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 November 2007

 

ÆTERNA ZENTARIS INC.

 

1405, boul. du Parc-Technologique

Québec, Québec

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   o  Form 40-F  x

 

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   o  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.

 

Æterna Zentaris’ Interim Report – Third Quarter 2007 (Q3)

 

2



November 7, 2007

 

To Our Stockholders,

 

Over the past five months, the executive management team completed a thorough review of our extensive pipeline and business operations with the goal of identifying our critical success factors and placing the appropriate clarity and prioritization surrounding our key value drivers. We have therefore established the following main guidelines:

 

Cetrorelix, currently in a Phase 3 program for benign prostatic hyperplasia (BPH), is clearly the Company’s highest priority, being the asset with the largest combination of probability of success, proximity to launch and potential medical and commercial value. Furthermore, we plan to move cetrorelix into a Phase 2b trial in endometriosis, an indication for which we regained rights from Solvay last May. We will eventually seek commercial partners in both indications, as cetrorelix could prove to be a novel efficient treatment in those two large markets.

 

We have also established our cytotoxic conjugate, AEZS-108, as our highest earlier-stage priority, and will therefore initiate a Phase 2 trial with this compound in both endometrial and ovarian cancers before year end. We feel AEZS-108 has large market opportunities that could compare to those for the chemotherapeutic agent, doxorubicin.

 

As far as our global partnering strategy moving forward, it is clear that all commercially viable projects will be ideally developed internally through proof-of-concept in man while Asia (especially Japan) remains a market of interest for us.

 

By preparing this strategic roadmap, we have clearly established a solid foundation for the basis of our strategy and have identified the strategic levers we believe will ensure long-term, sustained growth.

 

At the corporate level, we completed our executive management team by appointing Paul Blake, M.D., Senior Vice President and Chief Medical Officer. With over 25 years of solid experience in clinical development and product launching for major pharmaceutical companies worldwide, he will be instrumental in effectively managing our development programs through to commercialization, specifically our Phase 3 program in BPH for cetrorelix, as well as focusing on our other high priority drug development programs.

 

At the Board level, Jürgen Ernst, acting Vice President of the Board since November 2005, was appointed Chairman of the Board.
Mr. Ernst is a seasoned executive, and we will continue to benefit from his 35 years of pharmaceutical industry experience, specifically corporate development and pharmaceutical product marketing expertise. He succeeds Eric Dupont, Ph.D., who founded the Company in 1991 and retired from the Board.

 

3



 

I believe that with this experienced, highly competent team along with our rich, self-sustaining pipeline, we have all the key elements to successfully place Æterna Zentaris in a new growth category and significantly unlock shareholder value.

 

In closing, on behalf of my colleagues and our Board of Directors, I thank you for your continued interest and support and look forward to communicating with you regularly regarding our progress over the year.

 

Sincerely,

 

 

 

Dave J. Mazzo, Ph.D.

President and Chief Executive Officer

 

4



 

Third Quarter 2007

 

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 nine-month periods ended September 30, 2007. In this Management’s Discussion and Analysis (MD&A), the “Company”, “we”, “us”, and “our” mean Æterna Zentaris Inc. and its subsidiaries. This discussion should be read in conjunction with the information contained in Æterna Zentaris Inc.’s interim consolidated financial statements and related notes for the three-month and nine-month periods ended on September 30, 2007 and 2006. 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

 

Æterna Zentaris Inc. (TSX: AEZ, NASDAQ: AEZS) is a global biopharmaceutical company focused on endocrine therapy and oncology.

 

We benefit from an extensive and balanced pipeline, combined with a management team with substantial pharmaceutical and business experience in developing, launching and marketing products.

 

We are focused on advancing our product development pipeline with a priority on our lead product candidate, cetrorelix, currently being studied in an extensive Phase 3 program for benign prostatic hyperplasia (BPH), as well as our promising, targeted earlier clinical-stage programs with high potential.

 

Key Developments for the Quarter Ended September 30, 2007

 

CORPORATE:

 

Change at the Board Level – The Board of Directors nominated Jürgen Ernst as Chairman of the Board of Directors and David J. Mazzo, Ph.D., the Company’s President and Chief Executive Officer (CEO), to its Board of Directors. Jürgen Ernst succeeds Eric Dupont, Ph.D., who founded the Company in 1991 and retired from the Board.

 

5



 

Appointment of Chief Medical Officer – We completed our executive management team with the appointment of Paul Blake, M.D., as Senior Vice President and Chief Medical Officer.

 

The Outcome of Management’s Strategic Review – We completed a thorough review of our extensive pipeline and business operations with the goal of creating a strategy optimized for success. The strategic plan includes the following fundamentals:

 

o            We are a multinational company with a clear vision to eventually become a fully integrated biopharmaceutical company (without commercial manufacturing). The necessary resources have been identified and allocated to achieve business success.

 

o            We have prioritized our pipeline, developed a partnering strategy and determined the value of our most immediate assets:

 

Cetrorelix

 

Cetrorelix, currently in a Phase 3 program for BPH, is clearly our highest priority, being the asset with the largest combination of probability of success, proximity to launch and potential medical and commercial value. We decided to seek a commercialization partner for cetrorelix, which, in this indication, has potential for base case peak annual sales of over $500 million in the United States market alone. After defining the critical path to registration, we expect to file a NDA in the first half of 2010 for cetrorelix in BPH.

 

Furthermore, after optimization of formulation and trial design, we plan to move cetrorelix into Phase 2b in the endometriosis indication and will announce timelines relative to this program once a clear strategy is established. The decision to proceed with development was made based on:

 

a)                 the proven safety and efficacy of Cetrotide®;

b)                the overall database from preclinical and clinical studies in endometriosis;

c)                 the large unmet medical needs and commercial opportunity in the area of endometriosis.

 

Additionally, as with the BPH indication, Æterna Zentaris will eventually seek a commercialization partner for endometriosis as cetrorelix has the potential for base case peak annual sales of approximately $200 million in the U.S. market alone in this indication.

 

6



 

AEZS-108

 

We established our cytotoxic conjugate, AEZS-108, as our highest earlier-stage priority, and will therefore initiate a Phase 2 trial with this compound in both endometrial and ovarian cancers before year end. We believe AEZS-108 has significant market opportunities that could compare to those for doxorubicin.

 

o            Regarding our partnered programs, we will be fully supportive of the development activities conducted by our partners and will define a registration pathway for the geographic regions where we retain rights.

 

o            The advancement of preclinical and very early-stage development programs is prioritized based on risk-adjusted maximum market potential.

 

o            We established a clear global partnering strategy moving forward:

 

                  All commercially viable projects will be ideally developed internally through proof-of-concept in man;

                  Asia (especially Japan) remains a market of interest for Æterna Zentaris.

 

Consolidated Results of Operations

 

For the three-month and nine-month periods ended September 30, 2006, previously consolidated revenues and expenses of Atrium Biotechnologies Inc., now Atrium Innovations (Atrium), representing the former Active Ingredients & Specialty Chemicals Segment as well as the Health & Nutrition Segment, have been reclassified as discontinued operations. Since we disposed of our entire position in Atrium in January 2007, we will no longer have access to liquidity or cash flows from the said company in 2007 and ensuing years.

 

7



 

The following table sets forth selected Canadian GAAP consolidated financial data in thousands of US dollars, except per share data.

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

$

 

$

 

$

 

$

 

Revenues

 

 

 

 

 

 

 

 

 

Sales and royalties

 

7,919

 

8,419

 

24,333

 

20,222

 

License fees

 

3,674

 

2,211

 

9,438

 

8,539

 

 

 

11,593

 

10,630

 

33,771

 

28,761

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

Cost of sales

 

3,433

 

3,992

 

10,092

 

8,038

 

Research and development (R&D) costs, net of tax credits and grants

 

10,096

 

6,181

 

26,295

 

20,247

 

Selling, general and administrative (SG&A)

 

6,055

 

4,540

 

15,823

 

12,900

 

Depreciation and amortization (D&A)

 

1,596

 

1,673

 

4,551

 

4,889

 

 

 

21,180

 

16,386

 

56,761

 

46,074

 

Loss from operations

 

(9,587

)

(5,756

)

(22,990

)

(17,313

)

 

 

 

 

 

 

 

 

 

 

Other revenues (expenses)

 

(187

)

184

 

(16

)

(653

)

Income tax recovery

 

1,070

 

903

 

4,346

 

2,966

 

Net loss from continuing operations

 

(8,704

)

(4,669

)

(18,660

)

(15,000

)

Net earnings from discontinued operations

 

 

3,100

 

 

9,289

 

Net loss for the period

 

(8,704

)

(1,569

)

(18,660

)

(5,711

)

 

 

 

 

 

 

 

 

 

 

Net loss per share from continuing operations

 

 

 

 

 

 

 

 

 

Basic and diluted

 

(0.16

)

(0.09

)

(0.35

)

(0.29

)

 

 

 

 

 

 

 

 

 

 

Net loss per share

 

 

 

 

 

 

 

 

 

Basic and diluted

 

(0.16

)

(0.03

)

(0.35

)

(0.11

)

 

Consolidated Revenues

 

Consolidated revenues are derived from sales and royalties as well as license fees. Sales are derived from Cetrotide® (cetrorelix), Impavido® (miltefosine), reagents and active pharmaceutical ingredients. Royalties are derived from Cetrotide® (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

 

8



 

contract fees and amortization of upfront payments received to date from our licensing partners.

 

Consolidated revenues for the three-month period ended September 30, 2007 were $11.6 million compared to $10.6 million for the same period in 2006. The increase is attributable to higher license fees revenues, partly reduced by lower sales of Cetrotide®. The increase in license fees revenues is related to a milestone payment of $1.4 million received from our partner, Ardana Biosciences, Limited (Ardana), for the initiation of a Phase 3 study for the diagnosis of growth hormone disorders with our Growth Hormone Secretagogue, AEZS-130. The sales of Cetrotide® were lower for the three-month period ended September 30, 2007 compared to the same period in 2006, due to a significant first order of the product related to the launch in Japan in September 2006.

 

Consolidated revenues for the nine-month period ended September 30, 2007 were $33.8 million compared to $28.8 million for the same period in 2006. The increase in consolidated revenues is mainly attributed to higher sales of Cetrotide®, due to the launch in Japan in September 2006, growth of Impavido®, as well as additional license fees revenues.

 

Consolidated Operating Expenses

 

Consolidated cost of sales decreased to $3.4 million for the three-month period ended September 30, 2007 compared to $4 million for the same period in 2006. The decrease in cost of sales is related to lower sales of Cetrotide® for the three-month period ended September 30, 2007. The corresponding gross margin increase for the three-month period ended September 30, 2007 is related to higher sales of products with higher margin compared to the same period in 2006.

 

Consolidated cost of sales for the nine-month period ended September 30, 2007 was $10.1 million compared to $8 million for the same period in 2006. There were no significant changes in the gross margin for the comparable periods. The increased cost of sales is related to higher sales of Cetrotide® and Impavido®.

 

Consolidated R&D costs, net of tax credits and grants (R&D) were $10.1 million for the three-month period ended September 30, 2007 compared to $6.2 million for the same period in 2006. Consolidated R&D costs, net of tax credits and grants were $26.3 million for the nine-month period ended September 30, 2007 compared to $20.2 million for the same period in 2006. The increase in R&D expense is related to the additional expenses incurred for the initiation in 2007 of our ongoing Phase 3 program with cetrorelix in BPH, as well as further advancement of targeted, earlier clinical-stage development programs including AEZS-108.

 

Consolidated selling, general and administrative (SG&A) expenses were $6.1 million for the three-month period ended September 30, 2007 compared to $4.5 million for the same period in 2006.

 

9



 

Consolidated SG&A expenses for the nine-month period ended September 30, 2007, were $15.8 million compared to $12.9 million for the same period in 2006. The increase in SG&A expenses for both the three-month and nine-month periods ended September 30, 2007 is due to additional expenses related to the restructuring of the management team and the Board, as well as the opening of a new office in Warren, New Jersey, U.S.A.

 

Consolidated loss from operations increased to $9.6 million for the three-month period ended September 30, 2007 compared to $5.8 million for the same period in 2006.

 

Consolidated loss from operations for the nine-month period ended September 30, 2007 was $23 million compared to $17.3 million for the same period in 2006. The increase in consolidated loss from operations for both the three-month and nine-month periods is attributable to increased R&D and SG&A expenses, partly offset by increased revenues.

 

Consolidated other expenses for the three-month period ended September 30, 2007 were $0.2 million compared to consolidated other revenues of $0.2 million for the same period in 2006. The decrease of consolidated other revenues for the three-month period is mainly attributable to a goodwill impairment loss of $500,000 related to our reagent business in Salt Lake City, and partly offset by higher interest income derived from our short-term investments.

 

Consolidated other expenses for the nine-month period ended September 30, 2007 were $0.1 million compared to $0.7 million for the same period in 2006. The decrease in consolidated other expenses for the nine-month period ended September 30, 2007 relates to increased interest income derived from our short-term investments and reduced financial charges attributed to convertible term loans since they were converted into common shares in the first quarter of 2006. This was partly offset by additional expenses related to foreign exchange losses recorded in the first nine months of 2007 amounting to nearly $800,000. These foreign exchange losses are attributable to the weakness of the Canadian currency in comparison with the Euro and relates to a cash advance to our subsidiary in Germany. The decrease in consolidated other expenses for the nine-month period ended September 30, 2007 was also partly offset by a goodwill impairment loss of $500,000 related to our reagent business in Salt Lake City.

 

Consolidated income tax recovery for the three-month period ended September 30, 2007 was $1.1 million compared to $0.9 million for the same period in 2006.

 

Consolidated income tax recovery for the nine-month period ended September 30, 2007 was $4.3 million compared to $3 million for the same period in 2006. The increase in the income tax recovery for the nine-month period ended September 30, 2007 is mainly attributable to higher future income taxes related to taxable losses in jurisdictions where it is more likely than not that we will recover such losses.

 

10



 

Consolidated net loss from continuing operations for the three-month period ended September 30, 2007 was $8.7 million compared to $4.7 million for the same period in 2006. The increase in consolidated net loss from continuing operations is attributable to a combination of higher R&D, SG&A and other expenses recorded during the three-month period ended September 30, 2007.

 

Consolidated net loss from continuing operations for the nine-month period ended September 30, 2007 was $18.7 million compared to $15 million for the same period in 2006. The increase in consolidated net loss from continuing operations is attributable to higher R&D and SG&A expenses, partly offset by increased revenues from Cetrotide® and Impavido®, lower other expenses and higher income tax recovery.

 

Consolidated net earnings from discontinued operations recorded in the three-month and nine-month periods ended September 30, 2006 were completely attributable to our former subsidiary, Atrium, which operations were excluded from consolidation effective on October 18, 2006.

 

Discontinued operations include the following items:

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

(in thousands of US dollars)

 

2006

 

2006

 

 

 

$

 

$

 

Revenues

 

73,282

 

223,574

 

 

 

 

 

 

 

Earnings before the following items:

 

8,641

 

26,429

 

 

 

 

 

 

 

Income tax expense

 

(2,220

)

(6,856

)

Loss on dilution of investments

 

(5

)

(140

)

 

 

 

 

 

 

Earnings before non-controlling interest

 

6,416

 

19,433

 

Non-controlling interest

 

(3,316

)

(10,144

)

 

 

 

 

 

 

Net earnings from discontinued operations

 

3,100

 

9,289

 

 

 

 

 

 

 

Net earnings per share from discontinued operations

 

 

 

 

 

Basic and diluted

 

0.06

 

0.18

 

 

Consolidated net loss for the three-month period ended September 30, 2007 was $8.7 million or $0.16 per basic and diluted share, compared to $1.6 million or $0.03 per basic and diluted share for the same period in 2006.

 

Consolidated net loss for the nine-month period ended September 30, 2007, was $18.7 million or $0.35 per basic and diluted share, compared to $5.7 million or $0.11 per basic and diluted share for the same period in 2006. The increase in consolidated net

 

11



 

loss for the three-month and nine-month periods ended September 30, 2007, is attributable to an increased net loss from continuing operations combined with the completion of the distribution of Atrium to our shareholders on January 2, 2007. Net earnings from discontinued operations for the three-month and nine-month periods ended September 30, 2006 were nearly $3 million and $9.3 million, respectively.

 

The weighted average number of shares outstanding used to calculate the basic and diluted net loss per share for the three-month period ended September 30, 2007 was 53.2 million shares compared to 52.7 million shares for the same period in 2006.

 

The weighted average number of shares outstanding for the nine-month periods ended September 30, 2007 and 2006, used to calculate the basic and diluted net loss per share, was 53.2 million shares and 51.9 million shares respectively. These increases reflect the issuance of Common Shares following the conversion of the convertible term loans in February 2006, the acquisition of a patent, as well as the exercise of stock options over the last 12 months.

 

Total Consolidated Assets and Long-Term Liabilities

 

   CONSOLIDATED BALANCE SHEET DATA

 

 

 

As at
September 30,

 

As at
December 31,

 

(in thousands of US dollars)

 

2007

 

2006

 

 

 

$

 

$

 

 

 

 

 

 

 

Total assets

 

133,623

 

223,491

 

Long-term liabilities

 

14,301

 

28,302

 

 

The decrease in total assets and in long-term liabilities is mainly attributable to the special distribution to our shareholders of our long-term investment in Atrium, effective on January 2, 2007.

 

Critical Accounting Policies and Estimates

 

There have been no significant changes in our accounting policies and estimates since December 31, 2006, with the exception of the application of new accounting standards as described below. Please refer to the corresponding section in our 2006 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 2006 financial statements. Furthermore, significant differences in measurement and disclosure from the U.S. GAAP are set out in note 9 to our interim consolidated financial statements.

 

12



 

New Accounting Standards

 

In January 2005, the CICA issued four new accounting standards in relation with financial instruments: Section 3855 “Financial Instruments – Recognition and Measurement”, Section 3865 “Hedges”, section 1530 “Comprehensive Income” and Section 3251 “Equity”.

 

Sections 3855, 3865 and 1530 have been adopted by us on January 1, 2007. Adoption of these standards did not have any material impact on the Company’s consolidated balance sheet as described in note 2 of our interim consolidated financial statements for the three-month period ended September 30, 2007.

 

Effective January 1, 2007, we adopted CICA Handbook Section 1506 “Accounting Changes”. This Section establishes criteria for changes in accounting policies, accounting treatment and disclosures regarding changes in accounting policies, estimates and corrections of errors. In particular, this Section allows for voluntary changes in accounting policy only when they result in the financial statements providing reliable and more relevant information. Furthermore, this Section requires disclosure of when an entity has not applied a new source of GAAP that has been issued but is not yet effective. Such disclosures are provided below. The adoption of this Section had no further effects on the financial statements for the three-month and nine-month periods ended September 30, 2007.

 

Impact of Accounting Pronouncements Not Yet Adopted

 

The CICA issued Section 1535, “Capital Disclosures”, Section 3862, “Financial Instruments – Disclosures”, Section 3863, “Financial Instruments – Presentation” which replace Section 3861, “Financial Instruments – Disclosure and Presentation” and Section 3031, “Inventories” which will replace existing Section 3030. The new Sections are effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2008. We are currently evaluating the impact of these new standards. Please refer to the note 2 of our interim consolidated financial statements for the three-month period ended September 30, 2007 for a complete description of these new standards.

 

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 position reached $47.6 million as of September 30, 2007, compared to $61 million as of December 31, 2006. We believe that these liquidities will be adequate to meet operating cash requirements for the foreseeable future. However, acquisition of complementary businesses or additional investments in our product portfolio may require additional financing. As of September 30, 2007, cash and short-term investments of the Company included $44.9 million in Canadian currency.

 

13



 

The variation of our liquidity by activities is explained below, not considering any cash flows used or provided by discontinued operations in the comparative period.

 

Operating Activities

 

Cash flows used by our continuing operating activities for the three-month period ended September 30, 2007 were $6.2 million compared to $2.8 million during the same period in 2006. The increase in cash flows used by our continuing operating activities of $3.4 million is mainly attributable to higher R&D and SG&A expenses.

 

Cash flows used by our continuing operating activities for the nine-month period ended September 30, 2007, were $18.4 million compared to $10.4 million during the same period in 2006. The increase in the cash flows used by our continuing operating activities was primarily attributable to additional spending in R&D and higher SG&A. We expect cash flows used by our operating activities to increase in the next quarter of 2007 compared to the first three quarters of 2007.

 

Financing Activities

 

Cash flows used in continuing financing activities for the nine-month period ended September 30, 2007, were $0.7 million compared to $0.8 million for the same period in 2006. These funds were mostly used for debt reimbursement. There were no significant financing activities during the three-month periods ended September 30, 2007 and 2006.

 

Investing Activities

 

Cash flows used in continuing investing activities (excluding the change in short-term investments) were $1.3 million for the three-month period ended September 30, 2007 compared to $0.2 million for the same period in 2006.

 

Cash flows used in continuing investing activities (excluding the change in short-term investments) for the nine-month period ended September 30, 2007, were $2.2 million compared to $1.4 million for the same period in 2006. Cash flows were mainly used for the purchase of equipment and were partly offset during the second quarter of 2007 by proceeds for the sale of manufacturing equipment. The additional investment is related to the scaling-up of production of cetrorelix, as well as additional equipment and furniture for the opening of a new office in Warren, New Jersey, U.S.A.

 

14



 

Contractual Obligations

 

We have certain contractual obligations and commercial commitments. The following table indicates our cash requirements to respect these obligations:

 

(in thousands of US dollars)

 

Payments due by period

 

 

Total

 

2007

 

2008-2010

 

2011-2012

 

2013 and
beyond

 

Unaudited

 

$

 

$

 

$

 

$

 

$

 

Long-term debt

 

782

 

7

 

775

 

 

 

Operating leases

 

14,140

 

618

 

6,634

 

5,077

 

1,811

 

Commercial commitments

 

15,754

 

2,690

 

13,064

 

 

 

Total contractual cash obligations

 

30, 676

 

3,315

 

20,473

 

5,077

 

1,811

 

 

Outstanding Share Data

 

As of November 5, 2007, there were 53,187,470 common shares issued and outstanding and there were 4,273,592 stock options outstanding.

 

15



 

Quarterly Summary Financial Information

(in thousands of US dollars, except per share data)

 

 

 

Quarters ended

 

Unaudited

 

September 30,
2007

 

June 30,
2007

 

March 31,
2007

 

December 31,
2006

 

 

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

11,593

 

12,228

 

9,950

 

12,631

 

Loss from operations

 

(9,587

)

(5,146

)

(8,257

)

(6,794

)

Net earnings (loss) from continuing operations

 

(8,704

)

(4,846

)

(5,110

)

22,300

 

Net earnings (loss)

 

(8,704

)

(4,846

)

(5,110

)

39,101

 

Net earnings (loss) per share from continuing operations

 

 

 

 

 

 

 

 

 

Basic and diluted

 

(0.16

)

(0.09

)

(0.10

)

0.42

 

Net earnings (loss) per share

 

 

 

 

 

 

 

 

 

Basic and diluted

 

(0.16

)

(0.09

)

(0.10

)

0.74

 

 

 

 

Quarters ended

 

 

 

September 30,
2006

 

June 30,
2006

 

March 31,
2006

 

December 31,
2005

 

 

 

$

 

$

 

$

 

$

 

Revenues

 

10,630

 

9,383

 

8,748

 

14,273

 

Loss from operations

 

(5,756

)

(5,451

)

(6,106

)

(1,988

)

Net loss from continuing operations

 

(4,669

)

(4,430

)

(5,901

)

(3,519

)

Net earnings (loss)

 

(1,569

)

(1,562

)

(2,580

)

936

 

Net loss per share from continuing operations

 

 

 

 

 

 

 

 

 

Basic and diluted

 

(0.09

)

(0.08

)

(0.12

)

(0.08

)

Net earnings (loss) per share

 

 

 

 

 

 

 

 

 

Basic and diluted

 

(0.03

)

(0.03

)

(0.05

)

0.02

 

 

Note:        Per share data is calculated independently for each of the quarters presented. Therefore, the sum of this quarterly information may not equal the corresponding annual information.

 

16



 

Outlook for the remainder of 2007

 

We expect Cetrotide® (cetrorelix) to continue to generate a significant part of our sales and royalties.

 

We expect R&D expenses to continue to increase throughout the remainder of 2007, primarily due to the continuation of our Phase 3 clinical development program with cetrorelix in BPH as well as the emphasis on clinical development of targeted earlier clinical-stage product candidates.

 

We expect cash flows used for operations to increase in the last quarter of 2007 in comparison with the three-month period ended September 30, 2007.

 

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 period ended September 30, 2007, 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 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.

 

Interest Rate Risk

 

We are exposed to market risk relating to changes in interest rates with regard to our short-term investments.

 

17



 

Related Party Transactions and Off-Balance Sheet Arrangements

 

There were no related party transactions and no off-balance sheet arrangements included in the financial statements. As of September 30, 2007, we did not have interests in any variable interest entities.

 

Risk Factors and Uncertainties

 

There has been no significant change in the risk factors and uncertainties facing Æterna Zentaris, as described in the Company’s 2006 annual MD&A dated March 2, 2007 as filed with the Canadian Securities regulatory authorities on September 19, 2007 (which was included as Exhibit 99.4 to our Annual Report on Form 40-F filed with the SEC on March 23, 2007 and subsequently amended on September 19, 2007) as well as described in our short form base shelf prospectus dated September 27, 2007.

 

Continuous Disclosure

 

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 on request from the office of the Secretary of the Company or through the Internet at the following addresses: www.aeternazentaris.com, www.sedar.com and www.sec.gov/edgar.shtml.

 

Changes in Internal Controls over Financial Reporting

 

There has been no change in the Company’s internal control over financial reporting that occurred during the three-month period ended September 30, 2007 that have 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

 

18



 

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 if we are requested by a governmental authority or applicable law.

 

On behalf of management,

 

 

 

Dennis Turpin, CA

Senior Vice President and Chief Financial Officer

November 6, 2007

 

19



 

Æterna Zentaris Inc.

Interim Consolidated Balance Sheets

(expressed in thousands of US dollars)         

 

 

 

As at

 

As at

 

 

 

September 30,

 

December 31,

 

Unaudited

 

2007

 

2006

 

 

 

$

 

$

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

5,666

 

9,356

 

Short-term investments

 

41,980

 

51,663

 

Accounts receivable

 

 

 

 

 

Trade

 

7,101

 

7,035

 

Other

 

3,450

 

2,737

 

Income taxes

 

113

 

941

 

Inventory

 

5,954

 

5,367

 

Prepaid expenses and other deferred charges

 

2,748

 

2,671

 

Future income tax assets

 

 

21,953

 

 

 

67,012

 

101,723

 

 

 

 

 

 

 

Investment in an affiliated company (note 3)

 

 

57,128

 

Property, plant and equipment

 

7,509

 

13,432

 

Long-lived assets held for sale (note 4)

 

7,989

 

 

Deferred charges and other long-term assets

 

1,013

 

1,354

 

Intangible assets

 

38,883

 

39,106

 

Goodwill (note 5)

 

11,217

 

10,748

 

 

 

133,623

 

223,491

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable and accrued liabilities

 

11,534

 

10,021

 

Deferred revenues

 

5,402

 

5,570

 

Current portion of long-term debt

 

782

 

719

 

Future income tax liabilities

 

922

 

 

 

 

18,640

 

16,310

 

 

 

 

 

 

 

Deferred revenues

 

4,476

 

8,468

 

Long-term debt

 

 

704

 

Employee future benefits (note 6)

 

9,214

 

8,167

 

Future income tax liabilities

 

611

 

10,963

 

 

 

32,941

 

44,612

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

Share capital (note 7)

 

30,566

 

168,466

 

Other capital

 

77,724

 

6,226

 

Deficit

 

(29,361

)

(10,114

)

Accumulated other comprehensive income

 

21,753

 

14,301

 

 

 

100,682

 

178,879

 

 

 

133,623

 

223,491

 

 

The accompanying notes are an integral part of these interim consolidated financial statements

 

Approved by the Board of Directors

 

Jürgen Ernst, MBA

Gérard Limoges, FCA

Director

Director

 

20



 

Æterna Zentaris Inc.

Interim Consolidated Statements of Operations

For the periods ended September 30, 2007 and 2006

(expressed in thousands of US dollars)

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

Unaudited

 

2007

 

2006

 

2007

 

2006

 

 

 

$

 

$

 

$

 

$

 

Revenues

 

 

 

 

 

 

 

 

 

Sales and royalties

 

7,919

 

8,419

 

24,333

 

20,222

 

License fees

 

3,674

 

2,211

 

9,438

 

8,539

 

 

 

11,593

 

10,630

 

33,771

 

28,761

 

Operating expenses

 

 

 

 

 

 

 

 

 

Cost of sales

 

3,433

 

3,992

 

10,092

 

8,038

 

Research and development costs, net of tax credits and grants*

 

10,096

 

6,181

 

26,295

 

20,247

 

Selling, general and administrative*

 

6,055

 

4,540

 

15,823

 

12,900

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

487

 

494

 

1,298

 

1,415

 

Intangible assets

 

1,109

 

1,179

 

3,253

 

3,474

 

 

 

21,180

 

16,386

 

56,761

 

46,074

 

Loss from operations

 

(9,587

)

(5,756

)

(22,990

)

(17,313

)

Other revenues (expenses)

 

 

 

 

 

 

 

 

 

Interest income

 

495

 

233

 

1,373

 

743

 

Interest expense

 

(15

)

(35

)

(69

)

(1,297

)

Foreign exchange loss

 

(167

)

(14

)

(820

)

(99

)

Goodwill impairment loss (note 5)

 

(500

)

 

(500

)

 

 

 

(187

)

184

 

(16

)

(653

)

Loss before income taxes

 

(9,774

)

(5,572

)

(23,006

)

(17,966

)

Income tax recovery

 

1,070

 

903

 

4,346

 

2,966

 

Net loss from continuing operations

 

(8,704

)

(4,669

)

(18,660

)

(15,000

)

Net earnings from discontinued operations (note 3)

 

 

3,100

 

 

9,289

 

Net loss for the period

 

(8,704

)

(1,569

)

(18,660

)

(5,711

)

Net loss per share from continuing operations

 

 

 

 

 

 

 

 

 

Basic and diluted

 

(0.16

)

(0.09

)

(0.35

)

(0.29

)

Net loss per share

 

 

 

 

 

 

 

 

 

Basic and diluted

 

(0.16

)

(0.03

)

(0.35

)

(0.11

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding (note 8)

 

 

 

 

 

 

 

 

 

Basic and diluted

 

53,184,803

 

52,692,065

 

53,181,248

 

51,900,754

 

* Stock-based compensation costs included in:

 

 

 

 

 

 

 

 

 

Research and development

 

72

 

90

 

179

 

285

 

Selling, general and administrative

 

438

 

473

 

1,312

 

1,393

 

 

 

510

 

563

 

1,491

 

1,678

 

 

Statement of Comprehensive Loss

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

Unaudited

 

2007

 

2006

 

2007

 

2006

 

 

 

$

 

$

 

$

 

$

 

Net loss for the period

 

(8,704

)

(1,569

)

(18,660

)

(5,711

)

Other comprehensive income (loss) :

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

6,315

 

(584

)

13,204

 

4,830

 

Variation in the fair value of short-term investments, net of income taxes

 

81

 

 

(87

)

 

Comprehensive loss

 

(2,308

)

(2,153

)

(5,543

)

(881

)

 

The accompanying notes are an integral part of these interim consolidated financial statements

 

21



 

Æterna Zentaris Inc.

Interim Consolidated Statements of Cash Flows

For the periods ended September 30, 2007 and 2006

(expressed in thousands of US dollars)

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

Unaudited

 

2007

 

2006

 

2007

 

2006

 

 

 

$

 

$

 

$

 

$

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

Net loss for the period

 

(8,704

)

(1,569

)

(18,660

)

(5,711

)

Net earnings from discontinued operations

 

 

(3,100

)

 

(9,289

)

Net loss from continuing operations

 

(8,704

)

(4,669

)

(18,660

)

(15,000

)

Items not affecting cash and cash equivalents

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

1,595

 

1,673

 

4,550

 

4,889

 

Stock-based compensation costs

 

510

 

563

 

1,491

 

1,678

 

Future income taxes

 

(1,118

)

(1,091

)

(4,275

)

(3,322

)

Goodwill impairment loss

 

500

 

 

500

 

 

Employee future benefits

 

86

 

118

 

377

 

356

 

Deferred charges

 

139

 

(742

)

505

 

(792

)

Deferred revenues

 

(549

)

525

 

(4,972

)

(1,916

)

Accretion on long-term borrowings

 

15

 

 

68

 

1,227

 

Foreign exchange loss (gain) on long-term items denominated in foreign currency

 

(178

)

18

 

325

 

(79

)

Change in non-cash operating working capital items (note 6)

 

1,524

 

822

 

1,676

 

2,595

 

Net cash used in continuing operating activities

 

(6,180

)

(2,783

)

(18,415

)

(10,364

)

Net cash provided by discontinued operating activities

 

 

8,634

 

 

24,713

 

Net cash provided by (used in) operating activities

 

(6,180

)

5,851

 

(18,415

)

14,349

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repayment of long-term debt

 

(9

)

(8

)

(776

)

(742

)

Issuance of shares pursuant to the exercise of stock options

 

15

 

 

33

 

44

 

Share issue expenses

 

 

 

 

(112

)

Net cash provided by (used in) continuing financing activities

 

6

 

(8

)

(743

)

(810

)

Net cash used in discontinued financing activities

 

 

(2,794

)

 

(9,038

)

Net cash provided by (used in) financing activities

 

6

 

(2,802

)

(743

)

(9,848

)

 

 

 

$

 

$

 

$

 

$

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

Purchase of short-term investments

 

(148

)

(1,254

)

(5,994

)

(7,487

)

Proceeds from the sale of short-term investments

 

3,681

 

2,253

 

22,557

 

12,680

 

Purchase of property, plant and equipment

 

(1,300

)

(188

)

(2,756

)

(1,396

)

Proceeds for the sale of property, plant and equipment

 

 

 

612

 

 

Acquisition of amortizable intangible assets

 

(2

)

(13

)

(29

)

(11

)

Net cash provided by continuing investing activities

 

2,231

 

798

 

14,390

 

3,786

 

Net cash used in discontinued investing activities

 

 

(4,149

)

 

(9,290

)

Net cash provided by (used in) investing activities

 

2,231

 

(3,351

)

14,390

 

(5,504

)

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

525

 

30

 

1,078

 

1,359

 

Net change in cash and cash equivalents

 

(3,418

)

(272

)

(3,690

)

356

 

Cash and cash equivalents - Beginning of period

 

9,084

 

27,895

 

9,356

 

27,267

 

Cash and cash equivalents - End of period

 

5,666

 

27,623

 

5,666

 

27,623

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents related to:

 

 

 

 

 

 

 

 

 

Continuing operations

 

5,666

 

7,328

 

5,666

 

7,328

 

Discontinued operations

 

 

20,295

 

 

20,295

 

 

 

5,666

 

27,623

 

5,666

 

27,623

 

 

The accompanying notes are an integral part of these interim consolidated financial statements

 

22



 

Æterna Zentaris Inc.

Interim Consolidated Statements of Changes in Shareholders’ Equity

For the periods ended September 30, 2007

(tabular amounts in thousands of US dollars, except common shares data)

 

Unaudited

 

Common
shares
(number of)

 

Share
capital

 

Other
capital

 

Deficit

 

Accumulated
other
comprehensive
income

 

Total

 

 

 

 

 

$

 

$

 

$

 

 

$

 

Balance – December 31, 2006

 

53,169,470

 

168,466

 

6,226

 

(10,114

)

14,301

 

178,879

 

Adjustment related to the implementation of new accounting standards (note 2)

 

 

 

 

(587

)

(41

)

(628

)

Net loss for the period

 

 

 

 

(18,660

)

 

(18,660

)

Distribution of Atrium Shares - Foreign currency translation (note 3)

 

 

 

 

 

(5,624

)

(5,624

)

Foreign currency translation

 

 

 

 

 

13,204

 

13,204

 

Variation in the fair value of short-term investments, net of income taxes

 

 

 

 

 

(87

)

(87

)

Issued pursuant to the stock option plan

 

 

 

 

 

 

 

 

 

 

 

 

 

For cash

 

18,000

 

33

 

 

 

 

33

 

Ascribed value from Other Capital

 

 

26

 

(26

)

 

 

 

Reduction of the stated capital (note 3)

 

 

(137,959

)

70,032

 

 

 

(67,927

)

Stock based compensation costs

 

 

 

1,492

 

 

 

1,492

 

Balance - September 30, 2007

 

53,187,470

 

30,566

 

77,724

 

(29,361

)

21,753

 

100,682

 

 

Total deficit and accumulated other comprehensive income amount to $7,608 as of September 30, 2007 and $32,448 as of September 30, 2006.

 

23



 

Æterna Zentaris Inc.

Interim Consolidated Statements of Changes in Shareholders’ Equity

For the periods ended September 30, 2007 and 2006

(tabular amounts in thousands of US dollars, except common shares data)

 

Deficit

 

 

 

Nine months ended 
September 30,

 

Unaudited

 

2007

 

2006

 

 

 

$

 

$

 

Balance – Beginning of period

 

(10,114

)

(43,224

)

Adjustment related to the implementation of new accounting standards (note 2)

 

(587

)

 

Net loss for the period

 

(18,660

)

(5,711

)

Loss on settlement of convertible term loans

 

 

(280

)

Balance - end of period

 

(29,361

)

(49,215

)

 

Accumulated Other Comprehensive Income

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

Unaudited

 

2007

 

2006

 

2007

 

2006

 

 

 

$

 

$

 

$

 

$

 

Balance – Beginning of period

 

15,357

 

17,351

 

14,301

 

11,937

 

Adjustment related to the implementation of new accounting standards (note 2)

 

 

 

(41

)

 

Distribution of Atrium Shares – Foreign currency translation
(note 3)

 

 

 

(5,624

)

 

Foreign currency translation

 

6,315

 

(584

)

13,204

 

4,830

 

Variation in the fair value of short-term investments, net of income taxes

 

81

 

 

(87

)

 

Balance – End of period

 

21,753

 

16,767

 

21,753

 

16,767

 

 

 

 

 

 

 

 

$

 

$

 

Consisting of the following :

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

 

 

 

21,881

 

16,767

 

Unrealized losses on investments (1)

 

 

 

 

 

(128

)

 

 

 

 

 

 

 

 

 

 

 

Balance - end of period 

 

 

 

 

 

21,753

 

16,767

 

 


(1)                     Unrealized losses on available for sale investments as of September 30, 2007 include $128 of aggregate losses.

 

The accompanying notes are an integral part of these interim consolidated financial statements

 

24



 

Æterna Zentaris Inc.

Notes to Interim Consolidated Financial Statements

For the periods ended September 30, 2007 and 2006

(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 September 30, 2007 and for the periods ended September 30, 2007 and 2006 are unaudited. They have been prepared by the Company in accordance with Canadian generally accepted accounting principles (GAAP) for interim financial information. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows for these periods have been included.

 

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. These interim results of operations are not necessarily indicative of the results for the full year.

 

2. New Accounting Standards

 

Financial instruments

 

In January 2005, the CICA issued four new accounting standards in relation with financial instruments: section 3855 “Financial Instruments – Recognition and measurement”, section 3865 “Hedges”, section 1530 “Comprehensive Income” and section 3251 “Equity”.

 

Section 3855 expands on section 3860 ‘‘ Financial Instrument - Disclosure and Presentation’’, by prescribing when a financial instrument is to be recognized on the balance sheet and at what amount. It also specifies how financial instrument gains and losses are to be presented.

 

Section 3865 provides alternative treatments to section 3855 for entities which choose to designate qualifying transactions as hedges for accounting purposes. It replaces and expands on Accounting Guideline AcG-13 “Hedging Relationships”, and the hedging guidance in Section 1650 “Foreign Currency Translation” by specifying how hedge accounting is applied and what disclosure is necessary when it is applied.

 

Section 1530 “Comprehensive Income” introduces a new requirement to temporarily present certain gains and losses outside net income.

 

Consequently, Section 3250 “Surplus” has been revised as Section 3251 “Equity”. (tabular amounts in thousands of US dollars, except share/option data and per share/option data and as otherwise notes)

 

Sections 1530, 3251, 3855 and 3865 were adopted by the Company on January 1, 2007.

 

25



 

Recognition of financial assets and liabilities

 

Short-term investments

 

The short-term investments are classified as available-for-sale investments. The Company recognizes transactions on the settlement date.

 

These investments are recognized at fair value. Unrealized gains and losses are recognized, net of income taxes, if any, in “Accumulated other comprehensive income”. Upon the disposal or impairment of these investments, these gains or losses are reclassified in the consolidated statement of operations.

 

A difference of $41,000 between the carrying amount and the fair value of investments classified as available-for-sale is recognized as an adjustment to the opening balance of “Accumulated other comprehensive income”, net of income taxes.

 

Effective interest rate method

 

Premiums and discounts on short-term investments and long-term debt are accounted for using the effective interest rate method.

 

The impact of the use of the effective interest rate method amounted to $587,000 and was recognized as an adjustment to the opening balance of deficit, net of income taxes.

 

Transition

 

The recognition, derecognition and measurement methods used as well as the hedge accounting policies used to prepare the consolidated financial statements of periods prior to the effective date of the new standards were unchanged and, therefore,  those financial statements have not been restated.

 

Accounting changes

 

Effective January 1, 2007, the Company adopted CICA Handbook Section 1506 “Accounting Changes”. This Section establishes criteria for changes in accounting policies, accounting treatment and disclosures regarding changes in accounting policies, estimates and corrections of errors. In particular, this Section allows for voluntary changes in accounting policy only when they result in the financial statements providing reliable and more relevant information. Furthermore, this section requires disclosure of when an entity has not applied a new source of GAAP that has been issued but is not yet effective. Such disclosures are provided below. The adoption of this Section had no further effects on the financial statements for the three-month and nine-month periods ended September 30, 2007.

 

26



 

Impact of accounting pronouncements not yet adopted

 

Capital Disclosure

 

The CICA issued Section 1535, “Capital Disclosures”. This standard 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. The new requirements will be effective starting January 1, 2008. The Company is presently evaluating the impact of this new standard.

 

Financial Instruments – Disclosures and Financial Instruments - Presentation

 

The CICA issued Section 3862, “Financial Instruments – Disclosures” and Section 3863, “Financial Instruments – Presentation” which replace Section 3861, “Financial Instruments – Disclosure and Presentation”  The new  disclosure standard requires the disclosure of additional detail of financial asset and liability categories as well as a detailed discussion on the risks associated with the company’s financial instruments. This standard harmonizes disclosures with International Financial Reporting Standards (“IFRS”). The presentation requirements are carried forward unchanged. These new standards will be effective starting January 1, 2008. The Company is presently evaluating the impact of these new standards.

 

Inventories

 

The CICA issued Section 3031, “Inventories” which will replace existing Section 3030 with the same title and will harmonize accounting for inventories under Canadian GAAP with IFRS. 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 new Section is effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2008. The Company is currently evaluating the impact of this new standard.

 

27



 

3. Completion of the Special Distribution of the remaining interest in Atrium Biotechnologies Inc. (new Atrium Innovations Inc.)

 

On December 15, 2006, the Company’s shareholders approved a reduction in the stated capital of the Company in an amount equal to the fair market value of its remaining interest in Atrium for the purpose of effecting a special distribution in kind of all 11,052,996 Subordinate Voting Shares of Atrium held by the Company. On January 2, 2007, Æterna Zentaris’ shareholders received approximately 0.2079 of an Atrium Subordinate Voting Share for each one of their common shares.

 

This special distribution has been accounted for as a nonreciprocal transfer to shareholders measured at the carrying value of the investment in Atrium on the date of the distribution. As the special distribution is considered as a taxable transaction for the Company and treated as a reduction of the stated capital for tax purposes, the share capital of the Company has been reduced by the fair value of the Atrium shares distributed ($137,959,000), the long-term investment in Atrium ($57,128,000) has been removed from the balance sheet and the difference, taking into account the related income taxes ($16,423,000) and cumulative translation adjustment ($5,624,000), has been recorded as Other Capital ($70,032,000).

 

For the three-month and nine-month periods ended September 30, 2006, previously consolidated revenues and expenses of Atrium, representing the former Active Ingredients & Specialty Chemicals Segment as well as the Health & Nutrition Segment, have been reclassified from continuing operations to discontinued operations.

 

 

 

Three months
ended September 30,
2006

 

Nine months ended
September 30,
2006

 

 

 

$

 

$

 

Revenues

 

73,282

 

223,574

 

 

 

 

 

 

 

Earnings before the following items

 

8,641

 

26,429

 

 

 

 

 

 

 

Income tax expense

 

(2,220

)

(6,856

)

Loss on dilution of investments

 

(5

)

(140

)

 

 

 

 

 

 

Earnings before non-controlling interest

 

6,416

 

19,433

 

 

 

 

 

 

 

Non-controlling interest

 

(3,316

)

(10,144

)

 

 

 

 

 

 

Net earnings from discontinued operations

 

3,100

 

9,289

 

Net earnings per share from discontinued operations

 

 

 

 

 

Basic and diluted

 

0.06

 

0.18

 

 

28



 

4.              Long-lived assets held for sale

 

During the three-month period ended 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 located in Quebec City. The building was reclassified as “long-lived assets held for sale”. Management considers that the net realizable value of the building exceeds its carrying value. Consequently, no impairment has been recorded in the statements of operations for the period.

 

5.              Goodwill

 

The change in carrying value is as follows:

 

 

 

$

 

Balance as at December 31, 2005

 

9,777

 

Effect of foreign exchange rate

 

971

 

 

 

 

 

Balance as at December 31, 2006

 

10,748

 

Effect of foreign exchange rate

 

969

 

Goodwill impairment loss

 

(500

)

 

 

 

 

Balance as at September 30, 2007

 

11,217

 

 

During the three-month period ended September 30, 2007, the revision of the business plan by management and corresponding forecasts with respect to the financial position and results of operations of one of its subsidiaries, Echelon Biosciences Inc., has led the Company to perform a preliminary impairment test regarding goodwill of the said subsidiary. The impairment test will be completed during the next quarter. According to the preliminary test results, an estimated impairment loss of $500,000 was recorded in the statement of operations for the three-month and nine-month periods ended September 30, 2007.

 

29



 

6.              Statements of cash flows and additional information

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

$

 

$

 

$

 

$

 

Change in non-cash operating working capital items

 

 

 

 

 

 

 

 

 

Accounts receivable

 

1,237

 

(1,226

)

794

 

889

 

Inventory

 

(684

)

11

 

(125

)

(179

)

Prepaid expenses

 

351

 

(504

)

72

 

(673

)

Accounts payable and accrued liabilities

 

649

 

2,554

 

83

 

2,041

 

Income taxes

 

(29

)

(13

)

852

 

517

 

 

 

1,524

 

822

 

1,676

 

2,595

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

 

 

 

 

 

 

 

 

From continuing operations

 

 

4

 

1

 

12

 

From discontinued operations

 

 

1,978

 

 

7,779

 

Income taxes paid (recovered)

 

 

 

 

 

 

 

 

 

From continuing operations

 

79

 

180

 

(923

)

(301

)

From discontinued operations

 

 

4,788

 

 

8,693

 

 

 

 

 

 

 

 

 

 

 

Employee future benefit expense for defined benefit plans

 

148

 

176

 

466

 

443

 

 

30



 

7.              Share capital

 

The following table summarizes the stock option activity under the Stock Option Plan:

 

 

 

Nine months ended
September 30, 2007

 

Year ended
December 31, 2006

 

 

 

Number

 

Weighted
average
exercise
price (CAN$)

 

Number

 

Weighted
average
exercise price
(CAN$)

 

 

 

 

 

 

 

 

 

 

 

Balance - Beginning of period

 

3,490,092

 

6.02

 

3,843,592

 

6.16

 

Granted

 

905,000

 

4.28

 

45,000

 

6.41

 

Exercised

 

(18,000

)

1.96

 

(22,000

)

3.98

 

Expired

 

(10,000

)

6.68

 

(346,000

)

7.68

 

Forfeited

 

(108,500

)

4.99

 

(30,500

)

6.21

 

 

 

 

 

 

 

 

 

 

 

Balance - End of period

 

4,258,592

 

5.69

 

3,490,092

 

6.02

 

 

Assumptions used in determining stock-based compensation costs

 

 

 

Nine months ended
September 30,
2007

 

Year ended
December 31,
2006

 

 

 

 

 

 

 

Dividend yield

 

Nil

 

Nil

 

Expected volatility

 

58.0

%

58.1

Risk-Free interest rate

 

4.57

%

4.06

Expected life (years)

 

5.00

 

5.77

 

 

31



 

8.              Net loss per share

 

The following table sets forth the computation of basic and diluted net loss per share:

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

$

 

$

 

$

 

$

 

Net loss from continuing operations

 

(8,704

)

(4,669

)

(18,660

)

(15,000

)

 

 

 

 

 

 

 

 

 

 

Net earnings from discontinued operations

 

 

3,100

 

 

9,289

 

 

 

 

 

 

 

 

 

 

 

Impact of assumed conversion of dilutive stock options in a former subsidiary

 

 

(186

)

 

(754

)

Net earnings from discontinued operations, adjusted for dilution effect

 

 

2,914

 

 

8,535

 

 

 

 

 

 

 

 

 

 

 

Net loss, adjusted for dilution effect

 

(8,704

)

(1,755

)

(18,660

)

(6,465

)

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average number of shares outstanding

 

53,184,803

 

52,692,065

 

53,181,248

 

51,900,754

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive stock options

 

333,576

 

348,423

 

13,083

 

489,455

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average number of shares outstanding

 

53,518,379

 

53,040,488

 

53,194,331

 

52,390,209

 

 

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
September 30,

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

3,341,999

 

1,924,833

 

2,838,999

 

1,920,275

 

Common shares which would be issued following the conversion of the convertible term loans

 

 

 

 

776,237

 

 

For the three-month and the nine-month periods ended September 30, 2007 and 2006, 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.

 

32



 

9. 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.

 

Reconciliation of net loss to conform to U.S. GAAP

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

$

 

$

 

$

 

$

 

Net loss for the period under Canadian GAAP

 

(8,704

)

(1,569

)

(18,660

)

(5,711

)

 

 

 

 

 

 

 

 

 

 

Accretion on convertible term loans

 

 

 

 

502

 

Conversion of convertible term loans

 

 

 

 

(280

)

Amortization of in-process R&D (a)

 

393

 

411

 

1,156

 

1,206

 

Other

 

 

 

 

(10

)

Deferred income taxes (b)

 

(22

)

 

(1,385

)

 

Income tax effects of above adjustments

 

(160

)

(168

)

(472

)

(493

)

 

 

 

 

 

 

 

 

 

 

Net loss for the period under US GAAP

 

(8,493

)

(1,326

)

(19,361

)

(4,786

)

 

 

 

 

 

 

 

 

 

 

Out of which:

 

 

 

 

 

 

 

 

 

Net loss from continuing operations

 

(8,493

)

(4,426

)

(19,361

)

(14,075

)

Net earnings from discontinued operations

 

 

3,100

 

 

9,289

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) per share

 

 

 

 

 

 

 

 

 

Basic and diluted

 

(0.16

)

(0.02

)

(0.36

)

(0.09

)

From continuing operations

 

(0.16

)

(0.08

)

(0.36

)

(0.27

)

From discontinued operations

 

 

0.06

 

 

0.18

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding under U.S. GAAP

 

 

 

 

 

 

 

 

 

Basic and diluted

 

53,184,803

 

52,692,065

 

53,181,248

 

51,900,754

 

 

33



 

Statement of Comprehensive income

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

$

 

$

 

$

 

$

 

Net loss for the period under U.S. GAAP

 

(8,493

)

(1,326

)

(19,361

)

(4,786

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

4,381

 

(344

)

3,156

 

5,954

 

Change in fair value of investments, net of income taxes (c)

 

81

 

87

 

(87

)

(379

)

 

 

 

 

 

 

 

 

 

 

Change in fair value of interest rate swap, net of income taxes

 

 

 

 

78

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income in accordance with U.S. GAAP

 

(4,031

)

(1,583

)

(16,292

)

867

 

 

Reconciliation of shareholder’s equity to conform to U.S. GAAP

 

The following summary sets out the significant differences between the Company’s reported shareholder’s equity under Canadian GAAP as compared to U.S. GAAP. Please see corresponding explanatory notes for additional information.

 

 

 

As at September 30,

 

As at December 31,

 

 

 

2007

 

2006

 

 

 

$

 

$

 

Shareholder’s equity in accordance with Canadian GAAP

 

100,682

 

178,879

 

 

 

 

 

 

 

In-process R&D (a)

 

(14,259

)

(14,348

)

Deferred tax effect (b)

 

 

5,134

 

Other

 

 

39

 

Shareholder’s equity in accordance with U.S. GAAP

 

86,423

 

169,704

 

 

34



 

The following table summarizes the shareholder’s activity under U.S. GAAP since December 31, 2006

 

 

 

Share
capital

 

Other
capital

 

Deficit

 

Accumulated
other
comprehensive
income

 

Shareholder’s
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 state capital (note 3)

 

(137,959

)

70,032

 

 

 

(67,927

)

Issued pursuant to the stock option plan

 

 

 

 

 

 

 

 

 

 

 

For cash

 

18

 

 

 

 

18

 

Ascribed value from other Capital