial reporting, or caused it
to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with the
company's GAAP;
5. I have caused the company to disclose in the interim MD&A any change in the
company's internal control over financial reporting that occurred during
the company's most recent interim period that has materially affected, or
is reasonably likely to materially affect, the company's internal control
over financial reporting.
August 12, 2008
/s/ Dennis Turpin
Dennis Turpin, CA
Senior Vice President and Chief Financial Officer